Daniel Lacalle

Why is productivity growth so low? (Focus Economics)

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Please read the entire article here.  Focus Economics analyses the weak productivity growth in most OECD countries.

23 economic experts weigh in: Why is productivity growth so low?

The OECD has written extensively on the subject of productivity growth observing that productivity is pro-cyclical, meaning that in times of recession productivity tends to fall and in times of economic growth, productivity tends to increase. Therefore, looking at producitvity growth in the shorter-term, such as quarterly or annually, can be misleading, as it is often extremely volatile. Most strong quarters or years of economic growth will show strong gains in productivity and vice versa. Looking at multi-year longer-term productivity growth, however, is more useful. For example, producivity growth has been low in the U.S. for the last 5 years, even as the economy has emerged from the financial crisis, which raises a lot of red flags.

Indeed, U.S. manufacturing sector productivity increased 0.5% over the last five years from 2011 to 2016, which the U.S Bureau of Labor Statistics notes is “well below the growth rate of 3.2 percent from 1987 to 2016.”

This is not exclusive to the U.S., as productivity growth has generally been low going back to the financial crisis for most developed countries. However, the drop in productivity has been going on for decades, all the way back to the 1970s in some cases

My opinion:

“The decline in productivity, in my opinion, is the result of a combination of factors:

– Perpetuating overcapacity through cheap debt and excess liquidity.
– Large increase in subsidies to obsolete or low productivity sectors (particularly so-called national champions) including currency devaluations that are indirect subsidies to rent-seekers and crony sectors.
– Large increase in government spending aimed at financing areas with no real economic return and white elephants.

These factors make capital allocation go to low productivity sectors because incentives are provided through fiscal and monetary policy. Financial repression incentivises low productivity subsidizing it.”

All text and graph courtesy of Focus Economics @focuseconomics

 

 

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