The writer is chair of Rockefeller International
By late 2020, many economists saw a silver lining in the pandemic. Stuck at home, people were adopting digital technology at an accelerating pace. Productivity was surging. Perhaps the long, debilitating decline in productivity growth was over. Alas, after peaking above 3 per cent the surge collapsed, exposed as a blip typical during the early stages of a recovery, when businesses are slow to hire new workers.
This leaves unsolved a great paradox. Since the computer age dawned in the 1970s, we have lived with a sense of accelerating progress and innovation. Yet as the computer age began, the postwar productivity boom ended. Except for a revival around the turn of the century, productivity has trended downward for more than 50 years.
Optimists suggest that innovations such as internet search are often free, and so fail to register in productivity measurements, or that the impact of technology comes in waves. The productivity revival that began in the late 1990s was driven by checkout scanners and other digital inventions, applied in retail stores. The impact of newer advances such as artificial intelligence will come, they say, just wait.
Pessimists respond that in earlier eras capitalism generated advances such as electricity and gas engines, which lifted productivity across industries. Now it produces distractions — digital games and social media.
But a closer look at the timing and location of the productivity slump points to an alternative explanation: the expanding role of government.
It is more than coincidence that starting in the 1970s, major capitalist countries began running budget deficits, in good times and bad. Large bank and corporate bailouts have grown more sweeping since the early 1980s. Government stimulus (both monetary and fiscal) has smashed records in the last three major crises, spiking in developed economies to more than 7 per cent of GDP in 2001, 12 per cent in 2008 and 45 per cent in 2020.
With increasingly generous rescues, corporate defaults have fallen in each crisis, even as recessions deepened after 2000. This decay was most dramatic in Europe, where the default rate on speculative corporate credit fell from around 20 per cent after the 2001 recession to 10 per cent after 2008 and 5 per cent in 2020.
As the cleansing effect of defaults and downturns faded, so too did entrepreneurial dynamism. New business creation plummeted, leaving behind a stock of fewer older, bigger companies. The number of listed US companies fell by half in recent decades. The largest survivors are increasing their share in three out of four US industries and cornering a growing share of the profit.
More active government support has undermined creative destruction, the lifeblood of capitalism. Productivity growth fell further following the global financial crisis of 2008, as bailouts and stimulus grew significantly. In developed economies productivity growth plummeted to just 0.7 per cent in the 2010s — less than half the pace of the already declining trend over prior three decades.
This decline has, however, not been genuinely global. Over much of the last half century, productivity rose steadily in emerging nations, from below zero in the late 1970s to a peak above 5 per cent in the late 2000s. While developed economies increasingly socialised economic losses during that period, China and later India pivoted to more market-orientated economic systems.
Despite backsliding in recent years, new data shows that productivity in emerging countries still grew at 3 per cent in the 2010s — above the trend of the previous decades. Since 2010, nearly all developed countries have seen productivity drop.
Big government has advantages as an explanation for the productivity paradox. For one thing, it does not require scepticism of new technology. It can also account for strong productivity growth in emerging countries, where the role of the state has broadly declined since the 1970s. It does not rely on the idea that the productivity boost from digitisation eludes clear measurement, which cannot explain why this boost was easy to measure during the technology revival around 2000, but impossible before and after.
It also better fits the timeline. As government interventions grew, the cumulative hit started to overwhelm the boost from technology. Studies tie the decline in recent decades to the beneficiaries of government support, including bloated financial markets, monopolies and zombies — lifeless companies that survive on fresh debt.
Zombies barely existed in 2000 but now account for 20 per cent of listed companies in the United States, and higher shares in Europe. The rise of the “zombie economy” has been linked to increasingly easy money pouring out of central banks, amid warnings that zombies lower productivity across industries by sucking resources from more dynamic companies.
Now comes a twist. Inflation is back, possibly ending the era of easy money, which may in turn remove some of the deadwood blocking a new productivity wave. But easy money is only one aspect of big government, entrenched as a new governing culture of bailouts, market rescues and constant stimulus. To revive productivity, the government needs to rethink its role in the economy.
