Global Glance: April 10, 2017
A quick look at intriguing international stories
By John Bostwick, Managing Editor, Radius
IMF to Governments: Promote Productivity or Else
In his book The Rise and Fall of American Growth, economist Robert Gordon argues that the century spanning 1870 to 1970 was a golden age of innovation that powered economic growth. The widespread implementation of indoor plumbing, electricity, central heating, refrigeration and other technologies dramatically increased worker productivity by, as he tells PBS, freeing “households from an unremitting daily grind of gainful manual labor, household drudgery, darkness, isolation and early death.”
The years since have seen a fall in worker productivity despite astonishing gains in digital technology. PBS explains that technology’s effects on economic growth, measured in something called total factor productivity, are now roughly a third of what they were fifty years ago.
While (of course) not all economists agree, Gordon reckons our era of sluggish productivity isn’t ending soon, since we aren’t likely to see the kinds of profoundly life-changing technological advances witnessed during the century starting in 1870. He tells PBS, moreover, that wage inequality “is siphoning off the little productivity that we have got into the top one percent. And so the bottom 99 percent have good reason to be resentful and anxious.”
PBS economics correspondent Paul Solman says that while economists may disagree about whether productivity and economic growth rates will ever reach the highs of 1870 to 1970, there is “near-universal agreement about the headwinds now facing US economic growth: problems in education, an aging population, a huge national debt, and, most of all, growing inequality.”
The PBS article quoting Gordon and Solman was published 14 months ago. But a speech last week delivered by IMF chief Christine Lagarde suggests that economists are still in agreement about the headwinds Solman mentions. Lagarde spoke at the American Enterprise Institute in Washington, DC about productivity growth, and in particular about a newly published IMF report titled “Gone with the Headwinds: Global Productivity.”
— Christine Lagarde (@Lagarde) April 3, 2017
Lagarde contends that productivity growth “is the most important source of higher income and rising living standards over the long term … [and] allows us to substantially grow the economic pie, creating larger pieces for everyone.” She warns, however, that “this engine of prosperity has slowed down in recent years, with negative consequences for growth and incomes that look very hard to unwind.”
She confirms Gordon’s assertion that recent technological breakthroughs such as smartphones have not affected productivity rates, and that productivity growth has slowed from about one percent before the financial crisis to about a third of a percent since then, even in advanced economies such as China. The IMF estimates that if the rate had stayed at one percent over the last decade, the combined GDP of advanced economies would be five percent higher than it is today. That’s the equivalent, Lagarde says, “of adding another Japan — and more — to the global economy.”
Lagarde calls on policymakers to take steps to spur productivity growth and prevent dire financial and social instability, further income inequality and unsustainable public and private debt obligations. She cautions that “leaning back and waiting for artificial intelligence or other technologies to trigger a productivity revival is simply not an option.”
Echoing Solman’s comments, Lagarde says that productivity growth is hampered by “at least three major headwinds” — an aging population, a slowdown in global trade and what she calls “the unresolved legacy of the global financial crisis in some major economies.” The crisis has hit Southern Europe particularly hard, as organizations there that had existing high levels of debt at the time of the collapse had to sell assets and cut investments.
In order to spur growth, Lagarde prescribes government policies that encourage business risk and innovation. The policies, she says, should reduce bureaucratic red tape and promote education, infrastructure and research and development through tax incentives and other public investment. She also calls on policymakers to promote global trade and look on refugees a source of youth and dynamism who can contribute “growth and productivity dividends.”
Some commentators have noted that Lagarde’s remarks related to global trade and immigration may have been directed primarily at the current US administration. She did not mention Donald Trump by name, but as The Financial Times points out, IMF economists have urged governments to “resist the sort of trade protectionism and curbs on immigration advocated by populists such as US president Donald Trump.” Citing the IMF report, the Times clarifies that the “biggest cause of the recent productivity slowdown is lagging business investment and trade, and a misallocation of capital toward low-risk projects, caused by the 2008 crisis” which has “led to an adverse feedback loop between weak and low-risk investment, [productivity growth] and potential growth.”
While Lagarde is unequivocal about the benefits of productivity growth, at least one economist has recently made a connection between low unemployment rates and low productivity rates. International Business Times noted that last month, Bank of England’s chief economist Andy Haldane spoke at the London School of Economics. He declared that “an extra one percent to two percent increase in productivity could cost the UK economy up to 1.5 million jobs, reflecting ‘a very significant macroeconomic cost’ for unemployment.”
IBT explains that current low interest rates have enabled businesses to pay off debt and stay above water, but “this comes at a cost of decreased productivity and reduced diffusion of technological innovation.” Haldane points out that only a very small percentage of UK companies have experienced rapid productivity growth in recent years, which, IBT explains, “is a crucial reason for the rise in household inequality, as highly productive firms can afford to pay higher wages to only a small concentration of the workforce.” Like Lagarde, Haldane advocates for increasing productivity rates across all businesses, in his case through modest, realistic gains over time while also keeping down interest rates and (with luck) unemployment.