Blog Post

AEIdeas

US productivity growth, at least as measured, has been in low gear for a decade. And especially so since the Great Recession, averaging just 0.6% annually from 2010 through 2014. We’re aren’t going to consistently hit 3% GDP growth, much less 4%, like that.

Then again, productivity growth has slowed in most OECD countries over the past decade. A new OECD research note doesn’t think the problem is a lack of innovation, so much as an inability to spread innovation broadly throughout advanced economies. “A breakdown of the diffusion machine” is what the OECD calls it. The gap between high productivity firms and low productivity firms is increasing. (Maybe also helping to explain rising inequality.) So why aren’t innovations spreading as fast as they used to? The WSJ’s analysis of the paper sums it up nicely

One key reason appears to be that the process of “creative destruction” identified by Austrian economist Joseph Schumpeter as essential to capitalism’s dynamism appears to have lost some of its ferocity. In the OECD’s words, “market selection is weak.” One reason for that is government policy, which the OECD said favors incumbents across a whole range of areas, from regulations designed to protect the environment, to taxation. As a result, older firms that suffer from low productivity growth endure, often “trapping” workers in jobs for which they are over qualified. “High rates of skill mismatch often coincide with the presence of many small and old firms,” the OECD said. “These firms are often unproductive and tend to be harmful for aggregate productivity to the extent that they absorb valuable resources, thereby constraining the growth of more innovative firms.” In countries where this pattern is particularly prevalent–Italy and Spain–the OECD said better used of workers skills could boost productivity by as much as 10%.

Too much crony capitalism, not enough competitive capitalism. The US actually scores pretty well against other advanced economies, though we need to do even better. For instance, only a fifth of small Finnish firms are less than five years old vs. more than half in the US. OECD: “This likely reflects the inability to grow to scale and the fact that low potential firms can survive when market selection is weak, with significant cross-country differences emerging in the relative sizes of old and new businesses.”

So how to reenergize the innovation diffusion machine? This is key: “A level playing field that does not favour incumbents over entrants. Many policy measures, from environmental to fiscal measures, are designed to favour incumbents.” More entry through startups and more exit by uncompetitive incumbents.

And again, if you get more innovation you might get more inequality, but also more social mobility.

More on this issue:

Fighting the Crony Capitalist Alliance

Crony Capitalism Needs a Kick in the Keister

Here’s how crony capitalism and regulation kill US economic growth

Regulatory and financial reforms to combat cronyism and modernize our economy