Productivity Growth Has Disappeared | Seeking Alpha

Ruchir Sharma, Chair of Rockefeller International, writes in the Monday’s Financial Times:

“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.”

I have been writing about this concern for most of the time I have been blogging.

The only difference is that I came at the picture from a different direction.

Still, both Mr. Sharma and I look at the same foundational cause of the slowdown in productivity.

“A closer look at the timing and location of the productivity slump points to an alternative explanation: the expanding of government.”

Mr. Sharma starts here:

“It is more than coincidence that starting in the 1970s, major capitalist countries began an alternative explanation: the expanding role of government.”

There has been major government stimulus during this time period, but Mr. Sharma points the finger at another role of government in the process:

Increasing government rescues.

“With increasingly generous rescues, corporate defaults have fallen in each crisis, even as recessions deepened after 2000.”

And, Mr. Sharma concludes:

“As the cleansing effect of defaults and downturns faded, so too did entrepreneurial dynamism.

More active government support has undermined creative destruction, the lifeblood of capitalism.

In developed economies productivity growth plummeted to just 0.7 percent in the 2010s–less than half the pace of the already declining trend over prior three decades.

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 percent of listed companies in the United States….”

Credit Inflation

I have not covered the space that Mr. Sharma has, but I have presented a picture that coincides with the history that Mr. Sharma describes in his article.

My narrative begins in the early 1960s as the Kennedy administration, followed by the Johnson administration constructed a policy of economic stimulus that basically resulted with the government providing almost constant support for the economy through monetary and fiscal means.

The effort of the federal government was to bring about higher levels of employment through the government’s largess.

The basic model of the economy used by the Kennedy/Johnson administrations was the evolving macro-model of the economy based upon Keynesian tenets.

Adding support to this approach was something called “the Phillips Curve,” an empirical relationship between the unemployment rate and the rate of inflation.

The statistics showed a negative relationship between these two variables. That is, if the government were able to achieve a slightly higher rate of inflation for the country, the rate of unemployment could be lowered modestly.

This seemed to be an excellent program for the politicians. A little inflation, that would really bother no one, and a lower level of unemployment, that would play well on election day.

By 1969, Richard Nixon, now the President of the United States, would buy into this idea, claiming that “we are all Keynesians now!”

And, so by the end of the decade, “credit inflation” became the economic policy of the government, both Democratic as well Republican governments.

This coincides perfectly with Mr. Sharma’s picture, drawn above.

Impacts Of Credit Inflation

The impacts of credit inflation can be described in a different way, however.

The steady influx of government spending and monetary stimulus created some different incentives in the economy than had previously existed.

Before, in the Keynesian model, the government stimulus resulted in an expanding corporate capital investment, spending that would increase the productivity of the economy’s physical capital base.

This was what the whole Keynesian model was built upon.

The credit inflation that was developed resulted in more of the government largess going into assets than into capital spending programs that would increase productivity.

For example, this credit inflation went into the prices of gold, commodities, middle-income housing, and other assets where rising asset prices created by the steady government support of inflation kept prices rising and rising and rising.

Economic growth progressed, but more and more of the government money went into non-productive efforts.

Here is where the picture drawn by Mr. Sharma comes into play.

In order to keep the economy growing and existing corporations in business, the government came into support of “bloated financial markets, monopolies, and zombies.”

This support of “distressed” institutions was a part of the credit inflation being supported by the government.

And, this support did not contribute to the growth of productivity.

But, Mr. Sharma’s argument does contribute to an understanding of what the federal government was doing during the past sixty years.

Supply Side Problem

Mr. Sharma ends up his article by saying,

“To revive productivity, the government needs to rethink its role in the economy.”

I couldn’t agree more.

The credit inflation of the past sixty years has totally distorted the economy.

Furthermore, the thrust of credit inflation has created an enormous change in the income/wealth distribution in the country as the primary beneficiaries of credit inflation has been wealthy individuals.

If the government wants to get the economy growing faster and if the government wants to stop the income/wealth distribution of the society from becoming more tilted toward the wealthier of the country, then we need a new model to work with.

Although introduced with good intentions, the Keynesian approach to government stimulus augmented by the support for the Phillips Curve assumption about how a little more inflation can keep unemployment at lower levels has created a real-world response that has left the growth of labor productivity at very low levels and has left the world with greater income/wealth inequality.

This is not what was wanted.

It is time to change.

So, “the government needs to rethink its role in the economy.”

And, it needs to do so before the Chinese, with their emphasis upon the long run, make further gains. I know that China is having economic problems right now, but my guess is that it will be back in the near future.