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MIRACLE reasons for productivity puzzle

The US is worried about the puzzle of their flat output/ GDP and productivity growth following the 2008 financial crisis, yet employment has risen

Likewise the UK and other G7 nations

They had all expected growth to ‘revert to trend’ by now and be at least 2% per annum, not approach zero as seems to be happening

Interestingly, all G7 nations are suffering in much the same way which must offer a clue as to what’s going on

Explanations offered by a variety of experts include:

  • M = Mismeasurement of GDP, a seriously flawed statistic:

    • GDP doesn’t count many of the things we value in life e.g. free internet services

    • And it counts incomes realised by financial and oil companies before allowing for associated costs later

  • I = Innovation – Major technological innovations have peaked:

    • Artificial Intelligence, driverless cars and Twitter are seen as no match for the gains made from electricity, the internal combustion engine and telephones – at least, not yet

    • But productivity can even dip upfront as new innovations are introduced but returns are slow to build – there can be a time lag between invention, trial and error, prototypes and launch through to widespread adoption e.g. electric motors and light bulbs had little impact over the period 1890 to 1920

  • R = The Rest – Vanguard firms continue to improve, the rest do not

    • Either there’s a lack of diffusion of transformational (digital) technologies from the best to the rest in all/ most sectors – it always takes time, often many years

    • If it’s truly general purpose like electricity or computers, most other organisations need time to be convinced and seek demonstrable proof before they ‘keep up with the Joness – then they take the plunge which can mean re-structuring and re-training of staff

    • Laggard firms,  including zombies, comprise some 80% in all sectors – most do little to try and catch up, not least because current very low interest rates put little pressure on them to become more profitable, even enabling some to stay alive rather than letting creative destruction do its work

  • A = Admin – Government/ EU regulations have been mushrooming:

    • Some say they’re stifling corporate efforts to improve

    • Others say well-intentioned social welfare programmes are keeping people from moving to better jobs

  • C = Capex – A slowdown in productivity-enhancing investments, much due to the corporate hangover still being suffered following the financial crisis as banks restricted lending whilst they shored up balance sheets and companies were concerned about uncertain economic outlooks, Brexit included

  • L = Labour – An influx of cheap labour has deterred many companies from investing in productivity-enhancing equipment and systems plus others have indulged in ‘labour hoarding’ to avoid high outplacement costs and in expectation of imminent demand rises

  • E = Exports – Outside the G7 there is a huge ‘Rest of World’ market waiting to be developed and itching to catch up rather than fall further behind – but exports still only account for a small percentage of total output

Each of the above probably has some impact on apparent national productivity levels, especially GDP mis-measurement, but none explain why there has been a dramatic slowdown ‘across the board’

As ever, as soon as there’s more than one (credible) explanatory variable for an issue, and no clear understanding about their interactions and effects, then it’s open season for all sorts of forecasts and explanations

Hence we get so many conflicting views from so many learned commentators

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