## America Must Rediscover Its Dynamism ## Source details **Canonical URL:** [America Must Rediscover Its Dynamism](https://www.imf.org/-/media/files/publications/fandd/article/2024/09/peters.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fandd/article/2024/09/peters.pdf.md) - [Structured JSON version](/-/media/files/publications/fandd/article/2024/09/peters.pdf.json) --- ### Overview - The US economy has experienced a marked slowdown in productivity growth: - Between 1947 and 2005, labor productivity grew at an average annual rate of 2.3 percent. - After 2005, the rate fell to 1.3 percent. - If output per hour had continued at 2.3 percent between 2005 and 2018, the US would have produced $11 trillion more in goods and services than it did, according to the US Bureau of Labor Statistics. - The productivity slowdown is part of a broad-based trend across advanced economies; productivity growth in Europe has been even slower than in the US, contributing to a widening GDP per capita gap with the US. - Two related measures of productivity are highlighted: - Labor productivity: real output per hour of work. - Total factor productivity (TFP): accounts for changes in capital intensity and capacity utilization. - Labor productivity and TFP have moved in tandem since the 1940s; falling TFP growth drives declines in labor productivity gains. ### Evidence and mechanisms linking dynamism to productivity - Creative destruction and business reallocation are central to aggregate productivity: - Aggregate TFP reflects both technological frontier and efficiency of resource allocation. - Productivity growth can arise from new technologies or from reallocating resources from unproductive to productive firms. - Indicators of declining business dynamism in the US: - Entry rate (share of enterprises that started operating in a given year) fell from 13 percent in 1980 to 8 percent in 2018 (US Census Bureau). - Average number of employees per enterprise rose from 20 in 1980 to 24 by 2018. - A secular decline in business-to-business reallocation since the late 1980s (research by John Haltiwanger and others). - Rising corporate concentration and its correlates: - Average markup by publicly traded US companies rose from about 20 percent in 1980 to 60 percent today. - Labor’s share of the US economy has fallen by about 5 percentage points since 1980, with faster declines in more concentrated industries. ### Proximate causes: how reduced churn affects growth - Slower new business formation and larger incumbent firms reduce competitive pressure: - Lower entry rates mean fewer new firms to challenge incumbents, diminishing creative destruction. - Incumbents shielded from competition can expand markups and profit margins, reduce labor’s share, and lower aggregate productivity growth. - Reduced worker reallocation across firms implies less movement from declining to expanding businesses, weakening the dynamism mechanism that supports productivity growth. ### Fundamental causes under consideration Researchers consider four broad, non–mutually exclusive explanations: - The advent of information technology and resulting economies of scale - Advanced IT made it easier for productive firms to scale across product markets and to reduce marginal costs relative to higher fixed costs. - Initial IT adoption produced a productivity boom in the late 1990s and early 2000s, but large-scale incumbents may deter entry and reduce long-run creative destruction. - Research cited: Aghion et al. (2023); De Ridder (2024). - Changes in the process of knowledge diffusion - Lagging firms face greater difficulty adopting frontier technologies; superstars may be technologically beyond adoption by smaller rivals. - Defensive patenting and dense patent thickets may impede diffusion. - Research cited: Akcigit and Ates (2023) document rising concentration of patenting among superstar firms and link adoption changes to declines in dynamism and productivity. - Slowing population growth (demographics) - US population growth has plunged since the 1960s and reached historical lows in recent years. - Slower population growth can reduce creative destruction and new business entry, thereby lowering productivity growth. - Research cited: Peters and Walsh (2021) show slowing population growth reduces business entry and firm dynamics. - Policy changes (regulation, taxes, R&D incentives) - Changes such as licensing requirements, R&D subsidies favoring incumbents, or corporate tax changes could affect entry and dynamism. - Evidence suggests policy changes alone are unlikely to quantitatively account for the aggregate productivity slowdown; the phenomenon also appears across other developed economies. ### Policy implications and recommendations - Occam’s razor suggests focusing on global changes—advanced IT adoption and declining population growth—as key drivers with policy relevance. - Demographics and immigration - Given limited success in reversing declining fertility, immigration policy is the main short- to medium-term lever to counter falling population growth and its effects on dynamism and productivity. - Competition policy and antitrust - If advanced IT has increased concentration and market power with adverse consequences for productivity, strengthened antitrust enforcement could address not only higher prices but also slower innovation and growth. - The stakes are substantial: reversing the slowdown is framed as “quite literally, a trillion-dollar question for policymakers.” ### Key statistics and magnitudes (exact source figures) - Labor productivity average annual growth: - 1947–2005: 2.3 percent - After 2005: 1.3 percent - Foregone output if 2.3 percent had continued from 2005–2018: $11 trillion - Entry rate of enterprises: - 1980: 13 percent - 2018: 8 percent - Average employees per enterprise: - 1980: 20 - 2018: 24 - Average markup by publicly traded US companies: - 1980: about 20 percent - Today: 60 percent - Change in labor’s share of the US economy since 1980: fallen by about 5 percentage points *Article: America Must Rediscover Its Dynamism, Michael Peters, September 2024.* --- _Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/09/peters.pdf_