## America Must Rediscover Its Dynamism

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## Bibliographic details
- Authors: MICHAEL PETERS
- Published: September 4, 2024

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### Overview and headline finding
- The US experienced a dramatic 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 to grow 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.
- Slower productivity growth in the US is part of a broader pattern across advanced economies and threatens to lower growth prospects globally, with adverse consequences for poverty reduction in developing economies.

### Measures and historical patterns
- Two key measures:
  - Labor productivity: real output per hour of work.
  - Total factor productivity (TFP): accounts for changes in capital intensity and capacity utilization.
- Historical evolution:
  - Labor productivity gains slowed from the range of 3–3.5 percent a year in the 1960s and 1970s to about 2 percent in the 1980s.
  - Late 1990s and early 2000s: a temporary rebound to 3 percent.
  - Since about 2003: lackluster gains; labor productivity slowed to an average growth rate of less than 1.5 percent in the decade after the Great Recession.
- TFP closely mirrors labor productivity; falling TFP growth drives the decline in labor productivity gains, while labor productivity typically exceeds TFP growth because of increases in capital intensity.

### Creative destruction and proximate causes
- Declining business dynamism—fewer new firms and larger incumbents—aligns with lower productivity growth through reduced creative destruction and slower reallocation of resources.
- Key empirical markers:
  - 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.
  - Rise in corporate concentration accompanied by higher market power: the average markup by publicly traded US companies surged 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 larger declines in industries that experienced more concentration.
  - Secular decline in business-to-business reallocation since the late 1980s, indicating reduced worker movement from declining to expanding firms.
- Mechanism: Less entry reduces competitive pressure on incumbents, enabling higher markups and profit margins, which can depress labor’s share and slow aggregate productivity growth.

### Fundamental causes under consideration
Researchers have advanced four broad, non‑mutually exclusive explanations for the decline in creative destruction and productivity:

- The advent of information technology and resulting economies of scale
  - Advanced IT lowered marginal costs but raised fixed costs, favoring already-productive, large firms that can scale across markets.
  - Initial IT-driven productivity boom in the late 1980s and 1990s may have been followed by persistent concentration that discourages entry and reduces overall dynamism.

- Changes in the process of knowledge diffusion
  - Technological frontier firms may be so advanced that lagging firms cannot adopt frontier technologies.
  - Defensive patenting and concentrated patenting by superstar firms can create adoption barriers and explain rising noncompetitive rents and lower dynamism.

- Demographics and falling population growth
  - US population growth has plunged since the 1960s and reached a historic low in recent years.
  - Slowing population growth reduces the rate of new business formation and, thereby, creative destruction and productivity growth.

- Policy changes (regulation, R&D incentives, corporate taxes)
  - While potential contributors at the industry level (e.g., licensing requirements, R&D subsidies that favor incumbents), recent research suggests such policy changes are unlikely to quantitatively account for the aggregate slowdown, which is observed across many developed economies.

### Interpretation and policy implications
- Occam’s razor suggests focusing on global developments (advanced IT and declining population growth) as the most likely drivers of the broad-based slowdown in dynamism and productivity.
- Policy levers:
  - Demographics: Given limited success of fertility-reversal policies, immigration policy is identified as the main short- to medium-term lever to counter falling population growth and its effects on dynamism.
  - Competition policy: If IT-driven scale economies increased concentration and reduced creative destruction, stronger antitrust enforcement and competition policy become central to countering higher markups, slower innovation, and lower growth.
- Stakes: Reversing the productivity slowdown is framed as “a trillion-dollar question” for policymakers due to the large cumulative output losses associated with persistent low productivity growth.

*Michael Peters, F&D Magazine, September 2024.*

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_Source: https://www.imf.org/en/publications/fandd/issues/2024/09/america-must-rediscover-its-dynamism-michael-peters_