How can we get the economy moving?
Photo: Doug Tengdin
When people think of productivity they usually think about getting more done during their work-time, about working harder or smarter or more focused. But when we talk about productivity in the economy, we think about how much workers can get done within the structure of their jobs. Productivity is important. Economic growth is determined by labor growth times productivity growth. That’s all there is to it.
So long-term trends in productivity are critical. They determine what happens to living standards over the long run. And the trend is not our friend. For the last 40 years productivity has been falling across the developed world—from almost 5% per year in Europe and Japan in the ‘70s to less than 1% per year almost everywhere now. And this decline has been especially pronounced in the last decade.
Source: OECD, Financial Times
Many politicians—including both major Presidential candidates—say the solution is infrastructure investment, like a 21st-century interstate highway system—say, universal free high-speed wireless internet. But apart from the “free” label, most cities already have high-speed connections. Better access to more kitten videos and “Game of Thrones” episodes probably won’t help us get more done. And fixing bridges and potholes is important, but our roads aren’t exactly falling apart or disrupting commerce.
And it’s probably not high corporate taxes or population growth—this trend is present in countries with low taxes and in countries with high taxes, in countries with slow population growth and countries with high growth and relatively liberal immigration regimes.
One factor to consider is the importance of small businesses in the economy. As the economy has matured, more and more people are working for larger and larger companies. Large companies tend to be more bureaucratic and less focused. New business creation has slowed, held back by federal, state, and local regulations. In Europe, the EU—under the guise of harmonizing regulations—has multiplied them. The percentage of workers employed by small businesses has fallen dramatically over the last decade.
Source: Bureau of Labor Statistics
Whatever the reason, policy makers had better focus on how to reverse this trend. Because if the only way to increase production is to work more, eventually we’re going to run out of hours in the day.
Douglas R. Tengdin, CFA
Chief Investment Officer