The Pre-Global-Financial-Crisis Slowdown in Productivity Growth* September 24, 2015 John G. Fernald FRBSF and Visiting Scholar, EIEF

Gilbert Cette and Benoit Mojon Banque de France

* The views expressed here are our own and do not necessarily reflect the views of the Federal Reserve Bank of San Francisco, the Banque de France, or anyone else associated with these institutions

Diverging TFP performance 1995-2007

Diverging TFP performance 1995-2007

Diverging TFP performance 1995-2007

Diverging TFP performance 1995-2007

• TOP DOWN PERSPECTIVE • U.S. Exceptional 1995-2003 • Technology slowed • Not mismeasurement

• France/Germany Structural rigidities • Italy, Spain Capital flows fueled misallocation • U.K. Mismeasurement post2008?

Accounting for U.S. growth: Varying rates of normal

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Slow U.S. TFP growth since 2003

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Rise and fall of TFP growth in IT-intensive market services

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Rise and fall of TFP growth in IT-intensive market services

Post-2004 slowdown not in “bubble sectors” (finance, construction, mining/ag…)

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Rise and fall of TFP growth in IT-intensive market services

IT production had late 1990s bulge

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Rise and fall of TFP growth in IT-intensive market services

IT production had late 1990s bulge

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Rise and fall of TFP growth in IT-intensive market services

Market services had 2000-04 burst (wholesale/retail trade, info services, business services)

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Rise and fall of TFP growth in IT-intensive market services

Market services had 2000-04 burst (wholesale/retail trade, info services, business services)

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Rise and fall of TFP growth in IT-intensive market services

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Productivity paradox 2.0 “The things at which Google and its peers excel, from Internet search to mobile software, are changing how we work, play and communicate, yet have had little discernible macroeconomic impact. …Transformative innovation really is happening on the Internet. It’s just not happening elsewhere.” Greg Ip, Wall Street Journal, August 12, 2015

“Today’s information age is full of sound and fury signifying little.” Martin Wolf, Financial Times, Oct 2, 2012

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A productivity problem or measurement problem? • Goldman Sachs, Google, and others point to specialized equipment, software, and free digital goods – Quality-adjustment is hard—maybe national accounts are behind curve? – Facebook, Google, etc. are free (to users)

Growing mismeasurement doesn’t explain all

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Why did continental Europe diverge?

Should the same IT story apply equally everywhere?  No. Ideas flow across borders but have to be implemented locally 

Timing of “intangible investments” (e.g., reorganizations associated with IT) can differ  Theory: Basu, Fernald, Oulton, Srinivasan (2003)  Evidence: Corrado, Haskel, Jona-Lasinio, Iommi (2012)

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Institutions hold back technology in continental Europe  “Reallocations” and reorganizations that didn’t happen because of regulatory barriers  E.g., van Reenen et al (2010), Bourlès, Cette, Lopez, Mairesse, and Nicoletti (2013), Cette, Lopez, and Mairess (2013)…

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Why did TFP in peripheral Europe collapse relative to frontier?  Reis (2013), Gopinath et al (2015), model it as effect of capital inflows interacting with financial frictions  Underdeveloped financial sector channels funds to less productive projects  Increasing misallocation  Macro implication: Exogenous decline in real interest rates leads to low * productivity growth  Channel: Low-productivity firms get financed. Average productivity of firms falls.

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Why did TFP in peripheral Europe collapse relative to frontier?  Reis (2013), Gopinath et al (2015), model it as effect of capital inflows interacting with financial frictions  Underdeveloped financial sector channels funds to less productive projects  Increasing misallocation  Macro implication: Exogenous decline in real interest rates leads to low * productivity growth  Channel: Low-productivity firms get financed. Average productivity of firms falls.

 =>VAR with labor productivity (or TFP growth) and real interest rates 

Choleski identification with real interest rate last

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Real interest rate “shock” raises labor productivity (Euro area)

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Historical decomposition: “Explains” some low periphery LP growth

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What about the United Kingdom?

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An incredible coincidence?

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Coincidence…until the Great Recession

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Takeaways  TFP growth in many advanced economies slowed prior to Global Financial Crisis  Story involves technology, structural rigidities, and capital flows  Slowing technology growth at the frontier, reallocations that didn’t happen because of rigidities…and misallocation that did happen As OECD (Future of Productivity) emphasizes, “diffusion” that isn’t happening is key

  U.K. remains a puzzle: Could import/export deflators be misleading?

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Typically slower productivity growth after 1995… and even slower 2004-07

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