Category Archives: productivity growth

24/11/15: Europe’s Dead Donkey of Productivity Growth

Remember the mythology of European productivity miracles:

  1. The EU is at least as competitive as the U.S. (with Lisbon Agenda completed, or rather abandoned);
  2. The EU growth in productivity is structural in nature (i.e. not driven by capital acquisition alone and not subject to cost of capital effects); and
  3. The EU productivity growth is driven by harmonising momentum (common markets etc) at a policy level, with the Euro, allegedly, producing strong positive effects on productivity growth.
Take a look at this chart from Robert J. Gordon's presentation at a recent conference:
The following observations are warranted:
  • EU convergence toward U.S. levels of productivity pre-dates major policy harmonisation drives in Europe and pre-dates, strongly, the creation of the Euro;
  • EU productivity convergence never achieved parity with the U.S.;
  • EU productivity convergence was not sustained from the late 1990s peak on;
  • The only period of improved productivity in the EU since the start of the new millennium was associated with assets bubble period (interest rates and credit supply).
Darn ugly!

But it gets worse. Since the crisis, the EU has implemented, allegedly and reportedly, a menu of 'structural' reforms aiming at improving competitiveness.  Which means that at least since the end of the crisis, we should be seeing improved productivity growth differentials between Europe and the U.S. And the EU case for productivity growth resumption is supported by the massive, deeper than the U.S., jobs destruction during the crisis that took out a large cohort of, supposedly, less productive workers, thereby improving the remainder of the workforce levels of productivity.

Here is a chart from the work by John Van Reenen of LSE:

Apparently, none of this happened:
  • EU structural reforms have been associated (to-date) with much lower productivity growth post-crisis than the U.S. and Japan;
  • EU jobs destruction during the crisis has been associated with lower productivity increases than in the U.S. and Japan;
  • All EU programmes to support growth in productivity, ranging from the R&D supports to investment funding for productivity-linked structural projects have produced... err... the worst outcome for productivity growth compared to the U.S. and Japan.
And the end result?

I know, I know... a Genuine Productivity Union, anyone?...

4/6/15: Trend-spotting Out in 3 Key Charts

If you want to understand the German (and the Euro area) economy key trend, here are three charts:

Source for all:

Combined, these imply one thing and one thing only: Domestic Demand (Investment + Consumption + Government Spending) can be sustained [in theory] over the next decades by just one thing: "Government Spending". In practice, the bad news is: such spending is neither hugely productive, nor feasible in current levels of indebtedness worldwide. Worse [from economic perspective] news: much of this spending will be swallowed by health & end-of-life services that will not be increasing the productive capacity of our societies.

In the mean time, logic of the above two charts implies:

  1. Increased build up of external imbalances (current account surpluses in more extremely ageing countries);
  2. Increased savings not suitable (due to risk profiles) for private investment (hence higher retail & long-term demand for highly rated bonds and equity, as opposed to higher growth bonds and equity); 
  3. Reduced domestic consumption;
  4. Heating up tax competition on the side of capturing revenues (as opposed to incentivising higher growth);
  5. Growing reliance on 'hidden' taxes (e.g. currency devaluations and indirect taxation) to amplify (1) and (4);
  6. Current 'peak productivity' generation (chart 3 above) is screwed on the double, and productivity growth curve going forward is downward-sloping, most likely even if we control for technological innovation.

All six points currently are at play. Draw your own conclusions.