Can the market economy still deliver prosperity?
That may seem an odd question to ask when the United States is more than eight years into a sustained expansion and the world’s major economies are finally following suit. Unemployment is at its lowest since the end of the dot-com bubble at the end of the Clinton administration. The stock market’s sugar high, fueled by juicy profits and falling taxes, is being tempered only somewhat by fear that the Federal Reserve will take the punch bowl away.
And yet a broad sweep of statistics reveals a peculiar weariness spreading through the economy. Belying breathless headlines about the fabulous opportunities that technology is about to bestow on society, it suggests that many rich market democracies have lost much of their dynamism. Their companies are getting old, and their labor markets are getting stuck. Productivity growth has slumped. And many workers in their prime are peeling off from the labor force.
The pattern is particularly striking in the United States, where the share of adults with a job remains well below its peak at the end of the 20th century, and productivity growth has trundled along over the last decade at the slowest pace since the end of World War II.
But signs of lethargy are showing up elsewhere in the industrialized world. Productivity is at a crawl in most rich economies. Though not as intensely as in the United States, men in their prime, 25 to 54 years old, are leaving the labor force across the nations of the Organization for Economic Cooperation and Development. While women have picked up some of the slack, the labor supply across the OECD as a whole has flattened.
Most notably, the economy’s ability to generate and support new businesses — agents of creative destruction that bring new products and methods into the marketplace — appears to be faltering across the world. In the United States, the rate of company formation is half what it was four decades ago. And it is slowing in many industrialized countries.
One might blame this on the recession that crippled the world almost a decade ago, in the wake of the global financial crisis set off by the implosion of home values in the United States. But the weariness extends beyond the latest turns of the economic cycle.
The stagnation poses a threat to the market economy’s main claim to legitimacy: that it delivers prosperity. The income of the typical U.S. household is roughly the same as it was in the 1980s. It is unlikely to be a coincidence.
In a study published Tuesday by the Hamilton Project at the Brookings Institution, Jay Shambaugh, Ryan Nunn and Patrick Liu explore what economists have figured out about the U.S. economy’s inertia and the fallout for wages and living standards.
The evidence paints a distinct picture of decline: Fewer startups mean fewer new ideas and fewer young, productive businesses to replace older, less productive ones. Researchers have found that the decline in companies entering the market since 1980 has trimmed productivity growth by about 3.1 percent.
The dearth of new businesses is also cutting off one of the main paths to workers’ advancement: the outside job offer. Changing jobs allows workers to shift to positions in which they are more productive and better paid. But labor market fluidity — job switching, creation and destruction — has been declining since the 1980s.
Clear though the pattern may be, the researchers acknowledge that we haven’t yet figured out what is holding back the economy’s dynamism. “This is one of those big, economywide trends,” Shambaugh told me. “There is room for a lot of stories.”
Can the corporate landscape become more dynamic again? “None of the potential policy explanations have been conclusively shown to account for the bulk of the decline in dynamism,” Shambaugh and his colleagues note. The critical question that remains is whether there is a set of policies that might restore the economy’s vitality.
This isn’t just about demographic and social change. Sure, we are aging. Older workers will be less likely to move to a new job across state lines. Families with two earners will have a harder time relocating when one gets a new job offer. Stratospheric rents will make it tough to migrate to some of the most vibrant labor markets, like New York or San Francisco.
Policy has certainly played a role: Labor market regulations can gum up the sorting of workers into the best possible jobs, where they will be at their most productive and most highly paid. Specifically, state occupational licensing rules fence off some of the most desirable, well-paid jobs.
But this alone cannot explain away stagnation. Explaining stagnation requires explaining not only why there are so few well-paying jobs but also why there are so few emergent companies ready to employ productive workers. Well into the information age, in a business ecosystem with low barriers to entry, where venture capital stands ready to throw itself at the next good idea, the economy has somehow forgotten how to create companies.
My best guess is that this is all about the decline of competition. Shambaugh and his co-authors note how noncompete agreements and other devices used by businesses to stop their employees from seeking jobs elsewhere are preventing many workers from taking the better job that pays more money. I would argue that the failure is bigger: By allowing an ecosystem of gargantuan companies to develop, all but dominating the markets they served, the U.S. economy shut out disruption. And thus it shut out change.
This is not the only possible diagnosis, I understand. Many economists will reject my proposition that the nation’s economy has been given to oligopolies; that antitrust law has proved no match for the ferocious concentration of market power in the hands of a few businesses that have been allowed to impose their will on the economy as a whole.
It fits, however. An economy controlled by big, entrenched companies will have little place for the kind of disruption that could push productivity onto a higher plane. That description looks very much like the economy that many U.S. workers are coping with today.
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