Closing the productivity gap

>> Innovative Enterprises Bolster Productivity Enhancement

There’s nothing really new in this; Europe has been losing ground for a long time and it might be part of the reason why the US stock market has outperformed so much or that the US dollar has been strong. But acknowledging the problem is one thing; rectifying it is quite another.

Since 2000 real output per hour worked has risen close to 60% in the US and less than 20% in the euro zone. In other words, the whole history of the euro zone has been one of falling behind the US, at least in terms of this most crucial of metrics. And it is not just the euro zone; other countries have slipped as well, such as the UK.

Since 2000, labour productivity in the UK has averaged around 0.8% per year or only slightly more than a half of the 1.5% rate that we’ve seen in the US over the same period. We could list other countries and it is important that we do this because it shows that the poor performance in the euro zone is not down to factors specific to EMU such as the absence of a capital markets which may be hindering the flow of credit to those firms that want to invest in productivity-enhancing projects.

Another reason given for the US’s advantage is that it has a far greater share of ‘newer’ more productivity-enhancing industries such as phone technology (does anybody remember Nokia?) and, of course, artificial intelligence. That might be true if we compare the US with the likes of Germany, with its stronger manufacturing base, but the UK too is supposed to be a leader in many new technologies and yet its general level of productivity, as we’ve just said, is still down in the dirt compared to the US.

A relative lack of regulation in the US and “harder working Americans” are among other reasons cited for the US’s advantage. They might be part of the story, as might be the access to credit and technological advancement mentioned earlier. If that’s the case then perhaps these are things Europe can work on. But many analysts suspect that it is not the whole story and, that’s worrying as Europe might not be able to catch up.

For a key problem as we see it is that the US government has no targets on its deficit and debt levels and this means it cannot only ease aggressively when there is a crisis, but can maintain more fiscal largesse, even though the good economic times. Compare this with the euro zone, or the UK where limit s exist to fiscal support and we can see a clear demarcation line between the US and Europe.

>> Forecasts for productivity trends

In essence, the US is supporting its economy far more while the likes of the UK and euro zone run up against budgetary speed limit s when deficits are 3% of GDP. The latest forecasts from the non-partisan Congressional Budget Office (CBO) suggest that the US deficit/GDP ratio will be around 6% for as far as the eye can see; twice the level of the UK and euro zone speed limit .

Now, of course, the common repost is that speed limit s on the budget are there for a reason to prevent crashes. But there’s nothing magical about a 3% deficit/GDP ratio. This level – and the 60% debt limit  – appear to have been dreamt up back before EMU began as ‘responsible’ targets and the UK has sort of adopted the 3% rule probably so that it looks no worse than the euro zone.

However, as the National Institute for Economic and Social Research (NIESR) said last week of the UK, an incoming Labour government will have to ditch this rule or else face having to lift taxes. At a time when the tax burden is extraordinarily high the danger is that tighter policy just leaves the economy is a low growth funk and things don’t look much different for the euro zone. Those policymakers looking to close the productivity gap with the US might be hoping that US fiscal largesse eventually catches up with the White House.

Instead, Europe might have to take the view that, if you can’t beat them, you should join them and allow much more fiscal wiggle room. There have been some efforts to do this, at least in the euro zone, but they are still woefully short of what might be needed to close the productivity gap.