Title: Explaining Slower Productivity Growth: The Role of Weak Demand Growth
presented by Someshwar Rao S Rao Consulting Inc. and Jiang Li1 University of Victoria
Using panel data on Canadian industries and OECD countries, this article examines empirically the role of growth in domestic and external demand in labour productivity growth. The findings suggest that most of the post-2000 slowdown in business sector labour productivity growth was the result of weak demand growth, which impacts productivity directly by reducing economies of scale and scope and by affecting key productivity drivers such as investment and R&D. With an expected slowdown in both domestic demand growth in Canada and external demand growth for Canadian exports, the medium- to long-term outlook for productivity growth, and hence for real income growth of Canadians, is expected to be weak.
IMO, this research is important because it buttresses arguments that growing inequality, by marginal propensity to consume effects, is harmful to long term economic grow; at the margin, more redistribution is likely to be a long term positive -not negative for economic growth.
This research is also consistent with recent research that economic development aid does in fact promote economic growth. (Also goes against conventional thinking)
IMO, the key factor in this maybe the issue of whether an economy for whatever reason has long term demand impairment.
As noted previously on these pages, Steve Waldman summarizes the argument here:
"OK. So inequality-related MPC effects are real. But what to they have to do with growth? Nothing at all, in an unconditional sense. I’ll go further than Bernstein. It’s worse than “there is not enough concrete proof to lead objective observers to unequivocally conclude that inequality has held back growth.” There’s little reason at all to think that inequality has held back growth, in the past tense, through an MPC channel. Why not? Because we didn’t observe in the past anything that looked like an intractable insufficiency of aggregate demand!
Prior to 2008, we found means of supporting aggregate demand despite an almost certain drag imposed by increasing inequality. Those means included a broad mix that included fiscal policy (we ran deficits), unsustainable equity booms, the “democratization of credit” and unsustainable credit booms, and of course straightforward monetary policy.
But the reality of MPC effects means that, along with all those other possibilities, broadening the distribution of income would be expansionary and narrowing that distribution would be contractionary, ceteris paribus. If, like Larry Summers, it pains you that maybe the “natural interest rate” is negative now, the reality of MPC effects means that policy which broadens the distribution of income would help push it positive, and put us back into more comfortable territory. If, like me and Pope Francis, you think that present levels of inequality are horrific for human and communitarian reasons, then among the many macro policies that might support demand, it is rational to tilt towards those more likely to engender a broad distribution. It is quite irrational, as I think some well-meaning economists do, to hold MPC effects to much higher standards of evidence than the mechanisms that justify other interventions, because “economics is not a morality play” and reducing inequality would be the moral thing. Better to err on the side of human welfare rather than reputational purity.
I happen to think that the macroeconomic case for reducing inequality is much stronger than the case I’ve made here. I think the character of growth is badly misshapen when demand is narrowly sourced, that technological stagnation is mostly a distributional problem, that institutional correlates of growth are harmed by increasing inequality. But those are all more speculative claims. You can tell me the “jury is still out” on those. But the jury is not out, it never reasonably has been out, on the reality of distribution-related MPC effects. I’ll disagree, respectfully, if you claim that for supply-side or libertarian reasons we should ignore that reality and prefer other means of supporting demand (or that we should not worry about supporting demand at all). But don’t say “it’s unclear” whether income distribution affects aggregate demand, holding other factors constant. Of course it does."