James Pethokoukis: How Crony Capitalism is Slowing Global Economic Growth

Posted: July 8, 2015 | Author: Pundit Planet | Filed under: Economics, Global, Think Tank | Tags: Austrian School, Barack Obama, Budget, Central bank, Economic growth, Economy of the United States, Great Depression, Great Recession, Joseph Schumpeter, Nevada, Paul Krugman, United States |1 Comment

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James Pethokoukis writes: US productivity growth, at least as measured, has been in low gear for a decade. And especially so since the Great Recession, averaging just 0.6% annually from 2010 through 2014. We’re aren’t going to consistently hit 3% GDP growth, much less 4%, like that.

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Then again, productivity growth has slowed in most OECD countries over the past decade. A new OECD research note doesn’t think the problem is a lack of innovation, so much as an inability to spread innovation broadly throughout advanced economies. “A breakdown of the diffusion machine” is what the OECD calls it.

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[Read the full text here, at AEIdeas]

The gap between high productivity firms and low productivity firms is increasing. (Maybe also helping to explain rising inequality.) So why aren’t innovations spreading as fast as they used to? The WSJ’s analysis of the paper sums it up nicely:

One key reason appears to be that the process of “creative destruction” identified by Austrian economist Joseph Schumpeter as essential to capitalism’s dynamism appears to have lost some of its ferocity. In the OECD’s words, “market selection is weak.” One reason for that is government policy, which the OECD said favors incumbents across a whole range of areas, from regulations designed to protect the environment, to taxation. As a result, older firms that suffer from low productivity growth endure, often “trapping” workers in jobs for which they are over qualified.

“High rates of skill mismatch often coincide with the presence of many small and old firms,” the OECD said. “These firms are often unproductive and tend to be harmful for aggregate productivity to the extent that they absorb valuable resources, thereby constraining the growth of more innovative firms.” In countries where this pattern is particularly prevalent–Italy and Spain–the OECD said better used of workers skills could boost productivity by as much as 10%.

Too much crony capitalism, not enough competitive capitalism….(read more)

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