The Pre-Global-Financial-Crisis Slowdown in

Productivity Growth*

September 24, 2015

John G. Fernald

FRBSF and Visiting Scholar, EIEF

Gilbert Cette and Benoit Mojon

Banque de France

* The views expressed here are our own and do not necessarily reflect the views of the Federal

Reserve Bank of San Francisco, the Banque de France, or anyone else associated with these

institutions

Diverging TFP performance 1995-2007

Diverging TFP performance 1995-2007

Diverging TFP performance 1995-2007

Diverging TFP performance 1995-2007

• TOP DOWN PERSPECTIVE

• U.S. Exceptional 1995-2003

• Technology slowed

• Not mismeasurement

• France/Germany Structural

rigidities

• Italy, Spain Capital flows

fueled misallocation

• U.K. Mismeasurement post-

2008?

Accounting for U.S. growth: Varying rates of normal

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Slow U.S. TFP growth since 2003

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Rise and fall of TFP growth in IT-intensive market services

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Rise and fall of TFP growth in IT-intensive market services

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Post-2004 slowdown

not in “bubble

sectors” (finance,

construction,

mining/ag…)

Rise and fall of TFP growth in IT-intensive market services

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IT production had

late 1990s bulge

Rise and fall of TFP growth in IT-intensive market services

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IT production had

late 1990s bulge

Rise and fall of TFP growth in IT-intensive market services

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Market services had

2000-04 burst

(wholesale/retail

trade, info services,

business services)

Rise and fall of TFP growth in IT-intensive market services

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Market services had

2000-04 burst

(wholesale/retail

trade, info services,

business services)

Rise and fall of TFP growth in IT-intensive market services

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“The things at which Google and its peers excel, from Internet search to mobile

software, are changing how we work, play and communicate, yet have had little

discernible macroeconomic impact. …Transformative innovation really is happening

on the Internet. It’s just not happening elsewhere.”

Greg Ip, Wall Street Journal, August 12, 2015

Productivity paradox 2.0

“Today’s information age is full of sound and fury signifying little.”

Martin Wolf, Financial Times, Oct 2, 2012

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A productivity problem or measurement problem?

• Goldman Sachs, Google, and others point to specialized equipment, software,

and free digital goods

– Quality-adjustment is hard—maybe national accounts are behind curve?

– Facebook, Google, etc. are free (to users)

Growing mismeasurement doesn’t explain all

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Why did continental Europe diverge?

No. Ideas flow across borders but have to be implemented locally

Timing of “intangible investments” (e.g., reorganizations associated with IT) can differ

Theory: Basu, Fernald, Oulton, Srinivasan (2003)

Evidence: Corrado, Haskel, Jona-Lasinio, Iommi (2012)

Should the same IT story apply equally everywhere?

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“Reallocations” and reorganizations that didn’t happen because of

regulatory barriers E.g., van Reenen et al (2010), Bourlès, Cette, Lopez, Mairesse, and Nicoletti (2013), Cette,

Lopez, and Mairess (2013)…

Institutions hold back technology in continental Europe

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Reis (2013), Gopinath et al (2015), model it as effect of capital inflows

interacting with financial frictions

Underdeveloped financial sector channels funds to less productive projects

Increasing misallocation

Macro implication: Exogenous decline in real interest rates leads to low

productivity growth

Channel: Low-productivity firms get financed. Average productivity of firms falls.

Why did TFP in peripheral Europe collapse relative to frontier?

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* *

Reis (2013), Gopinath et al (2015), model it as effect of capital inflows

interacting with financial frictions

Underdeveloped financial sector channels funds to less productive projects

Increasing misallocation

Macro implication: Exogenous decline in real interest rates leads to low

productivity growth

Channel: Low-productivity firms get financed. Average productivity of firms falls.

=>VAR with labor productivity (or TFP growth) and real interest rates

Choleski identification with real interest rate last

Why did TFP in peripheral Europe collapse relative to frontier?

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* *

Real interest rate “shock” raises labor productivity (Euro area)

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Historical decomposition: “Explains” some low periphery LP growth

What about the United Kingdom?

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An incredible coincidence?

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Coincidence…until the Great Recession

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TFP growth in many advanced economies slowed prior to Global

Financial Crisis

Story involves technology, structural rigidities, and capital flows

Slowing technology growth at the frontier, reallocations that didn’t happen because of

rigidities…and misallocation that did happen

As OECD (Future of Productivity) emphasizes, “diffusion” that isn’t happening is key

U.K. remains a puzzle: Could import/export deflators be misleading?

Takeaways

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Typically slower productivity growth after 1995…

and even slower 2004-07

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