We know the left-liberal, progressive diagnosis for what ails the US economy, not just today’s woes but longer term: too much income inequality (we need to redistribute from the high-saving 1% to the high-consuming 99%), too little public “investment” (not enough spending on infrastructure.) So that’s Obamanomics, basically. It’s a Keynesian argument about demand.
But what is the GOP theory of the case? Some on the right would say, well, Obamanomics! But consider: from the end of World War Two through the 1980s, it took roughly six months for employment to recover to prerecession levels after each postwar recession. But it took 15 months after the 1990–91 recession and 39 months after the 2001 recession. The current recovery is 57 months old, and we are still some 4 million full-time jobs short of prerecession levels. Moreover, steep recession loses for mid-wage workers have not been matched by comparable gains during recovery. For the labor market overall, then, the Great Recession continues. But not for big business. Corporate profits returned to their prerecession peak in late 2009 and continue to make record highs. While Dodd-Frank, Obamacare, and investment tax hikes have not helped, the US economy’s problems seem to predate Obama.
So here is one possible explanation: these jobless recoveries are the result of an economy now better at generating process innovation (creating cheaper, more efficient ways to make existing consumer goods and services) than what business consultant Clayton Christensen has termed “empowering innovation” (creating new consumer goods and services). Efficiency innovation frees up capital that’s then reinvested in still more efficiency innovation — often machines rather than men — rather than in job-creating empowering innovation as in the past.
Why might this be? Years of government policy protecting incumbent firms from competition and failure present one possibility. As Ashwin Parameswaran has put it: “Incumbent firms rarely undertake disruptive innovation unless compelled to do so by the force of dynamic competition from new entrants. The critical factor in this competitive dynamic is not the temptation of higher profits but the fear of failure and obsolescence.”
Shorter: dynamic innovation is created by maximum competitive intensity. Here is the disturbing conclusion from a recent Kaufman Foundation report:
A number of signs point to a secular decline in U.S. business dynamism, which goes far beyond the more recent effects of the Great Recession. For example, the rate of new firm formation—a key element of business dynamism and new job creation—has been declining steadily for at least the last three decades. Job reallocation—the process that moves workers away from contracting or closing businesses and toward expanding or new firms—also has been declining over the same period.
Even the tech industry is not immune. The study notes that the number of technology companies aged five years or younger — the fast-growing “gazelles” of drivers of job creation — has fallen below 80,000 versus a high of 113,000 in 2001.
Some examples of how the US prevents both startup entry and incumbent exit: a “too big to fail” financial system (made worse by Dodd-Frank) that rewards gigantism and macroeconomic risk rather than lending to small business; occupational licensing and patent laws that reward cronyism rather than promoting the entry of new, entrepreneurial firms; a complex corporate tax code biased against investment and where big companies are able to lobby for favorable tax breaks and subsidies. Reform in all these areas is one way to, as Christensen argues, “to reset the balance between empowering and efficiency innovations.”
So, if you buy this theory: the US needs more creative destruction and more radical innovation, while also fashioning a strengthened safety net and an education system that teaches the technological and entrepreneurial skills that workers will need in the future.
Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.