Chris Giles
Good afternoon, and welcome to this webinar on Post-Pandemic Productivity. I’m Chris Giles. I’m the Economics Editor of the Financial Times and I’m delighted to be joined today by Janet Henry, who’s the Global Chief Economist of HSBC, Sven Smit, who’s the Chairman of McKinsey Global Institute in Amsterdam, and Dan Andrews, who’s a Senior Economist at the OECD and very shortly to become Head of Structural Policy at the OECD.
Now, we’re going to have a seminar, where the panellists are going to give their thoughts, first of all, for a few minutes each, and then we’re going to have a chat between the four of us. And then, after that, at about half past or 20 to, we’re going to open this up to everyone else, and if you could submit questions on the ‘Q&A’ box at the bottom of the Zoom screen, that will be really helpful. I can then read them out, either direct them to the whole panel, or to anyone in particular, if it’s a specific question to everyone. It will be better if you have questions, so the panel can respond, rather than statements, to make the conversation flow.
So this, of course, is about the most important issue for the post-pandemic economic world. Of course, that’s assuming that we get back with demand policy to – as well as the economies can function getting back any lost output we might have lost just from lower spending. But then, in the longer-term, we can only make progress, improve living standards, have a greener, better world, if we increase our productivity. This has always been the case, I’m not going to quote the Paul Krugman, famous quote from 1994, I think you all probably know it.
So the question then is, is productivity performance going to be better or worse after the pandemic is behind us? Hopefully that will be soon. And is it going – are we – or are we going to have a situation rather like the great financial crisis, to 2008-2009, where productivity growth, after the crisis was significantly worse than before? And just to highlight how much worse it was after the crisis, across the major economies, the US, the UK, France, Germany and Italy and Japan and Canada, so the G7 countries, every country suffered a very sharp decrease in productivity growth. The best country was Japan, which, sort of, suffered a decrease in productivity growth of about 0.8 percentage points. That’s a large difference in its growth rate. And the UK suffered the most, and its average growth rate of productivity fell by 1.76 percentage points per year after the last crisis. And that was a particularly difficult period and led to great difficulties with austerity, and people just being disappointed about the state of the economy, for a good decade after that. So the question really is, are we going to see the same, or is the world going to be significantly better?
Now, this is the time, I think, I should shut up, and we can listen to the real experts here, and the order we’ve agreed in advance is that Sven is going to take the floor first. Sven, over to you.
Sven Smit
Thank you, Chris, and thank you for framing this important question for us. You’re so right to say that post the financial crisis, productivity contracted in a very substantial way, thereby limiting the possibility for prosperity. And if you look at the last 70 years of larger crisis and how we came out of it, there is a range. There’s a few that are in the range of the global financial crisis, that, sort of, produced a 10 to 20% lift on the decadal basis. And there’s a few that actually produced a 30 to 50% lift on a decadal basis from the prior peak, and we would of course rather have the last than the first, for all the good things you mentioned, Chris.
And so what we looked at is, has anything happened during COVID, and was anything in the making, that for the next five years, to start with, would produce a significant potential for productivity growth? And we see the potential with available technology, available work methods, for a 1% annual productivity increase ahead of what it was, if we get it right. Some firms have already responded boldly in COVID and got some of that productivity going, whether that’s simple things that you can expect, telemedicine moved up, but also things like ecommerce and so on. But also, remote work and so these are things that we were not planning at this speed, so they have moved at pace and in surveys, executives respond that they would want to continue that pace also post-COVID. And so, as a result, we see a substantial acceleration of productivity possible.
However, that won’t come by itself. Relative to where we now, there will still have to be a significant diffusion of innovation across many firms, and we will have to have robust demand. This is not a session about demand, but we do want to make the point that if you look at past crises, most of the time investment and changes in productivity in companies have only started when demand was visible. And there’s almost, like, a sequential effect. They first want to see the investment possibility supported by growth and so that will have to be, sort of, in line, and of course, that’s a big uncertainty question. Collective action will then be needed to meet the economic challenge to get there, which helps sustain and spread innovation, that ensures that the actions to produce productivity of firms can be done, which has to do also by – about reskilling and other things that have to go there. And the investment that is needed will have to go up, which again, often has been dragged by lack of expectation of high demand. And there you have it a little bit, the chicken and the egg. The possibility probably now is more there than it was ten years ago.
I would also say, and Chris, you have raised this, are we in a place that we now can have sustainable growth? Because, of course, one way or the other, you could also look at, can we have all that productivity on a sustainable way? And the technologies on the sustainability side have moved forward, at least over the last decade, so that you probably could have an expansion that adds sustainability in the mix rather than sustainability as a constraint on the growth, and therefore the productivity.
So let me leave it at that. We see a productivity potential. It’s in the cards, and what businesses are doing. It will have to spread much further than it is now to be fully unfolding, and demand has to support it, ‘cause that’s what will trigger the investment.
Chris Giles
Thank you very much, Sven. So that’s a definitively optimistic outlook and we can have the opposite effect compared with the financial crisis. Dan, it’s over to you. Give us a few minutes of your thinking on the situation.
Dan Andrews
Yeah, thanks a lot. Am I able to share my – use my screen? I’ve just got a slide or two I wanted to share if possible [pause]. Okay, thanks a lot. Thanks for the invitation. This is a great event. Can everyone see that? Okay.
Chris Giles
Dan, it might help if you put it into – if you put – if you – that’s it.
Dan Andrews
Does that work? Okay, thanks a lot. So, I think that I want to make three main points. The first is that, you know, if you want to think holistically about the impact of COVID on productivity and potential output more generally, there’s, like, a number of channels and there’s a number of things we have to get our head around. So obviously, we’ve got to think about what the pandemic means for the quality of labour. So, in particular, you know, human capital, its impact on schooling, the consequences of labour market entry during a downturn, which we know it can affect the quality of matching and productivity for a long time. We need to know its impacts on capital, and also we need to know its impacts on total factor productivity. So, from the perspective of what happens within firms, innovation and R&D and all those types of things, and also some of the between firm effects, so the extent to which resources are still moving towards the most productive firms. So, I think the main point to take here is that this is complex, and importantly, many of these channels operate over very long horizons, and they’re not directly observable. So we won’t know the full impacts of the pandemic on human capital for a number of decades.
When I was – when the pandemic first hit, I was in the Australian Treasury at the time, and I must admit I was very pessimistic about the consequences for productivity. Clearly, the impacts on labour quality and human capital remains a concern. I’ve been undertaking some research using real-time data, and now I’m cautiously optimistic about the impacts on reallocation. So, Schumpeter used to talk about the potential cleansing effect of recessions, the extent to which recessions lead to a downsizing of less productive firms, and from the work I’ve done so far, it seems to be the case that dynamic is playing out. And that’s important, because it means that the tangible capital of the most productive firms in our economies have been protected.
Obviously the uncertainty there is still the phase out of job retention schemes, in a number of OECD countries, but certainly in my own country, that seems to be being phased out with minimal disruption. And obviously demand matters here. So, we know that basically investment is very cyclically sensitive and, sort of, and certainly what’s happening in the global economy at the moment augurs well for that.
You know, I think if you want to paint the truly optimistic scenario here, this really relates to the idea that the pandemic has forced businesses to undertake a lot of digital experimentation – digital investment and business experimentation that they’ve been putting off for some time. Crucially, and as Sven mentioned, that technology doesn’t automatically convert into high productivity. You know, firms need to undertake a number of complementary investments to get the full bang for their buck here. The classic anecdote is that electrification arrived in US factories in the 1890s, and we didn’t see the full productivity benefits for another two decades.
So there is some suggestion that we may be on the cusp of a productivity boom, and people at Chat Citizens stress the idea of a productivity J curve. So, initially, new technologies arrive, we don’t get the full impact because essentially firms need to make a number of complementary investments, restructuring, management and so forth. But it could be the case that a lot of intangible investment that’s complementary to making technology productive has occurred. Against that, I think anyone who wants to make the case for technology reigniting productivity growth has to confront the reality of the pre-pandemic period. So, a lot of my work is centred on the drivers of the structural slowdown of productivity from the firm level perspective, and it’s frankly, it’s not pretty reading.
So there’s a number of micro dimensions to productivity slowdown. The first is rising differences between the most productive firms and least productive firms in the global economy. And this is significant, ‘cause we typically expect innovations at the frontier to spill over and lift all boats. The second, we’ve seen evidence of slowing resource reallocation, so it’s become less likely that more productive firms expand and less productive firms contract or exit. We’ve seen fewer business start-ups, less efficient firm exits, so the complete pathology of that is the survival of zombie firms. And more recently, you know, there’s been a lot of suggestion that competition may have fallen, as reflected in metrics of rising product market concentration and markups. We’ve also seen decline in job-to-job transitions.
So, you know, before the pandemic, the million dollar question was, what was driving these micro dimensions of the productivity slowdown? Was it a benign story related to technology or did policy weakness play a role? And certainly my research has a bit of both. So I think that, you know, this is, sort of, a word of caution about assuming that the potential for the pandemic to, sort of, spur technology adoption, we should think twice about whether that’s going to rapidly convert to higher productivity growth.
So, in terms of what we need to do to, sort of, convert that potential to higher productivity growth, is I think we need to, sort of, target those numerous dimensions of structural weakness. So, you know, to the extent that COVID has accelerated a technological change, we need to think seriously about whether our competition policy frameworks are truly adapted to the digital age. To the extent that the pandemic implies a reallocation shock, you know, to the extent that businesses have undertaken new modes of, you know, sales, more people are working from home, that has implications for basically inner city property markets. At some point, that may force restructuring in our economies. So we need to make sure that there’s very few barriers to human mobility, in terms of occupational licensing, how we design our housing market policies, and barriers to firm entry. And at the same time, we need to make this equitable. So, Sven mentioned before the importance of supporting work transitions.
And finally, I think we need to make sure that this time around, policy gives sufficient direction to a green recovery. So, you know, there is a small emerging literature on the impacts of green stimulus from the GFC, and what we tended to see was that these programmes tended to have underwhelming results. And the main reason was that they didn’t benefit from clear policy signals, with respect to the price trajectory of carbon. And I think the other thing to note is that although greenhouse gas emissions fell in response to the GFC, they rose very quickly afterwards. And it could have been that policy, in a sense, inadvertently restructured – and inadvertently inhibited restructuring in those polluting parts of the economy.
This is a chart from the recent Going for Growth publication, which shows the share of industry capital sunk in zombie firms, and this is the difference between polluting industries and other industries. And we see, certainly after the GFC, there’s a big increase in misallocation, if you like, in those dirtier parts of the economy. So I think this is a cautionary tale about, you know, we can do green stimulus at the moment, but we also need to think about what else we need to do to get business certainties and direct the recovery on a greener path. So, thank you.
Chris Giles
Thank you very much, Dan. Now, Janet, I’ll turn to you, to give your sense of where we are and to give – to see whether you’ve worn the optimistic side like Sven or have a little bit more caution like Dan just had.
Janet Henry
I suppose I would say – I mean, I can’t fail to disagree with the optimism on the technology side. We know that there are going to be some sectors in the world that benefit considerably from the investments in technology. And the one thing I would be encouraged by, over the last year, is that broadly speaking, the investment spending globally has been a little bit more resilient than certainly we had feared at the start of the pandemic. We know that in certain sectors we’ve seen a decade’s worth of transformation in the space of about six months. If anyone had told me that HSBC would get over 100,000 people working from home in the space of a couple of weeks, I would have said, “No, that will take a decade.” So there have been some massive transformational shifts, and I think increasingly, we will see it much more in the service sector. You know, for the last couple of decades, yes, we’ve seen huge globalisation effects, we’ve seen dramatic technological advances, very much concentrated in the goods sector. I think the next decade will be in some of those service sectors, whether it is medical-related, education-related, and other areas of professional and business services. So I absolutely share that optimism.
But I think there is still a lot that we don’t know about the past and obviously don’t know about the future, that there are a lot of uncertainties, because although we very much focus on the dismal productivity performance during the global finan – since the global financial crisis, we can say that that has been driven by, perhaps, by austerity. It certainly doesn’t seem to explain all of it, given that in most countries – maybe not the US in the 1990s – but it was already slowing elsewhere in the world before the pandemic – sorry, before the global financial crisis. So we have to consider some other factors as well. And I think, you know, Dan did touch on some of these, and obviously, maybe in the Q&A we can go into a bit more detail. But it seems to be that maybe ageing itself has been playing a role in this, the investment preferences of ageing populations, you know, preferring investments that do support current income, rather than necessarily waiting longer term for productive outcomes. We still have ageing societies, in a post-pandemic world.
Education obviously matters, and you know, this is what both of my panellists – fellow panellists – have touched on as well, that, you know, this productivity won’t happen without skills, policies, improvements in education. But, you know, even the advanced economies look pretty dismal, particularly the US, in fact. There was a headline in the Economist this week, that said 48% of US adults are proficient in reading, which is a scary statistic in itself, never mind its very poor PISA scores, compared with other countries.
And I think, when we look forward, in terms of some of the risks from the pandemic, as opposed to, you know, just the opportunities to productivity, we need to think about, I think, you know, first of all – well, I suppose the impact of policy, but also the extent to which economic barriers are building between countries, and whether we get more in the way of national champions. Obviously what we’ve got – this huge shortage in the semiconductor industry, everyone wants to be self-sufficient, everyone’s investing a huge amount. I think there will be huge productivity improvements and I’m sure prices will come down, and availability will go up. But if this happens in more sectors, there’ll be implications for productivity for that.
And then a final point is just regarding unconventional policies and the extent to which that may have led to a misallocation of capital. Again, we didn’t think when the unconventional policies were first delivered by Bernanke and al, that they’d still be with us times – several times over, you know, more than a decade later, and some of the implications of that. So, I probably asked more questions than I’ve answered, but that’s some of my opening remarks.
Chris Giles
Lovely, thank you, Janet. Well, I mean, it’s time, I suppose, that I can ask some questions, and all of you can answer them. I’m sure you will. I just wanted to go – look back, first of all. So we’ve all touched on what a dismal decade we had after the global financial crisis. And I think there’s one question that does, sort of, stand out, about whether this was a massive policy failure of demand, whether having – if we’d had more demand over that decade, particularly from fiscal policy, where the conventional wisdom was that you needed to get your fiscal house back in order. Could that then have had effectively an endogenous affect? So by having just more spending coming from government, that would have created more demand, and therefore companies actually improving the supply side of their operations, such that you then have then – had a better performance? ‘Cause quite a lot of people, particularly on the left on the economic – of the political spectrum, think this was – this is the reason that productivity was so slow over the past decade. And I just wanted to get, maybe, if all of the panel could just address this question, because it does crop up all the time, whether actually, if we just get demand sorted, we will sort out productivity itself.
Sven Smit
You went on mute, Chris, but I’m happy to start. I don’t think – you wrote it yourself in your article also in May, this has been definitely solved, what happened. So you can only, sort of, add angles to it. The one thing I will say from a business perspective, when we look at how our clients operate and our business operate, there’s been not that much time of shortage, where people just didn’t have enough capacity to build. And part of the productivity equation for a company is that you actually expand capacity, but the incremental capacity is more efficient than the previous capacity. And when that system is not there, you do get the constraint on the productivity growth of companies, and it might concentrate, as Dan said, in what we call superstar firms, in a few that have the very high demand.
What we basically find, is in higher growth businesses, the productivity does move up. So, in my view, it is from a business perspective, if you’re planning for productivity growth, there was less demand than they could have had to produce productivity. Whether you then can, you know, put the thesis it’s governments should have done it, or it should have come somewhere else, to me is a slightly different question. So the source of demand, maybe somebody else can talk about that, I’d just say companies have not been in the situation that they couldn’t fulfil demand, therefore they had no incentive to, you know, add productive capital and capacity.
Chris Giles
I mean, now, if I come to Dan, just on the same question. Your chart you showed, which showed the difference between the high performing companies and the lower performing companies, does seem to argue against a straightforward demand equation, because there’s such heterogeneity between companies over the past decade.
Dan Andrews
Yeah, I think that’s right, but I would say that in pure macroeconomic terms, we know that the stepdown in labour productivity growth after the GFC is almost entirely accounted for by weaker capital [inaudible – 24:43] across OECD counties. So, TFP remains weak, but the big step down is in business investment, and, you know, typical macro accelerator models posit a large role for aggregate demand in business investment. So I think that there has to be something to that. Whether it’s the – I don’t think it explains everything. We know that there’s strong evidence that the damage to the financial sector had lingering effects, not only on investment, but the allocation of investment and the ability of young firms to attract finance and grow. We talk about a missing generation of young firms in the aftermath of the GFC in some countries. And finally, I think there is a structural story there as well. So, you tend to see that the productivity performance is, in the aftermath of the GFC, is a lot weaker in those countries that have large policy-induced barriers to corporate restructuring. So I’m thinking particularly in Southern Europe where you see very rigid insolvency regimes that delay necessary corporate restructuring, but also penalise failed entrepreneurs, in the case of pure luck, right?
So, it has to be, I think, a mix of, sort of, you know, demand with some type of financial friction, which further gets exacerbated by pre-existing structural policy weakness, to really be able to account for that, not only heterogeneity between firms, but different experience across countries in macroeconomic terms as well.
Chris Giles
Thank you. Now, Janet, I wonder if you could both address that question and push it forward a little bit, about whether we’re going to see a completely different demand landscape in the years ahead now we have quite different policies across the world?
Janet Henry
First of all, I completely agree with what’s just been said, and obviously the OECD did some excellent work in the wake of the global financial crisis, looking at the difference in productivity between the frontier companies and the others. So I think that, kind of, lack of, you know, partly because of the financial stress, the inability to have that, kind of, creative destruction, which might have allowed more economy-wide productivity to come through, you know, more, was part of the problem, why we didn’t have the capital deepening. But I also just think that the last decade was a highly unusual one, in that it seems like we went from, kind of, the biggest crisis that we’d ever had in living memory at that time, to, you know, one after another.
You know, the Eurozone crisis rapidly followed, and then we had a lot of concerns about China in 2015. So that the world never really reached the stage of not still being scared about the recent past, and of course, labour was very cheap. So, you know, maybe one of the reasons labour productivity was weak was because labour was cheap, so why invest when you’re so uncertain about your future, when you can employ a large number of workers really quite inexpensively? So I think that might just be one additional factor to add to the other factors that my colleagues have mentioned.
And in terms of looking forward, obviously this has been a very, very different policy response. Remember, it was at the start of the global financial crisis, not on the same scale, but for the first one or two years, we did have enormous monetary and fiscal stimulus, we just then went into a wave of multi-years of deep austerity in a number of countries. And I think people don’t realise quite how much was undertaken in the US, not just in Europe, by all the state level of tightening that came through on the fiscal side in the US as well. But remember, what we’ve seen over the last year is very different to a typical recession, and you know, in any year you normally see delinquencies. In the global financial crisis, you did see quite a lot of delinquencies, even if not as many across Europe as the banking system couldn’t take it. But over the last year, you really have seen a dramatic reduction in the number of delinquencies, so that we know, over the next couple of years, but we don’t know the timing, we don’t know how that’s going to fall on different companies, what that’s going to mean, in terms of which companies are more competitive, and how that will actually, you know, unfold. It is one of the big unknowns, and also, how the investment in technology impacts on other sectors.
Obviously, at the moment, we’re hearing a lot about labour shortages in hospitality, in recreation and suchlike, but remember, not so long ago, those were the only jobs that people could get, because technology had replaced a lot of the other jobs. So, again, I’m just adding to the unknowns about the future rather than suggesting what it means. But for me, it means, probably some sectors, probably with really strong productivity, and some sectors where it’s still pretty dismal. We still don’t know a lot about economy-wide productivity for the future, irrespective of the demand support and the policy support to, you know, to support that.
Chris Giles
Thank you. Now, I think it would be remiss of me if I didn’t add a, sort of, at least play Devil’s advocate for a second, and give you a pessimistic view of the world, which you might be entering, which is one where we learn lessons from this crisis, the pandemic crisis, and lessons that we didn’t have a resilient enough economy beforehand. We need to have more redundancy built into our services, and particularly our health services, our public services, but also some private services, and so that we might invest quite a lot, but we invest for, essentially, not output, just as an insurance device. Now, that might be entirely the right thing to do, but it will be pretty difficult for productivity statistics in particular and for output per worker, if we have a lot of people and equipment, just being there, just in case something goes badly wrong rather than trying to optimise. To what extent are you concerned that this is going to be a material issue? And then let’s go in reverse order, Janet?
Janet Henry
Am I concerned or is it to some degree inevitable? I mean, you know, Diane Coyle has written some excellent stuff over the years regarding GDP as a measure of output. And obviously, the decade that we had some of our strongest output in the global economy, it has been with great detriment to the planet. So if you were to change the way you measure it, and this is certainly something that Diane has written about a long time ago, you, you know, maybe you need to depreciate the damage to the climate and to the planet at the same time. So, I think there’s going to be a lot of discussion about this, and I suppose what I’m a little bit concerned about is how a lot of these broader goals are increasingly burdening on central banks, and that that might mean that they take their eye off the ball with other – with their central objectives of price stability. I think there are jobs for governments, and you know, obviously most of them are talking about greener, fairer, more inclusive growth in the global economy. There will be implications that governments will have to deal with. I just hope that they don’t overburden central banks in their desire to do so.
Dan Andrews
That’s a really…
Chris Giles
Well, one of the – I was just going to come to you, Dan. So one of the issues will be not just about the environment, but just in – just general economic policy health and education, we might think that we need to have more redundancy, more capacity, just to deal with crises, particularly in countries like our one, like the UK, where we found ourselves particularly short in the pandemic at times. Dan, is this something that then quite – can be quite difficult for productivity, and be a drag on productivity growth over the next decade or so?
Dan Andrews
Yeah, I mean, I haven’t – this is a really interesting point. I haven’t thought deeply about this and I guess that’s probably right. The one caveat would be that this would be disproportionately occurring in those sectors that have relatively low measured productivity anyway, right? So, you know, to the extent that this is actually buying more stuff and investing, it could inflate, like, labour productivity in the near term. I mean, I tend to think – I tend to be more concerned about accounts that potentially compromise the dynamics of the wealth producing parts of the economy, right? So, in terms of private enterprise and that, because that’s what pays for everything else, right? So – but I think that’s an interesting idea nonetheless. I mean, it’s a persistent challenge for structural policymakers to boost productivity in the non-market sectors of the economy. So, you know, it could be actually – lead to some compensating policy action, if you like, if it truly is relevant, but it’s hard to know at this point.
Chris Giles
I suppose the archetypal sector, which is maybe important here, is the social care sector for the vulnerable and the elderly, which in many, many countries came in under very severe strain in the crisis, is obviously a very low productivity sector, but taking Janet’s point entirely onboard, maybe GDP isn’t measuring the value that it creates, because it’s essentially measuring the wages of low wage people. So if that sector gets quite a lot bigger, to prevent what – the scenes that we saw across many, many advanced economies, then that’s going to look quite bad on GDP terms, isn’t it?
Dan Andrews
Yeah, well, potentially, but it also, you have to find workers to supply those sectors as well, right? So, are those workers being reallocated from hard-hit sectors by the pandemic that are similarly low waged? So are these workers coming out of in person services centred on hospitality and arts and recreation? If they are, then, you know, it may be awash, although there will be transition costs in moving those workers, right?
Chris Giles
I suppose I wonder how…
Sven Smit
And so my angle would be on this, and I agree it’s a very good question, that how we will interpret what happened last year will actually also be important to this. Because I could make an argument that in dealing with COVID we stepped up productivity a lot last year. I’m not sure how we measure it and so on, and I’m sure at some point research will come out that will say A or B. But we have accelerated vaccination and creation of vaccines and so on. So we have accelerated all this stuff. If in hindsight, the interpretation is now left for the brakes, let’s not go there, then I think those sectors will have the problems that you describe. If actually we have learned that you could actually move the healthcare sector faster than it maybe does today, or historically, we might have gained something. So to me, the lessons in that, sort of, don’t give an A, B answer, but I actually think how we interpret this event, also on the supply chain side, where you say you should double down on supply chains and so on, and build more resilience. At this point in time, I do see people getting more data on the supply chain, but they are learning two things. They are learning resilience, but they are also learning productivity and so I think the jury is still out, but I think a lot will be how the conversation shapes next year. Is it going to be a negative conversation or it’s actually going to be a learning conversation?
Dan Andrews
Can I just add one more thing? I think that’s a really good point about – Sven makes, in terms of how this is interpreted. Like, you know, you could imagine that yeah, there could be upsides in the sense that it sheds, you know, more light on the importance of funding basic research, when we know that the composition of innovation policy in OECD economies has dramatically shifted away from direct funding towards indirect measures such as R&D tax credits. So it could actually, you know, engender some more balance in how we design policy as well. But I think it’s a really thought-provoking question. You can take that in a number of directions, right, beyond just a, for instance, the social care sector.
Chris Giles
Thank you. Just to show you that I’m not just going to be Mr Gloomy here, the – clearly the real upside, where the pandemic could make the world in the long-term a better place, is by having, as I think Sven put it in his opening remarks, some sort of shock element that has shocked companies into doing things they always should have done, but never quite got round to doing. I just wonder, what evidence have we got – we know that companies have made enormous strides, and Janet was saying how HSBC managed to get 100,000 people working at home in a couple of weeks, which she didn’t think – wouldn’t have thought was possible. I think the same would definitely apply to the Financial Times, so I would share exactly that view. What evidence have we got that this is really going to make a difference in, I think it’s really the very large area of business services where this has been most evident, and also in smaller companies, that have often been the laggards in productivity? Dan, do you want to just talk about what we know so far?
Dan Andrews
So yeah, so I think the most convincing evidence, from my perspective, comes from people like Nick Bloom and Jose Barrero and Steve Davis, who have a number of papers thinking about the reallocative and technological aspects of the COVID shock. And in one of their papers they essentially look at patent applications that cite work from home technologies. And that shows a dramatic rise in patents citing those technologies, which suggests that this could have more enduring effects, if you like.
In terms of, you know, take up amongst laggards, smaller firms, I don’t have any data on that yet. You know, the – one of the problems is that, you know, these types of measure of within firm productivity are incredibly cyclical and noisy, right? So – but I think also, you have seen, sort of, more business entering in the US in those sectors that – where demand for COVID-induced type products has increased in that. So that to me suggests that there is, sort of, you know, these dynamics are playing out, but I just don’t know yet how broad-based this is. Sven, I don’t know, in terms of the data you have access to, but is this all companies, or is it, sort of, centred on medium-to-larger companies, you know, in terms of who you talk to and that? I think that that’s one of the big questions, right? Does it really diffuse to the true laggard who essentially has been resistant to adopting, you know, well-known technologies for the best part of two decades?
Sven Smit
Yeah, so the data – just to respond quickly – the data that we look at is not just the 5% of the firms, it’s a wider sample, and you see accelerated adoption. It almost – they almost had to, if you want to get at – so it’s a wider sample than just at 5%. Whether or not it will lead to the full diffusion that you would want, I think the jury on that’s still out. There’s the people that have implemented. But I think the one thing that it’s given me, also, a lot of confidence in, having talked about this with lots and lots of executives, is that they take the lesson of speed in rollout of the last year, to not just the area of COVID. They take it to other areas too. And so they’ve learnt – they’ve actually been studying – why is it that we did some stuff in two weeks that we normally would take two years for? Or why did we do something in five days that we would have planned five years for? And that why is actually a lot about decision-making. And of course, the decision-making was triggered by a deadline, which was meet the deadline of the lockdown. And now, maybe we know that line, it will slip back, but if you take the – let’s get back to vaccination. The approval was also being researched, is that 60% of the accelerated outcome of the vaccination was due to faster approval. Will we ever flip back that 60% or are we going to keep it? And does that mean that all vaccines or all medication will come 60% faster? That would be – these, kind of, things, that’s what – I think that’s why, even when you go down to the narrative, you hear some stuff that has just never happened. And that, to me, makes it at least hopeful.
Chris Giles
Janet, just to give us a sense of how you are thinking about it for your forecasting purposes. Are you now thinking that there’s going to be – that this, sort of, shock effect is going to raise the potential growth rates of economies?
Janet Henry
This is the difficult question. In the same way that monetary – you know, central bankers are saying what happens on reopening is no guide to the medium to long-term outlook, I think it’s the same with growth. You know, we’re seeing this, kind of, surge in pent up demand, a strong bank’s back from the lows of last year, but there’s still a lot we don’t know about the medium-term outlook, other than, probably, what we were most concerned about at the start was scarring, the lasting implications for potential growth and it looks like the supply side damage has not been as bad as most of us feared. So, while some of my team around the world did initially make some downward revisions to potentially growth, assuming a slightly lower rate of productivity, I would say some of them are already starting to reassess those, but it will very much depend on the pace of reallocation, and that’s what we really don’t know yet. At the moment, all this policy stimulus is still in place. You know, the US unemployment insurance will end in September. The UK job replacement scheme will be September, even if they phase it out slightly. The short shift schemes in Europe. It’s really only after that that we even get the beginning of the hint of the speed with which we’re seeing reallocation or indeed whether this support is remaining in place for longer. So no, not rushing to make upward or downward revisions at this point, but so far it has been slightly better news.
Chris Giles
So is the crucial period, assuming that we don’t get overtaken by another variant, is the crucial period the, sort of, second half of this year, the autumn of this year, we learn what the longer-term outlook for the economies are?
Janet Henry
I think we will get a hint of it, ‘cause we’ll have a better idea of when the labour market’s coming back and what that means for inflation, and whether we’re going to get any second round effects. And we may also get the hint for productivity. You know, some people are already jumping on the surge in productivity growth that we’ve seen in the last year, forgetting that the US had its strongest productivity performance during the Great Depression of the 1930s. You know, when you have an implosion in GDP, but you cut the labour by more, you, you know, arithmetically, you get a rise in productivity. It doesn’t tell you about the lasting implications. So what I’ll be looking for is one, are workers coming back, but two, what is happening on the investment side?
In our opening optimistic comments, it was, you know, the investment we’ve seen is in technology, and this is all really good news and good for productivity. The other area of resilience has, of course, been construction and residential property and property bubbles. I don’t think that’s going to be productivity enhancing. So what we need to see is a broader area of investment spending into areas that will be productivity enhancing over the medium-term. So yeah, what we see in 2022 on the investment side and later this year will be very important.
Chris Giles
Dan, if I can just come to you finally, before we go to the Q&A. The OECD, along with many other forecasters, was about this time last year, in its May forecast, or even maybe even a little bit later, very pessimistic about scarring effects from the economy, and has now become a little bit more optimistic. And I think this is – this, as they all said, it was – of course, in my view, I would think I was very pessimistic this time last year after the first wave, thinking that, you know, the world was never going to get back to something like normal, or we wouldn’t be able to reallocate to something better. Could you just talk about, you know, what has helped to change that mindset and made us all a little bit more optimistic a year on?
Dan Andrews
Well, I think it’s – so, firstly, that’s right, like, you know, for, you know, if you look at basic – there’s a whole literature from the OECD looking at four decades of recessions, which demonstrate that recessions, you know, carry long-lasting impacts on potential output. The mechanism varies, depending whether it’s TFP or on the labour side, but there’s, you know, real evidence and compelling evidence that recessions engender scar effects. Now, I think what’s changed, obviously, has been the vaccine rollout, which, you know, is actually – it’s going very well in some countries, it’s lagging in others. But, you know, certainly we’ve seen that when countries make big strides in the vaccine rollout, they can start to roll back some of the other barriers to mobility, if you like, and that’s, sort of, led to a, sort of, a pickup in confidence. Obviously, policy has been appropriate and if you look in the US, you know, obviously the big fiscal stimulus in the first, you know, in the first month or two of the new administration and that, all those things have come together in actually, if you like, you know – Janet mentioned this earlier, the importance of addressing uncertainty in the economy. This was a big constraint on business investment after the GFC.
And I think there has been, sort of, a co-ordinated policy response here, to, sort of, try to stabilise expectations. You know, so I think that the, sort of, big wildcard here, right? You know, to the extent that more countries can rollout their vaccines and, sort of, get their economies, sort of, back to something that approaches normalcy. And, you know, I think there’s also been some evidence starting to come out as well, that, you know, maybe the – when you look at – for an exit, albeit at low levels, it still seems to be connected to productivity in fundamentals in the same way as it was before the crisis, which suggests that you’re not getting this indiscriminate shakeout of firms. And so, you know, for me, the worst case scenario here would be if employment losses were concentrated in our most productive firms, ‘cause that’s where you get, you know, the true scarring effects coming from, in terms of, you know, within firm, you know, that of capacity, but also the distorted reallocation of between firm stats. So I think there’s been a number of factors there, but clearly the vaccine rollout and largescale policy action are at the core of that account.
Chris Giles
Thank you very much. Now, I’m going to move to the Q&A. So I’m going to go to Barbara Redpath’s question first. She asked – and I think I’ll go to both Janet and to Sven on this question. “Shouldn’t the absurdly low real interest rate level finally push CapEx and investment in a way that will, with a lag, significantly increase productivity together with investors beginning to think long-term?” Janet.
Janet Henry
I hope so. Can you hear me? I’m still seeing I’m muted, but I’m unmuted.
Chris Giles
You’re not muted. I can hear you.
Janet Henry
So I am – I think we should see some improvement in investment. But as I think we’ve all said, the biggest determinant of investment spending is expected future demand. So as long as you’ve got very low real interest rates and you can see viable investment opportunities because of higher future demand, then you should see some pick up in investment spending. But that isn’t always the case, you know, as indeed the same, you know, I would argue that, you know, one of the ways to support investment spending is investment incentives, ‘cause certainly corporate tax cuts didn’t work. And we saw that in, you know, with the US tax cuts in 2018. Instead, they were returned to shareholders. So I think a lot demands – it comes down to what shareholders demand and want from their companies. If they just want income returns to – or they want to support investment spending for longer-term returns, then we might see more in the way of big ticket spending in investment spending items and economy-wide productivity growth. So, it’s not necessarily, I suppose, is the answer to that question.
Chris Giles
Sven, is it not necessarily?
Sven Smit
I have a quite similar, but a small difference. I think on everything which is the, sort of, the two to three to four year out, it’s totally Janet, what I see is driven by is the demand there? And whether, then, the interest rate or the constant capital that they calculate with is one or two points higher or lower, it really – no, they’re not going to build a factory if the demand is not there, no matter what the interest rate is. And to sort of – that to me is the first proxy. So only if it leaks from the interest rate to demand, you will get, maybe, a cycle. On some very long large bets, you might see some difference in where people could – because there the risk is not – you basically have, sometimes you have to take the bet much earlier. But on the – I don’t think it’s a big influence, from what I see. People are looking for demand. When the demand is there, they will spend it, if the return on that business is good. And the hurdle rates are so far away from the real interest rates, I don’t think it’s – it’s a percentage factor rather than the full factor.
Chris Giles
Thank you, Sven. Now, I’m going to ask Dan maybe to have a go at this question from Sam Martin, which I think we can broaden out to the – looking at the whole education and skills sector. But the question specifically is, “How do we engage current universities – current university students, schoolkids and other young adults in the new post-pandemic working environment? Those between 16 and 25 have been one of the groups most affected by the pandemic and its impact on working patterns.” And then question is, “Are governments doing enough to support this age group if the world of work is revolutionised?” So, this is a really important topic, which I think you touched on anyway, about pandemic and education and skills, and the questioner is entirely correct that young people of this age group and maybe even below have been hardest hit. So, what is the solution?
Dan Andrews
Great question, Sam. So I’d emphasise, sort of, two relevant dimensions of that. There’s, in the 15 to 24 year age group, like, if you go to the upper end first, what you’re worried about there is labour market entry during a recession. And we know, from scores of studies spanning multiple OECD countries, that if you’re unlucky enough to enter the labour market during a recession, you’re going to be in trouble for up to a decade, in terms of your wages and employment opportunities. And that part – and, sort of, the roadmap to recovery there is one through jobs, which you – so what policy really needs to do there is remove barriers to labour mobility, so that people can move towards the opportunity and undo some of that damage.
For the younger people, you know, so the people who are maybe still in high school, you know, I think what you have to understand is that the pandemic has accelerated pre-existing trends that were already placing pressures on labour markets. So obviously the big one is digitalisation. So I think, you know, obviously we need to go to, obviously, core skills in schools and university about digital literacy. I worry when I see big variances across the socioeconomic distribution. We know that the pandemic has also exacerbated some of these inequities, in terms of, you know, poorer kids not actually having a suitable place to study at home and access to the relevant IT. So I think, you know, this goes to basically thinking about the equity angle as well, and, you know, there’s a great work by, I think, John Van Reenen, who talks about lost Einsteins. So if you could find a way to get poor but smart kids to go to university and reach their potential, that could be one of the biggest spurs to growth in our economy.
So I think we need to start thinking about younger people from, sort of, the dimension of inclusivity, but also growth. There’s no actual trade-off between growth and equity, in spending money on younger people. And I think, maybe if anything, OECD countries have got it round the wrong way, in terms of the allocation of their social spending.
You know, for your final point, you know, there’s some people who would have – and I think Janet mentioned, you know, two recessions in the space of a decade, right, you know. There’s some people who are maybe 30 who have lost their job multiple times over the last ten years. And they would have only just been recovering from the GFC in 2020, if you believe the studies, based on scarring effects of ten years, and then the pandemic hits. So, you know, I think that’s a really great question, and I don’t think I’ve done it justice, but there are a few thoughts, if you like.
Chris Giles
Thank you. Thank you, Dan. I’m going to go to another question now, which I think is – we can build out to a wider question. So it’s from Caroline Messacar, who says, “How big is the risk that political pressures will encourage an overly positive view of the outlook?” And I just think this is quite an important question, in terms of, we can sit here as – in a very analytical way, talking about what’s best for productivity. In the real world, it has to be implemented by Politicians who have many, many constraints on them, and in recent years, have often found populism, and not necessarily doing what Economists think is best for the economy, is best for their own political fortunes. And so, just how optimistic are you that the Politicians are going to do, as it were, the right thing? Not necessarily the optimal thing, ‘cause, you know, that would be far too much to ask, but just generally be in the right place in the years ahead? Janet, why don’t you give us a sense here, and what differences there might be around the world on that.
Janet Henry
I think the story so far is that the Politicians are aware that they do need to try something different. You know, they started off, I suppose, with central banks, didn’t it? You know, the Fed moving to average inflation targeting was a realisation that they didn’t want to be like Japan or the Eurozone and be stuck at the zero or negative bound forever, they needed to try something new, they adopted, you know, trying to engineer a regime shift. And I think there is a realisation that, given, you know, there was already an income inequality problem in, you know, it was evident again, before the global financial crisis, but it got exacerbated quite significantly by the global financial crisis, and every recession tends to be quite regressive, and this one even more so, because usually, you know, female workers fare better in a recession, given they’re in service industries. So there is a realisation that the income inequality issues, and as you already alluded to, Chris, the social care related issues, means that governments have to prioritise differently. So I think the story in the advanced world is that we need to do more.
Other countries around the world, that I think, you know, there is a greater alignment on the need to examine climate related issues on a global scale, but in the emerging markets, I think probably less so. And it’s not necessarily that they don’t have the desire, it’s just, one, they have different priorities, and a lot of them, two, don’t have the resources. You know, we know that they were – had to be a lot more modest with their policy stimulus, given their fiscal constraints in the wake of the crisis. A lot of them have got – so they couldn’t do as much as the advanced economies did. And now already, they are facing, you know, potential downgrades in some cases, and are already thinking about reining in their fiscal stimulus in 2021. So I think we will see it more so in the advanced economies, but, you know, a bit less so in the emerging economies, where the priority for now is mainly just about getting the economy back on its feet, and in some cases, in the face of still-rising COVID infections and no access to vaccines, than thinking about these broader political goals.
Chris Giles
Sven, do you want to come in here?
Sven Smit
Yeah, and I’d say we might live in a unique moment, and Dan, Janet, Chris, I don’t know whether you agree, but the uniqueness of the moment is, of course, in many ways, because we’re in a pandemic, but one uniqueness is that we are living in a period of relative agreement between Economists. Maybe now it starts to fracture again, but let’s say during the last 14 months, I didn’t see a lot of divergence that we should go all in and support everybody and so on. A society and Politicians to shop for views on the economy pre-COVID quite well, and there was little agreement. And so how can you have even agreement on the economic policy if the Economists don’t? I would hope the Economists would have a little bit of an agreement, still going forward, although I know it’s chattering a little bit, when you go to how you get out of this. And that that would help society to pick a path and then the complexity of politics will still be there, but maybe we should start from the Economists’ table to make it easier for the – for society.
Chris Giles
I think that’s a very good point. I think that – and it is definitively true that there’s been much more unanimity among the economics profession in the past year or so of how to deal with it, and to do quite radical things, than you might have expected if you’d heard all the squabbling over the previous decade. Dan, did you want to come in here?
Dan Andrews
Yeah, so I think that consensus is that, you know, when the house is on fire, you’ve got to do something, right? And so that consensus applies to crisis phase policy. It becomes more difficult when you’re talking about how to lift potential growth in your economy and getting in the nitty gritty of actually not just spending money but how you reorganise markets to be productivity enhancing. And I think that, you know, in the short run, we need the political centre to hold together, because that’s our best chance of actually being able to enact meaningful structural reforms to improve productivity prospects and opportunity for all in our economies. And, you know, I think that, you know, maybe in a few years’ time when governments then turn their mind to addressing public finance issues, that will be another, sort of, point when we get more traction here, on the structural side. But look, you know, it’s difficult, and there’s a lot of headwinds towards a society that embraces markets and wishes to encourage economic restructuring. But, you know, from what I’ve heard today, and Sven, some of your points about how people interpret the pandemic, I think maybe that’s an opportunity for a reset.
Chris Giles
Lovely, thank you very much. On that, unfortunately, we are now out of time. So, I’d like to thank the panel, to Dan, Sven and to Janet, very much for a really stimulating hour. If I was to sum it up, I would say that when we’re looking at the post-pandemic productivity outlook, I think we are still in the situation where we don’t know what’s going to happen. That doesn’t mean – that’s not a bad thing. We are much better – we’ve had an hour of very, very informed conversation. If we pretended we did know then we’d all only be lying to the audience. And so we don’t know, but we do know now much better, I think, what the relevant important parameters are for the world and what we all need to look out for. So I think it’s been really informative. Thank you ever so much, all the panel, and I’ll close it there. Thank you very much.
Sven Smit
Thank you, Chris.
Janet Henry
Thank you.
