In his recent speech on the UK’s productivity challenges, the Bank of England’s Andy Haldane had to defend himself against a peculiar charge: that the central bank was itself to blame for low productivity growth because ultra-low interest rate has allowed over-indebted, unproductive “zombie” companies to survive longer than they otherwise would. That claim echoes critiques by central bank-bashers in other economies.
In a purely mechanical sense, the accusation is not entirely untrue. All else being equal, highly indebted low-profit companies that can tide things over when debt service is cheap would not be able to do so if tighter monetary policy made it dearer, and would go bankrupt as a result. (Haldane rightly points out that other things would not be equal, and that some high-debt but high-productivity companies would be killed as well. But he accepts that the arithmetical effect would be higher productivity among the surviving companies.)
But there is nothing special about debt service costs. Many other things could kill low-productivity companies by eroding what little profit they make. Two factors are higher wages and higher business taxes, which would also kill off the least productive companies and thereby increase aggregate productivity. So until you hear the scourges of loose monetary policy attack excessively low minimum wages and insufficiently high business taxes as vehemently as they condemn low interest rates, suspect them of ulterior motives or economic illiteracy (or both).
The flip side of the analogy is, of course, that productivity benefits may well result from the incentives to increase efficiency that these other forms of higher costs would impose on business. There is intriguing anecdotal evidence that this is taking place in the UK as a result of the sharp rises in wage floors set in motion by George Osborne’s last Budget two years ago. My colleague Mark Vandevelde reports that about 4,000 low-wage retail workers in Britain have lost their jobs at leading store chains that are instead investing in more efficient technology. That is to say, employers are moving away from a business model based on cheap labour to one based on technology that makes each worker more productive, which makes higher wages viable. (Or put differently, British employers are learning from the example of France, where employers from supermarkets to restaurants make do with fewer workers for the same output.) Osborne’s crypto-Scandinavian experiment - of boosting productivity by reducing wage inequality - seems so far to have had the intended effects.
However, higher costs of doing business will only prompt productivity growth through technology investments or better work and production processes if the right complementary policies are also in place. Business managers need to be made aware of the possibility of becoming more productive and of possible ways of doing so - and here, Haldane’s suggestion that UK managers may simply not know how middling they are or how they could improve needs to be taken seriously. The fact that sluggish productivity growth largely has to do with the failure of laggard companies to adopt best practices from leaders, rather than our economies running out of ways to do things more productively, needs to be taken much more seriously.
Above all, while faster productivity growth allows for higher wages for retained workers, demand growth needs to be strong enough to create employment opportunities for those no longer needed. This was essential to making the Scandinavian model work, and it is the idea behind the push by a group of US economists for a “high-pressure economy”. An excellent overview of the argument is Jared Bernstein’s interview with Josh Bivens on this topic, as well as the latter’s paper the interview is based on.
And when it comes to boosting demand, as well as facilitating businesses’ ability to respond to incentives to become more productive, not all policies are equal. A tighter monetary policy is particularly unsuited: it reduces demand and makes technology investments dearer. Business taxes also blunt the reward to investment and do not help with demand. They may finance public spending, but greater government borrowing would have stronger demand effects in today’s economic situation.
In contrast, policies to boost wages, in particular at the low end, would boost demand, help those most harmed by economic structural changes, while maintaining the pressure on companies to become more productive. What’s not to like?
