Despite the waves of enthusiasm for this or that new technology, productivity is growing little at the moment. And without increased productivity there is no sustainable growth of the economy and employment. Three heavyweights among international organizations met/clashed in Paris on an issue of fundamental importance: 10 years after the great financial crisis, income, investment and employment have not returned to their pre-crisis trend. How come? In other words, the growth prospects in the medium term, despite the current cyclical recovery, are obscured by the lack of recovery in productivity, without which substantial increases in wages are not possible.
Is it always the fault of the financial crisis or have policies to counter it become part of the problem? In Europe, the fiscal policies adopted, i.e. the early fiscal consolidation is considered to be mainly responsible for the second European crisis and for the worse performance compared to the United States. In fact, in the US we immediately took care of cleaning up the balance sheets of banks and companies that had become over-indebted and public spending was used wherever necessary - from car production to banks - while in Europe we focused too early on fiscal consolidation , neglecting the cleaning of the budgets, or giving in to the ideology of some countries and ignoring recent history (case of Japan).
The conference focused on the role of financial factors and related policies in determining the slowdown in total productivity, which reflects the efficiency with which production factors are employed. Already in the pre-crisis period, total productivity growth had decreased to 1% per year, but after the crisis, without considering the years 2008-10, it decreased by 0,7 percentage points, to 0,3 % per annum.
The suddenness and magnitude of this decline in productivity after the financial crisis calls for an expansion of the discussion hitherto confined to innovation and business investment. Therefore, the OECD has analyzed another mechanism that slows down productivity: the multiplication of decayed firms, zombies that absorb credit and other factors of production, creating real congestion that prevents credit from flowing to the most productive firms. There is a clear correlation between the increase in the number and duration of zombie businesses and the low level of the interest rate. With interest rates close to zero, banks, to meet capital requirements, prefer to roll over loans to businesses even if they fail to pay the interest on their debt.
It is known that the crisis causes the bankruptcy of the weakest companies (and banks), but what is the mechanism for the creation of zombies? Does it depend on the excessive debt accumulated before the crisis? Certainly the huge growth and misallocation of investment in sectors such as construction dates from before the crisis (see US and Spain) and not from post-crisis monetary policy. Excessive lending to slow-moving sectors/companies challenges bank management in allocating loans rather than the interest rate determined by monetary policy. Failing to clarify that debt causes low productivity if it is targeted at lagging firms and sectors facilitates the erroneous conclusion that accommodative monetary policy causes resource misallocation, aka zombie congestion.
The Bank for International Settlements (BIS), through the mouth of its chief economist, underlined not only the correlation between low interest rates and the creation of zombies, but also the increase in debt and the risk of a new financial crisis.
The chief economist of the IMF instead recalled the slower recognition in Europe of non-performing loans and the need to increase the capital of banks compared to the United States. Hence the increase in zombie firms and the lack of reallocation of capital to higher productivity firms: to correct this misallocation of resources it is necessary to use specific tools such as more effective banking supervision and the reform of insolvency laws. The OECD calculates the overall productivity gain from solving zombies and reallocating resources at 0,6%, or how much TFP lost each year over the period 2011-16.
There would therefore be limited gain if monetary policy were used for this purpose, while the costs would be significant: losses in production and employment, risks of deflation and loss of credibility of the Central Bank. The chief economist of the Bank of England estimated that if the BoE had kept the interest rate at 4,25% instead of bringing it to 0,25, productivity would have been higher, but the unemployed would have risen by 1 million. or 5% of employment in the UK. The IMF recalled the successes of monetary policy after the financial crisis in supporting consumer demand and consequently investments, albeit reduced, which made it possible to avoid not only the economic, but also the social and political consequences of the Great Crisis of '29 .
The Paris conference analyzed whether it is the weaker banks that have zombie companies as customers, but without reaching a conclusion for the confidentiality rules that prevent a bank's loans from being tied to a specific company. Other papers illustrate how productivity depends on firm characteristics such as R&D and management. Still others show the effect of public administration on productivity via insolvency laws, but also the "distance from Washington/Frankfurt" or lobbying effects on bank supervisors.
In conclusion, for the increase in total productivity it is necessary to act on the specific causes 1) at the firm level: innovation, management, investment in new technologies; meritocracy; 2) at the level of public power: reform of the insolvency regime, of incentives for companies, of education and, in the USA, greater attention to the concentration of ownership and competition; 3) at the level of the financial system: banks must put their balance sheets in order and surveillance must act on micro- and macro-prudential regulation.
In short, it is time to wean ourselves from monetary policy which for too long has been - especially in Europe - the only game in town. It already has enough to do to meet its inflation target and sustain growth and jobs.
