America suffering from ‘economic calcification’ – JP Morgan
AEIdeas
Talk about two worrisome long-term trends. America, as I have written, is experiencing fewer business startups and less labor market churn. The result, according to a new JP Morgan research note, is the “economic calcification” of the US economy:
The churning that has long characterized the US economy, the frenetic creative destruction of firms rising and falling, has become less frenetic recently. New business creation has trended lower, as has the normally-massive amount of labor market reallocation. … This reduction in economic dynamism has taken place over the course of the last few decades … Less churning in the economy can have beneficial consequences, but the reality is that the negative effects likely outweigh the positive effects. The symptoms of reduced churn look similar to Euro-sclerosis.
Basically, a less dynamic economy will be marked by (a) less productivity and innovation, (b) less hiring and more labor force discouragement, (c) a lower natural unemployment rate since there will be fewer bouts of between-job unemployment. As evidence, JPM economist Michael Feroli summons a number of data points (reflected in the charts below). Let me paraphrase:
— Net job openings at new firms is down, averaging 1.3 million at the end of 2013 vs 1.5 million in the last business cycle and 1.8 million in the 1990s.
— Employment at newly-opened firms — not including reopening of seasonal firms — was 0.7% of all employment vs. between 1.1% and 1.3% during the 1990s.
— Throughout the 1990s, quarterly job reallocation — measured by the Business Employment Dynamics report — has fallen to around 12% vs. 15% and 16% in the 1990s.
— Worker reallocation (the sum of the hiring and separations rate) has also trended lower, as measured by the Job Openings and Labor Turnover Survey.
JPMorgan
JPMorgan
Feroli’s analysis is based in part on the Jackson Hole conference paper, “Labor Market Fluidity and Economic Performance” by Steven Davis and John Haltiwanger. While Feroli concedes that an aging population and the emergence of big box retailers are playing a role here, there is more than that going on:
Davis and Haltiwanger speculate that the increase in occupational licensing requirements may be reducing labor market dynamism, a cause which is readily addressable by policy interventions. Similarly, growth in exceptions to the employment-at-will principle is a cause of calcification that can easily be reversed by changing policy. It is not certain that policy can reverse the decline in American economic dynamism, but given the stakes it is worth trying.
The consensus is building that the US economy isn’t just demand constrained but also faces some deep, structural, supply-side problems — and that harmful public policy is playing a role.
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Of course. Any country where banks are allowed to hold much less equity against what is perceived as absolutely safe than against what is perceived as risky, and therefore earn much higher risk adjusted returns on equity on what is perceived as absolutely safe than on what is perceived as risky is doomed to calcify.
In short, “the land of the brave” is suffering from a shortage of risk taking
Yes, there is a shortage of risk taking, and a number of possible explanations for it.
I notice that although four of the five graphs show a downward long-term trend, all five of them also show a sharp drop around 2009 or 2010, which suggests that at least part of the reason is the recession itself. Understandably, people are hesitant to leave their current jobs when unemployment (especially long-term unemployment) is high, and they have no idea when they’ll be able to find another job.
Which suggests that once long-term unemployment comes down, the recession dip in job churn will disappear, and we’ll be left with only the long-term trend.
A few months ago I switched jobs voluntarily. But I’m fortunate: my old employer offered me leave-without-pay, with the option to return within a certain time. If I hadn’t had that security, in today’s economy I wouldn’t have made the jump. Most people don’t have that kind of security, so they’re unlikely to take risks with their careers.