Jim Pethokoukis provides a convenient summary of the various theories for why productivity growth has slowed. His list, however, doesn’t contain my theory.
In my book The Upside of Inequality: How Good Intentions Undermine the Middle Class, I argue that the economy has a finite capacity and willingness to bear risk, and that the economy is often at or near its risk-bearing limit. When the economy discovers unexpected risks, the threat of terrorism after 9/11 or the inherent instability of banking after the financial crisis for example, the economy dials back risk-taking—both investment and consumption—in order to return to equilibrium if its capacity and willingness to bear risk has been exceeded. Recession ensues. Unless the identified risks are reassessed or mitigated, growth will remain slow. In the wake of 9/11 for example, the threat of terrorism was reassessed downward when further attacks failed to materialize and growth recovered. In the aftermath of the financial crisis, no such reassessment has occurred so growth remains tepid. When the economy dials back risk-taking to compensate for increased risks, we should expect the risk-taking that produces productivity growth to slow.
It’s true productivity growth slowed prior to the financial crisis. But productivity growth was unusually high at that time so it was likely to return to its long term average regardless.
Buy my new book The Upside of Inequality: How Good Intentions Undermine the Middle Class (Penguin).