Productivity and Economic Growth in the Old and New Economy

It is easy to look at the pending Snapchat IPO, and either feel very confident that capital is being rightly allocated to the “New Economy,” or lament a possible $22 billion IPO valuation for a company with no profits and 330 employees. For comparison, Ford, an “Old Economy” bellwether, has $50 billion in revenues, $6.8 billion in pre-tax profit, and employees 201,000 people that pay taxes and support their local economies.

The truth about relative value lies between the Old and New Economy. Snapchat connects 158 million daily users, providing a large advertising, marketing and sales platform for companies that want to market on Snapchat. Those advertisers employ people that are producing goods and services, and can leverage the Snapchat platform to acquire more customers and increase sales, which leads to economic growth. While to some Snapchat may seem frivolous or narcissistic, it is in fact digital infrastructure, much like the road system that allowed Ford and the other automakers to thrive.

Likewise, Ford is a voracious technology user, innovator, and buyer, and have become a vertically integrated firm not just in manufacturing, but in the application of computer systems, moving into driverless cars, clean emissions vehicles, and ride sharing. They are as much a technology company as Snapchat.

Technology stands to benefit the US economy, helping productivity, which is at historically low rates. There are many reasons for the decline in productivity. Some believe that prior waves of innovation are no longer producing gains. A slowdown in capital spending may also be a reason for the decline. Stagnant wages have also played a role, as consumer purchasing power shrinks relative to the economic need.

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[1]Bureau of Labor Statistics

For companies like Ford and Snapchat to continue to build the economy, we must stimulate demand and job growth, which will drive up wages and increase consumer spending. We have to incentivize companies to reinvest capital in modern PPE, in order to drive up efficiency.   This in turn will spur economic growth, increase wages and profits, and create a virtuous cycle.

Productivity growth from 2005 to 2014 declined by more than 8% relative to its long-run trend. Business output is nearly $1 trillion less today than what it would be had productivity continued to grow at its average rate.[2]

New, high growth companies and small businesses are a main factor in economic and job growth. In the late 1970s, new business starts accounted for about 15% of existing U.S. businesses each year. In recent years that share has fallen below 10%. The rate of firms going out of business has also declined, but by a smaller amount, from about 10% per year in the 1970s to about 8% per year now. These declines are widespread and not heavily concentrated in particular industries or geographical areas[3].

Some things we can do include the following:

  • Reduce corporate tax rates – liberate cash for capital investment and hiring. This will create demand for labor, which will raise wages, spending, and increase tax revenues
  • Investment tax credits – incentivize companies to invest excess capital in new plant, equipment, investment, and other assets by providing a tax break for the investment
  • Reduce personal tax rates – allow more discretionary consumer spending, which flows into the economy
  • Enact smart regulations – regulations are important, and safety and environment are paramount, but reduce the morass of regulations and regulatory apparatus
  • Upgrade infrastructure – our infrastructure is in tremendous need of upgrades.   A sensible plan will look at all aspects of infrastructure, including rail, highways, airport, bridges, fiber optic cable, and renewable energy.
  • Reduce taxes on repatriated profits for US-based companies.   The estimated profits overseas are in the range of $2 trillion, which can be used in the US for expansions, dividends, and other expenditures that boost the economy.
  • Create an environment conducive to start ups. High growth startups and small businesses create a disproportionate amount of new jobs. Eighty percent of small business owners thought government regulation is a hindrance of new company formation and growth[4].

These are not political fixes – they straddle both side of the political aisle. A sensible approach to the new and old economy and providing impetus for investment and increased productivity will lift our economic growth rate from the tepid 2%> since the last recession in 2008-2009, to our long-term average of 3.22% from 1947 to 2016 (a 50% increase in growth rate). 

Northwestern Capital Partners (www.northwesterncapital.net) can assist high growth companies with raising capital, mergers and acquisition, marketing and operating strategies, and strategic planning. We would be honored to help your company navigate today’s economic climate.

[1] Bureau of Labor Statistics, 2016

[2] Behind the Productivity Plunge, Wall St. Journal, Edward Prescott and Lee Ohanion, June 25, 2014

[3] FRBSF Economic Letter, Federal Reserve Board of San Francisco, January 9, 2017

[4] US Chamber of Commerce, 2014

 

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