Like other advanced economies, Canada is experiencing a slowdown in productivity growth.Fred Lum/The Globe and Mail
Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.
Canada and other advanced economies are experiencing a historic slowdown in productivity growth. This is in no small part owing to a lack of investment, excessive red tape and compounded policy errors, which a growing chorus of leaders in science, business and policy are rightly calling out. But amid this sea of constructive criticism, it’s also worth considering the limits of innovation policy, and what makes it so difficult in the first place.
Even a somewhat parsimonious view of where innovation comes from suggests substantial challenges in raising total factor productivity (TFP), which is the measure economists use for the joint productivity of labour and capital. To grow our productivity, we can either produce more ideas, or we can address the misallocation of resources across sectors, businesses and regions.
Seems intuitive enough. But there’s only so much policy makers can do to put a dent in the production of useful knowledge. As Nicholas Bloom of Stanford University and his co-authors show, good ideas are simply getting harder to find.
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This may sound sacrilegious in an age of artificial intelligence (AI) optimism and tech booms but the data is stubborn. Even in the United States, which is an outlier in its relatively strong productivity growth over the last few years, it has taken an exponential increase in research and development (R&D) resources across fields to barely maintain U.S. TFP growth around 2 per cent over five decades. This time period includes major developments such as the invention of the internet, nuclear energy and our mapping of the human genome. As the Nobel Laureate Robert Solow presciently pointed out in 1987, “you can see the computer age everywhere except in the productivity statistics.”
As for misallocation, no doubt some persists, but it is not obvious where or how much. It is true that there are unnecessary trade barriers between provinces, and that somehow millions of Canadians are without a family doctor despite no shortage of people wanting to be doctors. We can debate how our tax structure, internal barriers and bureaucracy might be at fault. But at least historically, a really significant improved use of the same resources is a solution only developing economies can take advantage of. The degree of misallocation in countries such as China and India is simply much larger than in the West, for reasons one can imagine, and thus solutions are lower hanging.
In the grand scheme of things, Canadians can already work where they like and invest where they want. While it is easy to point to a few examples of probable misallocation, it is harder to say where our resources should be in general, and harder still to claim that solving this in an advanced economy will have substantial benefits on the order of raising a 0.5-per-cent productivity growth to 1 or 2 per cent.
There are also more practical aspects of innovation policy that make it an uphill battle. We have a tendency to imagine that TFP growth comes primarily out of a lab or workshop, where some innovative maverick creates new products that change the world. This ignores the less-sexy but critically important commercialization process of those products, which is something over which policy makers have limited control
Why does a scientific improvement or a new patent not lead to a one-for-one improvement in the productivity statistics? Because ultimately output is measured in dollars, not ideas. The Concorde jet was never adopted en masse because it did not make economic sense, even though it was an engineering marvel. Electric vehicles floundered for years before Tesla decided to make them look good. While we can subsidize R&D or equalize tax burdens across factors of production, no government can incentivize better branding, market research and simple business acumen.
No matter how difficult, the debate around our productivity slowdown is essential. A fraction of a per cent of additional economic growth is billions of extra dollars in Canadian hands. But we ought not to naively think it will be easy to get there.