Productivity is Key to Recovery

Policy makers seem to be short of ideas to get out of the crisis. The mantra of austerity has prevailed over the last four years. Now it is the time of reforms. But which reforms? The focus is put on labour market flexibility. We know that this is a false problem. Even  countries with high flexibility of the labour force like the US or the UK have undergone a severe crisis.  

Recently, the ECB governor, Mario Draghi made an important speech at the Brookings Institution. He said in his introduction that he re-read the open letter from John Maynard Keynes to President Roosevelt published in the New York Times on 16 December 1933. Why is it an important letter? Well, Keynes acknowledged the efforts of Pdt Roosevelt was in his view the only one to have understood the sense of  urgency for a profound change.  But he raised some criticisms on the Us programme arguing that not enough was done to boost recovery. The point about Keynes' letter is that he stressed the primacy of recovery to reform.  

Draghi's speech contains an agenda on how to exit the crisis, but unlike Keynes's point, he insists on reforms first before the need for fiscal space for supporting investment. This is arguable , but understandable in the European context.

However, there are two important points in his speech. First, he explains that a self sustaining recovery requires some prior conditions to be in place. First and foremost, new jobs have to be created by rising productivity of the business system, training of young people and support to maintain  social equity hardly hit by the austerity policies. 

The second point is that the ECB will continue providing liquidity support to the real economy, but this is insufficient for recovery. If productivity does not increase in businesses the liquidity will remain in the banks, funds or households; output will not rise, nor investment or consumption. This explains why in certain countries (for example in Italy) tax reductions for low income people have not  resulted in increases in consumption. 

In Draghi's words,  there will be no recovery if some conditions are not in place, namely, if we don't have both a rising workforce and rising productivity. But "for many European countries, there is scope to increase labour participation rates over time. But given demographic trends, raising structural growth will have to take place primarily through productivity"

Social cohesion is not antinomic to growth. However, it does not mean freezing the production structures to maintain employment. It implies change, that is through innovation and technical progress to generate productivity gains. 

The message is clear, but we must not forget Keynes' wisdom which proved to be right.