MNI POLICY: Jackson Hole Paper: Covid Worsens Dynamism Problem

The Covid-19 pandemic and its heavy toll on small businesses will exacerbate the decades-long decline in U.S. business dynamism, according to research presented at the Fed's Jackson Hole conference Thursday.

That's a problem for the Fed because a less dynamic economy means changes in interest rates will have less influence over the pace of investment, according to the paper by Ufuk Akcigit of the University of Chicago and Fed Board economist Sina Ates.

The pandemic is further tipping the economy in favor big companies with the market power to slow down innovation and competition, the authors said. They also listed 10 examples of how the world's largest economy is becoming less dynamic over the past three decades as patent laws and a lack of antitrust enforcement handicap smaller companies and allows bigger ones to grab the spoils. The list includes higher profit margins, slower productivity and a decline in the rate of new firms entering the economy.

"Business dynamism — the perpetual process of new firms forming, growing, shrinking, and dying — and the associated reallocation of factors toward more productive units is a fundamental source of aggregate productivity growth in a healthy economy," the authors wrote.

Some experts are already describing a "K-shaped" recovery with gains for large companies and the rich and more pain for everyone else. That could become another long-term headache for a Fed aiming to meet a mandate of full employment.

Part of the problem may be from the rise of giant tech firms, often seen as leading American innovation abroad. There appears to be less and less innovation from the ground up: The share of patents registered by the top 1% of owners has climbed to 50% from 35% in the early 1980s, and there has been a similar decline in the ratio of patents registered by new participants.

While the causes of the U.S. decline are markedly different from say Turkey's tight small business credit, or problems around politics and business in Italy, the end result is the same, according to the authors. U.S. policymakers could enforce antitrust laws and reforming the patent system, or seek more free trade to encourage domestic innovation, they said.