The missing pandemic innovation boom | The Economist

Why has the promised productivity boom failed to materialise? The optimists say that the benefits of the increase in investment that followed the pandemic will only be felt slowly. There is often a lag of three to five years between higher business investment and productivity growth. New research by Jason Draho of ubs, another bank, concludes that “starting in 2024, the rest of this decade could look more like the second half of the 1990s than the second half of the 1970s”. Yet there are three reasons to worry that the pandemic innovation boom might never arrive.

The first relates to investment. Firms are spending, but not necessarily on things that lift productivity. In recent months, with customers facing empty shelves, many have scrambled to expand and protect supply chains. This improves resilience but by creating redundancy it also increases costs. Many firms are also building up “inventories”, or stocks of raw materials and finished goods. Such spending counts towards investment, as measured in the national accounts, but has zero impact on productivity. In Germany in late 2021, the build-up of inventories accounted for 9% of total investment, the most ever.

Short-term crisis management has thus taken precedence over long-term innovation. In America r&d spending remains high, but our back-of-the-envelope calculation for 31 countries suggests that overall rich-world spending on “intellectual-property products” is running at about $3trn a year—below its pre-pandemic trend. There is little evidence of a boom in new discoveries and use of frontier technology. In 2020 economists talked excitedly about the coming wave of automation, as companies invested in AI and machine learning. But American robot imports, in real terms, are no higher than shortly before the pandemic.

The second factor relates to working from home. Almost overnight hundreds of millions of people moved from the office to the kitchen table. Many have stayed there: a third of paid full days in America are now done from home. This is great for work-life balance. But predictions that it would also help people work more efficiently, which pre-pandemic studies had suggested was possible, are as yet unfulfilled. A recent survey of economists in America and Europe found that they were “uncertain about the long-term impact on productivity”. At home people might be able to focus more on “deep work”; they are also able to spend more time walking the dog.