The Decline of Macy's and Sears May Signal Something Great
We are in the throes of another round of what the economist Joseph Schumpeter memorably called "creative destruction." Two icons of American business — Macy's and Sears — are struggling. Macy's plans to close 100 stores to improve profitability, and Sears has sold its Craftsman tools line for roughly $900 million to raise cash. Conceivably, one or both of these historic chains could go bankrupt.
Their distress is part of a larger consolidation of retailers under siege from e-commerce. The Limited is closing all its 250 stories. Kmart, owned by Sears, is shutting dozens of stores. This is a rough process for workers, managers and shareholders, but it holds out the promise of improved business efficiency, aka productivity. The most inefficient stores will shut; the survivors will be more viable and stable.
Except it hasn't happened yet.
What's puzzling about this episode of creative destruction is that we've gotten much pain but are still waiting for the gain. Instead of improving, productivity growth has slowed dramatically. From 2010 to 2015, average labor productivity increased only 0.4% a year, reports the Bureau of Labor Statistics. That's well below the average post-World War II productivity gain, which is about 2% annually.
What happened to the productivity dividend?
I have written about this subject before, because — though obscure — it is vital to our economic future. Faster productivity growth is the basic source of higher incomes and living standards. If not reversed, the productivity slowdown implies something close to long-term stagnation in wages and incomes. Changing the trajectory of productivity growth is a central challenge for the incoming Trump administration — as it would have been if Hillary Clinton had won.
To explain the puzzle, economists have offered many theories. Here are four:
(1) Despite contrary appearances, American technology is actually lagging;
(2) an aging society weakens risk-taking;
(3) too many government regulations discourage start-up firms;
(4) the Great Recession, with peak unemployment of 10%, made both consumers and corporations more reluctant to spend, resulting in slower economic growth.
There may be something to all these theories, but none resolves the underlying paradox of plentiful technology and skimpy productivity gains. My explanation lies in what I call "parallel technologies."
We have two systems to do one job. Companies have to support the old as well as the new technology. People no longer buy everything in stores, but stores are still necessary. (In 2016, e-commerce totaled about 8% of retail sales.) Still, the loss of sales makes brick-and-mortar stores less productive, and their loss of productivity offsets some or all of the gains from digital technologies.
This is, I think, the basic explanation of what's happening at Macy's and Sears. They have to invest in the new technology, even as the value of the old technology erodes. The effect is compounded because they've been slow to shut marginal stores. There's always the hope that these stores will bounce back and avoid large losses.
If these "parallel technologies" applied only to e-commerce and stores, it would be interesting but not decisive. But it applies to many industries and products, which magnifies its economic significance. You can think of many cases: smartphones and traditional landlines; paper and digital newspapers; cable TV and streaming internet video; standard taxis and Uber. Doubtlessly, there are other examples.
We're in the midst of a massive reallocation of economic resources — workers, firms and capital investment — that initially weakened productivity growth. That's my theory at least. Could there be a silver lining to this dark cloud? Maybe. Sooner or later, the adjustment will ebb as past inefficiencies are purged. But how long do we have to wait?
