The Wealth of Stagnation: Falling Growth, Rising Valuations

163 Pages Posted: 12 Dec 2024 Last revised: 5 Jan 2025

See all articles by James D. Paron

James D. Paron

University of Pennsylvania - Finance Department

Date Written: January 04, 2025

Abstract

Over the last half-century, economic growth stagnated but stock-market wealth boomed. I present evidence that declining innovation productivity reconciles these trends. At the macro level, I document that R&D spending has fallen relative to value, while M&A spending has doubled relative to R&D. At the micro level, most of the increase in aggregate valuation ratios is explained by a reallocation of sales shares toward high-valuation firms. Using a Schumpeterian model of growth and asset prices, I find that declining innovation productivity explains these facts. When innovation productivity falls, R&D falls and M&A rises. This concentrates production into the hands of the most efficient (high-valuation) incumbents, causing aggregate value to boom. Quantitatively, this explains most of the decline in growth and the rise in valuations. It also helps explain other salient trends, including declining firm entry, rising concentration, and falling interest rates. While stock-market wealth boomed, the present value of consumption (consumer welfare) stagnated with output.

Suggested Citation

Paron, James, The Wealth of Stagnation: Falling Growth, Rising Valuations (January 04, 2025). The Wharton School Research Paper, Available at SSRN: https://ssrn.com/abstract=5018781 or http://dx.doi.org/10.2139/ssrn.5018781

James Paron (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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