Dietz Vollrath has a nice response to our work on dynamism. Basically his argument is that the decline in dynamism doesn't seem to be affecting aggregate productivity. Yesterday I posted a comment at his blog, but comment moderation over there seems to be on hiatus, so I'm reposting my comment here:
In the paper, we are pretty careful not to draw conclusions about whether this is a good thing or a bad thing, since (as you suggest) it’s unclear what is optimal in terms of young firm activity and job flows. A lot of journalists have looked at our work and related work and run with stories about doom and gloom, but we’re not ready to draw any kind of conclusions.
Likewise, I think it’s a little premature to draw the conclusions you draw about productivity. First, just looking at the aggregate data without a plausible counterfactual is, as you know, pretty tricky. I know you’re aware of the evidence on productivity and reallocation (which we review in the paper); I think our prior, at least, should be that this matters.
Second, the Fernald chart you include is not inconsistent with a connection between productivity and dynamism. Note the trend break in the early 2000s. This is consistent with the dynamism data in Figure 3 from our paper–observe that the dynamism trend is pretty flat during the 1990s. Moreover, as we show in some newer work, dynamism measures for, eg, the high tech sector and public firms actually increase until the early 2000s, at which point they head downward (see http://updatedpriors.blogspot.com/2014/06/trend-reversal-new-fact-about-public.html and the paper linked therein). It’s not unreasonable to assume that strong dynamism in key sectors helped boost productivity in the 1990s, and once those sectors experienced reversal in the early 2000s the aggregate trend moderated somewhat.
As a side note, you mention retail. As we discuss in the paper, there is lots of evidence that consolidation in retail has been productivity enhancing. So, certainly, there are countervailing trends at work.