Marc Andreessen’s thoughtful “Tweetstorm” on secular stagnation raises a number of important questions. We are in agreement that the essence of the secular stagnation issue is not whether technology has stopped advancing; but rather whether there is a mismatch between desired saving and investment opportunities that results in low equilibrium real interest rates, precipitates financial instability, and may inhibit economic growth. Here I respond to his specific questions and criticisms regarding the secular stagnation hypothesis:
Have there ever been periods of sustained growth with stability from levels of output reasonably close to potential? Is there any normal to which we can hope to return?
For the roughly 30 years after World War II, the American economy generated consistent growth in living standards with business cycles of relatively low amplitude. From the early 1980s until the late 1990s, the economy again preformed quite well, leading many economists to speak of “The Great Moderation.” So, we have plenty of experience with satisfactory economic performance to set as an aspiration.
Is the apparent decline in real interest rates something fundamental or just the removal of a risk premium that was present after the high inflation 1970s?
No one can be sure, but note that:
(i) There is a similar downward trend in real short rates, where inflation uncertainty is not a large issue.
(ii) Markets – in the form of 30-year indexed bonds – are now predicting that real rates well below 2 percent will prevail for more than a generation.
(iii) However we understand real interest rates in the late 1970s and early 1980s, inflation was clearly under control by the early 1990s, and indexed bond yields have steadily trended down since then – not just in the United States, but in the world at large.
(iv) I think it is quite plausible and consistent with Marc’s picture that equilibrium real rates were roughly constant at around 2 percent until the mid-1990s and have trended downward since that time.
Is growth in the labor force and in productivity really slowing?
With respect to the labor force, the facts are pretty clear. The growth of the adult population will be much slower over the next 25 years than over the last 25 years. Female labor force participation, after trending upward for a long time, is now trending downward. And rates of work among teenagers and among men with limited skills were trending down before the recession, and they are now trending down more rapidly. Of course the millennials are, as Marc points out, a bigger generation than the boomers. But this does not deny the argument that the growth rate of the labor force is declining.
There is plenty of room for debate about measurements of productivity. It is very likely that official statistics take insufficient account of quality improvements and new products. Whether this phenomenon is increasing with the passage of time is hard to ascertain. Television, for example, was a massive change in lifestyles during the 1950s. But the evolution of productivity growth is not essential to the argument about whether equilibrium real interest rates have declined. This decline could have occurred for many other reasons – including increased foreign saving, lower priced capital goods, slower labor force growth, increased demand for safe assets, more burdens on financial intermediation, and lower rates of inflation.
What to make of it all?
Marc writes “While I am a bull on technological progress, it also seems that much that progress is deflationary in nature, so even rapid tech may not show up in GDP or productivity stats even as it =higher real standards of living”
From an economist’s point of view, this paragraph is very hard to understand. Real GDP and productivity statistics are calculated after adjusting for price changes – so they are unaffected by inflation or deflation. It is also not clear how one would distinguish deflationary and inflationary progress. The price level reflects the value of goods in terms of money, so it is hard to analyze without thinking about monetary and financial conditions.
There is a major puzzle regarding how technological changes, which seem to be associated with so much efficiency and certainly with job displacement, do not show up more visibly in productivity statistics. But I at least cannot understand in what sense this phenomenon can be attributed to technological progress’ deflationary character.
Marc and I agree that we are headed into a period of soft real interest rates, where there will be more money available than great deals. This may, as he suggests, not be all bad; as it will make it easier for risky ideas to get funded.
The danger which I think is very real is that the zero lower bound on nominal rates will prevent the attainment of full employment as desired investment falls short of desired saving. A related danger is that the very low interest rates will encourage risk-taking and asset price inflation in ways that will ultimately give rise to financial instability.
The important point to recognize is that – as the experience of the US economy in the 1930s demonstrates – even with rapid innovation it is possible for economic performance to be very poor when finances are not successfully managed. Recent good news about the state of the US economy should not blind us to this reality.
January 12, 2015