“Lax monetary policies may trigger asset bubbles, and prolonged fiscal stimulus may end in a debt crisis”
Something is definitely rotten in the state of capitalism. Despite unprecedentedly low interest rates, investment in most advanced countries is significantly below where it was in the years prior to the 2008 crisis, while employment rates remain stubbornly low. And even investment in the pre-crisis period was unimpressive, given low prevailing interest rates.
For some reason, achieving a level of investment that would generate full employment seems to require negative real (inflation-adjusted) interest rates, which is another way of saying that people have to be paid to invest. But in a world of low inflation and zero nominal interest rates, getting to the required negative real rate may be a challenge. This is the ailment that Larry Summers, recalling a 1938 paper by Alvin Hansen, has dubbed “secular stagnation.”
The policy consequences of this state of affairs remain open to debate (the issues are well summarised in an e-book edited by Coen Teulings and Richard Baldwin). For Keynesians, the answer is unconventional monetary policy (for example, quantitative easing), fiscal stimulus, and a higher target inflation rate. But, as Summers and others point out, lax monetary policies may trigger asset bubbles, and prolonged fiscal stimulus may end in a debt crisis.
Moreover, the Keynesians’ preferred policies address only the consequences of secular stagnation, not its causes – about which there is even less agreement. For some, the problem is a savings glut associated with slower demographic growth, rising life expectancy, and static retirement thresholds – a combination that forces people to save more for their old age. But, as Barry Eichengreen points out, the rise in savings appears to be too small to explain this.
For others, the problem is lower investment demand, caused partly by the fact that machines are now much cheaper and that technological progress has slowed since 1970. Economists like Robert Gordon and Tyler Cowen argue that the technological breakthroughs of the past, including piped water, air conditioning, and commercial air travel, had a greater social impact – giving rise to the suburban lifestyle of cars and shopping malls, for example – than many of today’s advances.
This assessment bothers optimists like Joel Mokyr or Erik Bryjnolfsson and Andrew McAfee, who do not believe that technological progress has slowed. Instead, they argue that the traditional concept used to measure economic output and growth, gross domestic product, understates that progress. After all, our lives have been made dramatically more productive thanks to Google, Wikipedia, Skype, Twitter, Facebook, YouTube, Waze, Yelp, Hipmunk, Pandora, and many other companies. But all deliver their services for free, which means that the benefits they provide are not counted in GDP.
As Edward Glaeser has argued, it is hard to believe that the median family in the United States, which supposedly is worse off than in 1970, would be willing to give up its cell phones, Internet access, and new health technologies in order to return to that halcyon era. Thus, the GDP numbers must be excluding much progress.
The fact that so much innovation is given away for free does not only create a measurement problem for economists; it is also a real problem for those trying to find investment opportunities. In the good old days of the post-World War II boom, if you wanted an air conditioner, a car, or a newspaper, you had to buy one, making it possible for producers to earn money by providing them.
Information-intensive products – typical of today’s technologically advanced economies – are different. Because the cost of providing an extra copy is almost nil, it is hard to