“Lax mon­e­tary poli­cies may trig­ger as­set bub­bles, and pro­longed fis­cal stim­u­lus may end in a debt cri­sis”

Financial Mirror (Cyprus) - - FRONT PAGE -

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

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