Wednesday, August 17, 2016

Why the Great Stagnation? What next?

This is what my CV says in the couple of years leading up to the great crash of 2008.
Programme Management - BT Wireless Cities: May 2006 - Sep 2007
A lucrative sixteen month contract, rolling out urban WiFi for BT across major cities in the UK.
Network architecture consultant to Dubai World Central: Jan 2008 - July 2008
A seven month contract in Dubai designing the network from scratch for a new ultra-wired airport/city complex. We completed the design and then the crash arrived .. and we flew home.
Network architecture consultant to Media City, Manchester: Dec 2008 - Jan 2009

Security Accreditation (IL2/IL3) at C&W and other clients: Jan 2010 - Sep 2010

Managed an RFQ for an international law firm, London: Jan 2012 - July 2012.
These were worthwhile but small-scale pieces of work. After that, things did not get any better. I was pleased to retire from network design in March 2014.


The UK economy normally rebounds from dips within three years (12 quarters) as this chart shows,


but as you can see, the 2008 crash was something special. The rate of growth was clearly negative for about a year and a half (six quarters) and after that - anaemic.

This chart - same source - looks at the rate of change of GDP (ie growth) over the period 1949-2012 (during the last 3 years UK annual GDP growth has fluctuated between 2% and 3%).

I read that financial crises always exhibit a longer recovery period, as people have to pay down their debts, but it's now been eight years since the big crash and growth rates are still subdued.

What's going on?

Larry Summers suggested an answer in his essay, "The Age of Secular Stagnation".
"Most observers expected the unusually deep recession to be followed by an unusually rapid recovery, with output and employment returning to trend levels relatively quickly. Yet even with the U.S. Federal Reserve’s aggressive monetary policies, the recovery (both in the United States and around the globe) has fallen significantly short of predictions and has been far weaker than its predecessors.

"Had the American economy performed as the Congressional Budget Office fore­cast in August 2009 - after the stimulus had been passed and the recovery had started—U.S. GDP today would be about $1.3 trillion higher than it is."
So what went wrong?
"The key to understanding this situation lies in the concept of secular stagnation, first put forward by the economist Alvin Hansen in the 1930s. The economies of the industrial world, in this view, suffer from an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest. The result is that excessive saving acts as a drag on demand, reducing growth and inflation, and the imbalance between savings and investment pulls down real interest rates.

"When significant growth is achieved, meanwhile—as in the United States between 2003 and 2007 - it comes from dangerous levels of borrowing that translate excess savings into unsustainable levels of investment (which in this case emerged as a housing bubble)."
But why are people be so keen to save, rather than invest?
"Greater saving has been driven by:
  • increases in inequality and in the share of income going to the wealthy, 
  • increases in uncertainty about the length of retirement and the availability of benefits, 
  • reductions in the ability to borrow (especially against housing), and 
  • a greater accumulation of assets by foreign central banks and sovereign wealth funds. 
"Reduced investment has been driven by:
  • slower growth in the labor force, 
  • the availability of cheaper capital goods, and 
  • tighter credit (with lending more highly regulated than before).
"Perhaps most important, the new economy tends to conserve capital. Apple and Google, for example, are the two largest U.S. companies and are eager to push the frontiers of technology forward, yet both are awash in cash and are under pressure to distribute more of it to their shareholders.

"Think about Airbnb’s impact on hotel construction, Uber’s impact on automobile demand, Amazon’s impact on the construction of malls, or the more general impact of information technology on the demand for copiers, printers, and office space.

"And in a period of rapid technological change, it can make sense to defer investment lest new technology soon make the old obsolete."
So how do we get out of this? It seems that austerity (clamping down on public expenditure to claw-back massive Government debt) has few friends left. Summers' remarks are addressed to a US audience, but are equally applicable to the UK.
"... primary responsibility for addressing secular stagnation should rest with fiscal policy. An expansionary fiscal policy can reduce national savings, raise neutral real interest rates, and stimulate growth.

"Fiscal policy has other virtues as well, particularly when pursued through public investment. A time of low real interest rates, low materials prices, and high construction unemployment is the ideal moment for a large public investment program. It is tragic, therefore, that in the United States today, federal infrastructure investment, net of depreciation, is running close to zero, and net government investment is lower than at any time in nearly six decades.

"It is true that an expansionary fiscal policy would increase deficits, and many worry that running larger deficits would place larger burdens on later generations, who will already face the challenges of an aging society. But those future generations will be better off owing lots of money in long-term bonds at low rates in a currency they can print than they would be inheriting a vast deferred maintenance liability."
Finally we come to the politics. With our ever-expanding university sector, we're seriously in the business of elite overproduction. New graduates, particularly those articulate, idealistic young people with arts degrees, can't get high-status, well-rewarded jobs. They naturally channel their unhappiness into political activism.
"Secular stagnation and the slow growth and financial instability associated with it have political as well as economic consequences. If middle-class living standards were increasing at traditional rates, politics across 
the developed world would likely be far less surly and dysfunctional. So mitigating secular stagnation is of profound importance.

"Writing in 1930, in circumstances far more dire than those we face today, Keynes still managed to summon some optimism. Using a British term for a type of alternator in a car engine, he noted that the economy had what he called “magneto trouble.”

"A car with a broken alternator won’t move at all - yet it takes only a simple repair to get it going. In much the same way, secular stagnation does not reveal a profound or inherent flaw in capitalism. Raising demand is actually not that difficult, and it is much easier than raising the capacity to produce. The crucial thing is for policymakers to diagnose the problem correctly and make the appropriate repairs."
I'm interested in what Peter Turchin is going to make of all this in September with his new book, "Ages of Discord".

Many of the recoveries we have seen in the past were driven by massive investment in new, productivity-raising technologies: electrification, petrol engines, scientific management, computers and the Internet. In every case, it took a good few years for the new technologies to develop, be perfected and for people to learn how to use them to increase productivity. It was only then that the economic tipping point occurred.

The next revolution will be driven by new technologies such as AI, new sensors, robotics and VR, bound together by high-speed ubiquitous networks; also genetic engineering and genomics. These technologies will surely launch a huge boom, but plainly we're in the earliest days.

So I expect a good decade or so of bouncing around in 'the new normal' before the next lift-off, deficit spending or no.


Tyler Cowen of Marginal Revolution (amongst many others) has written about this too.

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