Count Kenneth Rogoff as another economist not buying “secular stagnation” theory — advanced economies suffer from a chronic lack of demand — as the key explanation (though it could be complementary to some degree) for weak post-crisis economic growth. Rather, he writes. anemic recoveries “reflect the post-financial crisis phase of a debt supercycle where, after deleveraging and borrowing headwinds subside, expected growth trends might prove higher than simple extrapolations of recent performance might suggest.” And if he’s correct, the US is at the end of this cycle, and growth might surprise to the upside vs. current expectations. There is a lot to Rogoff’s analysis. But I wanted to highlight two parts of it. First, Rogoff offers a few ideas as to what policymakers could have done differently during the Crisis:
In particular, policymakers should have more vigorously pursued debt write-downs (e.g. subprime debt in the US and periphery-country debt in Europe), accompanied by bank restructuring and recapitalisation. In addition, central banks were too rigid with their inflation target regimes. Had they been more aggressive in getting out in front of the Crisis by pushing for temporarily elevated rates, the problem of the zero lower bound might have been avoided. In general, failure to more seriously consider the kinds of heterodox responses that emerging markets have long employed is partly a reflection of an inadequate understanding of how advanced countries have dealt with banking and debt crises in the past.
Rogoff also give counterpoint to the idea that there’s a slowdown in technological innovation, a view that also suggests a different take on middle-class stagnation:
Going forward, perhaps the most difficult secular factor to predict is technology. Technology is the ultimate driver of per capita income growth in the classic Solow growth model. Some would argue that technology is stagnating, with computers and the internet being a relatively modest and circumscribed advance compared to past industrial revolutions. Perhaps, but there are reasons to be much more optimistic. Economic globalisation, communication and computing trends all suggest an environment highly conducive to continuing rapid innovation and implementation, not a slowdown. Indeed, I personally am far more worried that technological progress will outstrip our ability to socially and politically adapt to it, rather than being worried that innovation is stagnating. Of course, given tight credit in the aftermath of the financial crisis, some technologies may have been ‘trapped’ by lack of funding. But the ideas are not lost and the cost to growth is not necessarily permanent.
What of Solow’s famous 1987 remark that “You can see the computer age everywhere but in the statistics”? Perhaps, but one has to wonder to what extent the statistics accurately capture the welfare gains embodied in new goods during a period of such rapid technological advancement. Examples abound. In advanced countries, the possibilities for entertainment have expanded exponentially, with consumers having at their fingertips a treasure-trove of music, films and TV that would have been unimaginable 25 years ago. Quality-of-health improvements through the low-cost use of statins, ibuprofen and other miracle drugs are widespread. It is easy to be cynical about social media, but the fact is that humans enormously value connectively, even if GDP statistics really cannot measure the consumer surplus from these inventions. Skype and other telephony advances allow a grandmother to speak with a grandchild face to face in a distant city or country. Disruptive technologies such as Uber point the way towards vastly more efficient uses of the existing capital stock. Yes, there are negative trends such as environmental degradation that detract from welfare, but overall it is quite likely that measured GDP growth understates actual growth, especially when measured over long periods. It is quite possible that future economic historians, using perhaps more sophisticated measurement techniques, will evaluate ours as an era of strong growth in middle-class consumption, in contradiction to the often polemic discussion one sees in public debate on the issue.
Right. Measures for a wheat-and-steel economy may not suffice for an internet economy. And here is a longer take by Rogoff.
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