Wednesday, November 26, 2014

What’s the Problem With Advanced Economies?

CAMBRIDGE – Is today’s slow growth in advanced economies a continuation of long-term secular decline, or does it reflect the normal aftermath of a deep systemic financial crisis? More important, do we need to answer that question definitively in order to boost the pace of economic recovery?

At a recent International Monetary Fund (IMF) conference, former US Treasury Secretary Lawrence Summers argued that today’s growth blues have deep roots that pre-date the global financial crisis. Summers placed particular emphasis on the need for more infrastructure investment, a sentiment that most economists wholeheartedly share, especially if one is referring to genuinely productive investment.

Others also certainly worry about secular decline, though most have emphasized the supply side rather than the demand side. The economist Jeffrey Sachs, for example, has argued that the US economy needs to confront a plethora of structural impediments to sustained growth, including offshoring, skill mismatches, and decaying infrastructure.

The Internet entrepreneur Peter Thiel and the legendary chess champion Garry Kasparov have suggested that the malaise runs even deeper, as has the economist Robert Gordon. They argue that the technology engine that has driven mankind from one economic plateau to the next over the past 200 years is running out of steam. Simply put, the Internet may be cool, but it is hardly as essential as running water, electrification, or the internal combustion engine.

The Gordon-Kasparov-Thiel thesis is extremely interesting, though I have challenged their negative conclusions, both in print and in a debate at Oxford. Personally, I think the greater risk is that the pace of technological progress will accelerate too much for societies to adapt, though the experience so far has basically been positive.

Certainly, today’s advanced economies urgently need to address all kinds of technological, social, and political deficiencies. Nevertheless, the subpar growth of the past half-decade still bears all the hallmarks of a typical sluggish recovery from a deep systemic financial crisis, as Carmen Reinhart and I documented in our 2009 book This Time is Different.

Of course, structural reform is essential after a financial crisis, as are policies to maintain aggregate demand while the economy heals. To my mind, the biggest failure of post-2008 economic policy has consisted in governments’ inability to find creative ways to write down unsustainable debts, for example in US mortgage markets, and in Europe’s periphery. This includes the failure to issue public debt where necessary to facilitate restructuring, particularly if overall economy-wide (or eurozone-wide) debt could be reduced in the same operation.

But Summers is certainly right that productive infrastructure investment is the low-hanging fruit. Of course, governments should be concerned about the long-term trajectory of public debt, all politically charged and polemical nonsense to the contrary. But productive infrastructure investment that generates long-term growth pays for itself, so there need not be any conflict between short-term stabilization and risks to long-term debt sustainability. With today’s ultra-low interest rates and high unemployment, public investment is cheap and plenty of projects offer high returns: fixing bridges and roads, updating badly outmoded electricity grids, and improving mass-transportation systems, to take just a few notable examples.

I appreciate that there are those who take on faith that Keynesian multipliers are much bigger than one, implying that even wasteful government spending is productive. But, given thin empirical evidence and legitimate concerns about undermining trust in the effectiveness of government, and with so many options for the productive use of resources, this seems like a titanic ideological distraction.

It is also far from clear why virtually all infrastructure needs to be publicly financed. There are still huge pools of private wealth sitting on the sidelines that can be rapidly mobilized to support productive infrastructure. The government needs to help with rights of way before construction, and with strong regulation to protect the public interest afterwards.

In his first term in office, US President Barack Obama suggested the creation of an infrastructure bank to help promote public-private partnerships. It is still a good idea, particularly if the bank maintained a professional staff to help guide public choice on costs and benefits (including environmental costs and benefits). Even if Keynesian multipliers are truly at the upper end of consensus, mobilizing private capital for investment has most of the advantages of issuing public debt.

One qualification is in order. Some commentators have suggested that the root cause of secular decline, as well as the main explanation of ultra-low interest rates, is low fertility throughout the advanced world. If true, the case for any kind of investment, public or private, would be more mixed; there must be labor to use the capital. But I suspect that the drivers of today’s slow growth and low interest rates go far beyond low fertility rates, in which case this should not be an obstacle.

The important point is that the case for expanding productive infrastructure investment does not rest on one narrow ideological viewpoint or economic theory. Whether Summers is right about secular stagnation in advanced economies, or whether we are still mainly suffering the aftermath of the financial crisis, it is time to break the political gridlock and restore growth.

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    1. CommentedArmen Papazian

      The problem with advanced economies is its economics and economists like you and the ones you mention. You have no sense of the cosmos, the power of imagination, and the critical necessity to reinvent this science. Here is how:

    2. CommentedRad Economics

      Growth, growth, growth. That is all that matters any more. Just believe in infinite growth and all our problems will solve themselves. Too bad any real scientist will tell you that infinite growth within a finite system (the planet we live on) is impossible. It truly amazes me that so many seemingly intelligent people aren't capable of making the connection between the environmental destruction we see and the never ending quest for more, more, more. More growth means more energy consumption, more natural resource consumption, more pollution....which I guess is ok if you are completely out of touch with reality. It's truly mind blowing how an entire profession can suffer from cognitive dissonance.

        CommentedMartin Erlic

        You can easily get unlimited growth if you reduce entropy. Converting matter into knowledge is the easiest way to do this, and the basis of the economy for the last 200 years. Growth can in theory be infinite if the proportion of energy to matter in the economy increases without bound toward infinity. I think this is incredibly reasonable given the vast improbability of the human species existing at all, and the acceleration of technological change, which, from the perspective of the age of the Universe, is merely a blink of the eye. Rogoff is entirely correct. Infrastructural and other forms of deep investment should accomplish this aim.

        CommentedMartin Erlic

        You can easily get unlimited growth if you reduce entropy. Converting matter into knowledge is the easiest way to do this, and the basis of the economy for the last 200 years. Growth can in theory be infinite if the proportion of energy to matter in the economy increases without bound toward infinity. I think this is incredibly reasonable given the vast improbability of the human species existing at all, and the acceleration of technological change, which, from the perspective of the age of the Universe, is merely a blink of the eye. Rogoff is entirely correct. Infrastructural and other forms of deep investment should accomplish this aim.

    3. CommentedJim Kelley

      My hammer is energy and almost every economist looks like a nail. Putting that aside, bad infrastructure is worse than one dollop of bad stimulus. The interstate highway system,for example, has turned out to be a long term disaster. Doing intentionally less should at least be in the option mix.

    4. CommentedRalph Musgrave

      Rogoff suggests just about EVERYTHING contributes to the problem: inadequate demand, supply side problems, excess debt, you name it. In other words he hasn’t a clue.

    5. CommentedVal Samonis

      The Internet is not only cool but the greatest invention since the Johannes Gutenberg times, half a millennium ago. We are still at the infancy of the Internet's global potential: a truly disruptive innovation!

      Val Samonis
      Vilnius University

    6. CommentedProcyon Mukherjee

      Some excellent points have been raised, the one that appeals me most is the one on public-private partnerships, something on which India has been struggling to make progress in the infrastructure sector. How strange but true that the ROW, or Right of Way issue that you are raising is the fundamental contentious issue on which we have very little progress being made everywhere. It seems to me that Coase Theorem, which talks about essentially this problem itself, may need to be reconstructed as social solutions do not seem to be emerging that minimizes costs on one hand and on the other government stepping in is also not helping.

      Is there a way out of this?

    7. CommentedTim Chambers

      No great mystery, Dr. Rogoff, except perhaps the cognitive dissonance of an industry captured profession that practices myth making instead of science. It is the Washington Consensus, otherwise known as NEOLIBERALISM. The benefits of Capitalism have not trickled down as promised.

      When a very small number of people are hovering up all the money, they leave the vast majority of us with little disposable income. Markets are collapsing world wide because of it. That this would happen was obvious from the start to those with intellectual integrity.

      The supply siders held that tax cuts and deregulation would foster investment and economic growth. But the economy grew at an average of 3% per year and people's wages stagnated. As the PC had already been invented, there were no significant new inventions. The Internet was disruptive, with a largely negative effect on incomes and jobs.

      When money is spread around by paying people a living wage, people spend it and economies grow. We learned that lesson in the 1950s and forgot it in the 1970s, when the real problem was that we needed a whole new industry to reignite economic growth. The PC gave us that. But we didn't distribute the wealth benefits of the growth the PC ignited.

    8. CommentedEdward Ponderer

      There is nothing wrong with advanced economy if we had one, or knew the proper behavioral economics to study it. Look at natural mutualism and the great success stories of nature and look at this wobbling humanity eating up the world such that one half bloats and the other starves, and all drown in the waste product till it all runs out.

      Human relations is, and has always been the key--like atoms that determine molecular properties, and the dependence of a grand edifice on its bricks, cement, and girders. We stay old school to our peril--and cheers for the economic students standing tall against faculty spouting and teaching the same draw-the-bulls-eye-around-the-last-real-economic-event-and-then-make-your-next-meaningless-guess economics. In your revolution for really economy and real economics, there is hope!

    9. CommentedAvraam Dectis

      There are a few good points here, all well within the box of acceptable economic thought - which you would expect from someone of Professor Doctor Kenneth Rogoff's stature.

      What may be missed here is that ( unlike virtually all other technologies ) the economic system itself has not significantly evolved in decades. It is like expecting modern car performance from a vehicle with an engine from the 1950s.

      Decades ago, we moved from the Gold Standard to Fiat Money , yet we still act as though we are on the Gold Standard.

      Fiat Money, for countries that borrow in their own currency, means that concepts of debt, deficit, surplus and national taxes are obsolete anachronisms. The only thing that matters is inflation, interest rates and productive capacity.

      Budgets can be raised by floating bonds and bonds can be paid off through QE. Inflation can be controlled by raising interest rates and not spending too much. The huge inefficiency of taxing every little thing on a national basis should go away along with all the efforts made to avoid those taxes.

      Regarding infrastructure, it should be publicly financed and free. People hate being eternally nickeled and dimed by tolls.

      Regarding low birth rates, it would be a simple matter to raise them. You merely have to offer a sufficient monetary inducement to promote births. This is a stimulus that pays off for decades.


    10. CommentedZsolt Hermann

      In truth there is nothing wrong with economy.
      We keep tweaking the superficial structures, like trying to do cosmetic surgery again and again not realizing that it is the person inside that needs curing.
      Economic systems are simply the external expressions of how people relate to each other.
      And driven by our inherently self-serving, egoistic human nature, we constantly relate to each other in a ruthlessly competitive, exploitative way.
      At the beginning we used to simply kill and eat each other, then we made each other slaves, then we invented industry and slavery moved to the employer, employee relationship, and even today we still live in modern slavery, where the majority of the population is brainwashed to work for and consume for goods they do not need, paying with money they do not have.
      Those at the top also compete with each other, trying to take away from each other and dominate, destroying the competition.
      This creates self-destruction and there is no way of solving the crisis unless we start changing the only problem at the root: changing our inherent nature.
      Only humans are capable of critical self-assessment and self-adjustment. And this can happen in two ways:
      1. By suffering and blows when in the last moment before destroying ourselves we realize we have no other choice but changing ourselves,
      2. By a pro-active, conscious process, taking into consideration historical examples, the conditions of the global, integral human network we evolved into within the closed and finite natural system, creating such an education system and societal value change that can provide the positive motivation for the self-change.
      With each passing day we are running out of time and getting closer and closer to option 1. instead of using our only free choice before the blows.

    11. Commentedroberto martorana

      I had write about this on "Riodialogues":I suppose a new rule for Central Bank: when CB, respectively of each country or through international agreements ,have a new emission of money whith the same CB print corresponding quantity of money of rate out balance ,and give this quantity, (to compense the monetary mass to solve the lack natural compensation previously provided by 'gold mining) , at a pubblic commission that use for pubblic necessity etc etc...we resolve three problem :pubblic necessity,pubblic balance,and market crisis,;for example : the B.C. have a emission of hundred billion unit and fix a rate of 3% and give this money to privat bank or pubblic... at the same moment print 3 billion extra and give these to "pubblic commission" that spend for pubblic problem ...i hope to be clear bat if not you can also have a look to :