Skip to main content

English

Financial Crisis or Innovation Crisis? Both!

NEW YORK  Former world chess champion and political activist Garry Kasparov and internet entrepreneur Peter Thiel, squared off with Harvard economist Kenneth Rogoff on the question whether advanced economies experience a financial crisis or an innovation crisis.

Mr Rogoff, who authored This Time is Different: Eight Centuries of Financial Folly (2009) with Carmen Reinhart, argues that the systemic financial crisis is the root cause of the prolonged economic slump in the western world. In their research, Mr Rogoff and Ms Reinhart found economic growth following a systemic financial crisis to be about a full percentage point below trend growth.

Mr Kasparov and Mr Thiel, on the other side, disavow Mr Rogoff’s claim that the collapse of advanced-country growth is the result of the financial crisis. In their view, the flailing western economies reflect stagnating technological development and innovation, and without radical changes in innovation policy, advanced economies are unlikely to see any prolonged pickup in productivity growth.

Robert Gordon of Northwestern University espouses in Is U.S. Economic Growth Over? an even more dire view, suggesting that the 250 years of rapid technological progress that followed the Industrial Revolution may prove to be the exception, rather than the rule.

A synthesis of the positions held by Mr Rogoff and Mr Kasparov and Mr Thiel is rather obvious. Most advanced economies are indeed suffering from a full-blown balance sheet recession in the aftermath of the worst systemic financial crisis since the Great Depression. Households, all too often saddled with mortgage debt exceeding the value of their home, are desperate to pay down debt and reluctant to spend money, let alone take out new loans.

In order to meet the requirements of the new regulatory environment, banks are assiduously trying to raise capital and hesitant to lend money to businesses. Both the lack of consumer demand and the credit contraction harms business activity in the western world, resulting in what may be a decade or more of subpar economic growth.

Subscribe now
ps subscription image no tote bag no discount

Subscribe now

Subscribe today and get unlimited access to OnPoint, the Big Picture, the PS archive of more than 14,000 commentaries, and our annual magazine, for less than $2 a week.

SUBSCRIBE

On the other hand, speculative bubbles in the housing market come with Dutch disease-like symptoms. The term ‘Dutch disease’ was coined 35 years ago by The Economist, and describes the observed relationship between the exploitation of natural resources and the decline of the industrial sector in a country.

The primary mechanism of deindustrialization is that a natural resources bonanza will lead to the appreciation of a nation’s currency, resulting in the nation’s other exports becoming more expensive for other countries to buy, thereby making the manufacturing sector internationally less competitive.

The other mechanism through which (indirect) deindustrialization takes place, is the so-called spending effect. As revenues from a natural resources boom are spent domestically, the demand for labor in the non-tradable sector increases, luring workers away from the tradable sector. We see something similar happening during a housing boom.

With residential housing prices on the rise, homeowners feel wealthier and are inclined to spend more, often with the help of a second or third mortgage. This in turn inflates the non-tradable sector. Since technological growth in the non-tradable sector is generally lower, compared with the tradable sector, a speculative bubble in the housing market harms innovation and technological growth.

The deindustrialization resulting from a housing boom could well explain the lack of technological progress and innovation in western economies, as observed by Mr Kasparov and Mr Thiel.

The Rogoff-Kasparov-Thiel synthesis is not compatible with the Keynesian view that the Great Recession is merely about a shortfall in demand, ie, that it is cyclical rather than structural. Through its adverse effect on the tradable sector, a housing boom does structural damage to an economy.

It is not a coincidence that Germany, the only western country that saw real housing prices decrease over the past decade, turned itself from the sick man of Europe at the end of the 1990s into one of the few advanced economies that seem globalization-proof.

The Dutch disease can’t account for Robert Gordon’s more pessimistic view that the era of rapid technological progress has come to an end altogether. But as the rise of China, India and other emerging economies poses tremendous challenges in terms of climate, food and other natural resources, I doubt his sobering outlook will prove true.

https://prosyn.org/kyq2nfx;
  1. palacio101_Artur Debat Getty Images_earthspaceshadow Artur Debat/Getty Images

    Europe on a Geopolitical Fault Line

    Ana Palacio

    China has begun to build a parallel international order, centered on itself. If the European Union aids in its construction – even just by positioning itself on the fault line between China and the United States – it risks toppling key pillars of its own edifice and, eventually, collapsing altogether.

    3
  2. rajan59_Drew AngererGetty Images_trumpplanewinterice Drew Angerer/Getty Images

    Is Economic Winter Coming?

    Raghuram G. Rajan

    Now that the old rules governing macroeconomic cycles no longer seem to apply, it remains to be seen what might cause the next recession in the United States. But if recent history is our guide, the biggest threat stems not from the US Federal Reserve or any one sector of the economy, but rather from the White House.

    1
  3. eichengreen134_Ryan PyleCorbis via Getty Images_chinamanbuildinghallway Ryan Pyle/Corbis via Getty Images

    Will China Confront a Revolution of Rising Expectations?

    Barry Eichengreen

    Amid much discussion of the challenges facing the Chinese economy, the line-up of usual suspects typically excludes the most worrying scenario of all: popular unrest. While skeptics would contend that widespread protest against the regime and its policies is unlikely, events elsewhere suggest that China is not immune.

    3
  4. GettyImages-1185850541 Scott Peterson/Getty Images

    Power to the People?

    Aryeh Neier

    From Beirut to Hong Kong to Santiago, governments are eager to bring an end to mass demonstrations. But, in the absence of greater institutional responsiveness to popular grievances and demands, people are unlikely to stay home.

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions