The Stephen King I’m writing about is an economic advisor to HSBC who was formerly the bank’s chief economist. He’s one of the most interesting economists I’m aware of. For instance, he was one of the first to warn of excesses in the US housing market a decade ago, and perhaps the most vocal in doing so.
Last week he weighed in on the issue of productivity in an Opinion article in the Financial Times. His main points:
1. The current low level of productivity–+1% yearly in the US, flat to down elsewhere–may not be due to lack of infrastructure spending (Lawrence Summers) or that most productivity-enhancing inventions have already been made (Robert Gordon). It may be instead that we’re seeing now is normal. It’s the generation that rebuilt after WWII, creating high growth in productivity in the process, that’s the outlier.
2. If #1 is true, then many of the mainstays of orthodox macroeconomic policy need to be reexamined. In particular,
–if the world is being flooded with money, then capital is equally available at cheap prices to high productivity enterprises and low ones. The result may be that the very process thought to be increasing economic growth is neutralizing the competitive advantage of high-productivity enterprises
–in a low-inflation, low-productivity world, interest rates will be “dragged down to incredibly low levels,” meaning recession-fighting monetary expansion may be difficult to achieve
–cultural expectations built over the past half century of ever increasing prosperity may prove to be too high. This would be trouble for, say, pension or social security schemes around the world whose ability to deliver promised benefits assumes the robust real economic growth of the past can be extrapolated into the future.
3. The ability of governments to create inflation may become increasingly important, as a means of keeping nominal GDP growth above zero during an economic downturn. Monetary theorists around the globe have assumed that doing so involves only the simple expedient of increasing the money supply. The past eight years in the US, however, have shown that creating inflation is much easier to theorize about than to do.
His overall conclusion: the Lawrence Summers idea of secular stagnation–which can be addressed through increased infrastructure spending–is a much cheerier outlook than it appears at first blush.