The case has been made again and again that Americans better get used to a secular shift to low growth and low demand, and that today’s low interest rates are a fundamental reflection of that “new normal” reality.
Enter Harvard economist Kenneth Rogoff — best known for his collaboration with Carmen Reinhart on “This Time is Different,” a 2009 book studying the similarities among financial crises over 800 years of history — to say, well, that analysts are once again wrong to assume that this time is different and that we’re heading into a new era of secular stagnation.
In a policy analysis published Wednesday on VoxEU, and based on a presentation he gave at an International Monetary Fund conference last Thursday, the economic historian argues today’s troubles are more reflective of a “garden variety post-WWII financial crisis” than the dawn of a new era of gloom.
As he phrases the question:
“Has the world sunk into ‘secular stagnation,’ with a long future of much lower per capita income growth driven significantly by a chronic deficiency in global demand? Or does weak post-crisis growth 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?”
Arguing for the latter, Rogoff cites characteristics of the 2008 global financial crisis that he says are all typical of debt supercycles.
These include the deep fall in output followed by a “very sluggish U-shaped recovery;” the large-magnitude housing boom and bust; the “huge leverage” accompanying the bubble; pre- and post-crisis equity price behavior; unemployment trends more stubborn than in recessions not accompanied by financial crises; and the dramatic rise in public debt.
In view of the historical regularity of such occurrences, policymakers could have reacted more constructively — for example, by writing down subprime debt in the U.S. and peripheral-country sovereign debt in the E.U. and by shunning austerity policies.
Rogoff also notes that historically underinformed analysts were routinely premature in expecting conditions to snap back.
“Virtually every major central bank, finance ministry, and international financial organization was repeatedly overoptimistic,” he writes. “Most private and public forecasters anticipated that once a recovery began it would be V-shaped, even if somewhat delayed. In fact, the recovery took the form of the very slow U-shaped recovery predicted by scholars who had studied past financial crises and debt supercycles.”
Rogoff acknowledges that secular factors with an adverse effect on demand are at play in today’s economy, but they should not be confused with root causes of a fundamentally new era.
So, yes, demographic decline has set in, but stabilizing global population could enhance the sustainability of global growth over the long term, he says. The tapering off of female labor force participation rates is another secular force removing a contributor to growth, as is the shift to consumption-based domestic demand in China and elsewhere in Asia.
Rogoff disputes the role stagnation proponents ascribe to technology — that the effect of computers and the Internet will not contribute to growth the same extent that previous breakthroughs did in earlier industrial revolutions.
“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,” he writes.
Indeed, Rogoff sees technology as the source for future growth, albeit in ways that statistics cannot accurately capture. Companies like Uber, for example, “point towards vastly more efficient uses of the existing capital stock.”
Besides Uber, disruptive technolgoies including cheap Internet-based entertainment, low-cost miracle drugs, social media and Skype may even be contributing to the broader economic welfare in terms not fully grasped today. As Rogoff writes:
“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.”
The economic historian’s upbeat main point is that “it is quite likely that measured GDP growth understates actual growth” over time.
Indeed, he continues: “The debt supercycle model matches up with a couple of hundred years of experience of similar financial crises. The secular stagnation view does not capture the heart attack the global economy experienced; slow-moving demographics do not explain sharp housing price bubbles and collapses.”
But in reaching this conclusion, Rogoff does not sidestep the contentious debate concerning today’s low interest rates, which many analysts argue can only be low because of the economy’s chronic deficiency of demand.
While the natural rate of interest cannot be observed, Rogoff’s “guess” is that it is higher than the chorus of pessimists suppose, and he blames ill-conceived financial market regulation for steering lenders to government and corporate borrowers and away from middle-class consumers and small businesess. Central bank balance-sheet expansion is a secondary factor weighing down interest rates, in his view.
Contrary to the stagnation proponents, Rogoff confidently predicts that the economy will again rise, leverage will again increase, financial innovation will break through onerous regulation, rates will again rise and the up and down cycles of economic history will resume their natural course.
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