Transcript Nicholas Crafts

Is Secular Stagnation the
Future for Europe?
Nicholas Crafts
Productivity Puzzles in Europe,
CEPREMAP, Paris, January 23, 2015
Secular Stagnation
• 2 (possibly related) concepts
• Short-medium term: significantly negative real interest
rates needed to prevent demand shortfall (in liquidity
trap)
• Medium-long term: very low natural rate of growth
(adverse demography, slow technological progress)
• Summers (2013) thinks we face the first; Hansen (1939)
thought the second of these afflicted the USA and would
seriously depress investment (and demand)
Balanced Growth
• Rate of growth of the capital stock equals the
natural rate of growth
ΔK/K = s/v = n + μ
• If the capital to output ratio is 3, a fall of 1
percentage point in (n + μ) implies a fall of 3
percentage points in investment/GDP, ceteris
paribus
• Presumably, downward pressure on real interest
rates.
Europe is More Vulnerable than
United States
• European demographics less favourable
• Productivity growth in Europe lower than
USA
• Debt overhang in Europe
• In a depressed economy, Fed better than
ECB
Why Was Alvin Hansen Wrong?
• Regime change stimulated strong recovery
post-1933 (Eggertsson, 2008)
• USA had strong TFP Growth from the 1920s
through the 1960s
• Europe adopted better supply-side policies and
enjoyed a ‘Golden Age’ of catch-up growth
• These boom years saw high investment, rapid
capital stock growth and full employment
Real GNP in USA
1929 III
100
1933 I
68.4
1936 I
85.2
1936 II
90.6
1936 III
93.2
1936 IV
96.3
1937 I
95.9
1937 II
98.4
1937 III
98.0
1937 IV
91.0
1938 I
87.1
1938 II
88.6
1938 III
93.7
1938 IV
97.4
Source: Balke and Gordon (1986)
‘Refined’ TFP Growth in USA
(Bakker et al. 2014; BLS, 2014)
1919-29
1.52
1929-41
1.88
1948-58
1.89
1958-73
2.27
Eurozone Today
• Still not out of a very lengthy recession
• This may largely reflect reduction in post-crisis
level of potential output rather than permanently
lower trend growth
• Nevertheless, the architecture of the Eurozone
makes escaping from the doldrums quite
difficult
• 2015 is more like the gold bloc in the 1930s than
the sterling bloc
Real GDP in Two Crisis Periods
Notes: ‘sterling bloc’ comprises Denmark, Norway, Sweden and UK, all of which left the gold standard and devalued in September
1931; the ‘gold bloc’ comprises Belgium, France, Italy, Netherlands and Switzerland, all of which stayed on the gold standard until
autumn 1936 apart from Belgium which exited in March 1935.
Source: derived using Maddison (2010) updated with The Maddison Project (2013); OECD (2013)
What Does OECD Project for PostCrisis Europe?
• Crisis affects output levels but not trend
growth rate
• Basically, it is pre-crisis ‘business as
usual’
• Catch-up growth resumes and slow
convergence towards ‘best-practice’
supply-side policy continues
Pre-Crisis Growth, 1995-2007 (% per year)
Real
GDP
Employment
GDP/
Worker
TFP, 2000-7
United States
3.2
1.2
2.0
1.8
Euro Area
2.3
1.3
1.0
0.0
France
2.2
1.1
1.1
0.1
Germany
1.6
0.4
1.2
1.0
Greece
3.9
1.3
2.6
0.1
Ireland
7.2
4.3
2.9
1.4
Italy
1.5
1.2
0.3
-1.1
Portugal
2.4
1.0
1.4
-1.2
Spain
3.7
3.6
0.1
-1.2
Sources: The Conference Board (2014) and OECD (2014)
OECD Future Growth Projections,
2014-2030 (% per year)
Real GDP Employment GDP/Worker
TFP
United States
2.4
0.5
1.9
1.6
Euro Area
1.7
0.2
1.5
1.2
France
2.2
0.3
1.9
1.2
Germany
1.1
-0.5
1.6
1.5
Greece
2.2
0.2
2.0
1.8
Ireland
2.3
1.2
1.1
0.8
Italy
1.5
0.3
1.2
0.7
Portugal
1.4
0.3
1.1
0.9
Spain
1.5
0.9
0.6
0.4
Source: OECD (2014)
Future Growth in the Leader
• Most projections a bit less optimistic than OECD;
GDP growth at 2.0%, GDP/HW growth at 1.5%
(Fernald, 2014)
• Even a famous pessimist sees 1.3% labour
productivity growth; closer to a post-Golden Age
normal than secular stagnation (Gordon, 2014)
• ICT revolution not yet complete (Byrne et al., 2013)
ICT Effects and Long-Run Growth
if ∆p/p = - 7% (% per year)
ICT-Use Own β
ICT-Use Swedish β ICT-Output
France
0.48
0.68
0.17
Germany
0.44
0.68
0.33
Ireland
0.39
0.94
0.51
Italy
0.36
0.70
0.19
Spain
0.53
0.76
0.10
UK
0.60
0.66
0.16
USA
0.70
0.71
0.22
Source: Oulton (2012)
TFP Growth in the Long-Term
• Fernald and Jones (2014) note positive and
negative arguments but stress end of ‘transitory
gains’ in USA from HK and R & D
• Important positives include robots and the rise of
research in China (16% world R & D in 2012)
• Key implication of ICT revolution is big rise in
productivity of R & D (Mokyr, 2014)
Machine Learning/Mobile Robotics
• 47% American employment has ≥ 0.7 chance
of being computerized by 2035; robot prices will
fall fast (Frey & Osborne, 2013)
• ‘Polanyi’s Paradox’ (Autor, 2014) will recede as
many more tasks can be ‘routinized’
• Creative intelligence, social intelligence, and
perception and manipulation tasks will remain
non-susceptible
Long-Term Secular Stagnation
in Europe?
• Good News: considerable scope for catch-up
including in IT and no reason to think growth in
leader will evaporate
• Bad News: European catch-up in GDP/Person
ended in the early 1970s and in GDP/HW in the
mid-1990s; pre-crisis productivity performance
very poor
• Very Bad News: the crisis may have adverse
medium-term effects on supply-side policy
Level of Real GDP/Hour Worked,
1995, 2007 and 2013 (USA = 100 in each year)
1995
France
Germany
Italy
Spain
UK
98.6
93.8
88.1
85.8
80.7
Source: The Conference Board (2014)
2007
93.5
90.1
73.0
70.8
84.7
2013
88.1
85.3
67.0
73.7
76.4
Supply-Side Policy in Bad Times
• 1930s’ protectionism resulted from unavailability of
macroeconomic policy (Eichengreen and Irwin, 2010)
• 1930s’ stagnation in Europe highly conducive to rightwing extremism (de Bromhead et al., 2013); today’s populism
is also not market-friendly
• Mild protectionism and lower levels of European
economic integration are apparent already (Evenett, 2014);
cf., lack of progress on the Single Market
→ OECD’s view of future TFP growth may be too optimistic
Supply-Side Reforms
• These are mainly country-level policies that
could stimulate private-sector investment and
TFP growth and speed up diffusion of new
technologies (e.g., ICT)
• As well as infrastructure, human capital and R &
D, competition, implementing Single Market,
regulation, and taxation policies matter for
medium-term growth
• Problem is that full impact is long-term; but over
5 years there could be appreciable stimulus
Impact after 10 Years on GDP (%): Structural
Reforms and Single Market
OECD Reforms
Full Single Market
France
Germany
15.0
12.5
11.5
11.6
Italy
Spain
UK
14.5
15.0
5.5
13.6
9.5
7.1
Sources: Aussilloux et al. (2011); Bouis and Duval (2011)
Short-Term Secular Stagnation
at the ZLB?
De-leveraging has a long way to go (Buttiglione et al.
(2014)
Neutral real interest rate is negative now
(Rawdanowicz et al., 2014)
3 ways to address the problem
• Unconventional monetary stimulus
• Fiscal stimulus
• Supply-side policies that crowd in private sector
spending (and improve productivity)
Why does the Eurozone find this
So Difficult?
• We know these policies have worked in the past
BUT today
Wrong sort of central bank
Absence of fiscal union
Politics of supply-side reform
→Europeans have good reasons to be afraid of
secular stagnation in both the short and the long
term; the American hypochondriacs didn’t and
don’t
Is Secular Stagnation the Future
of Europe?
• I don’t know
BUT
• If so, a result of policy failure and flaws
in the institutional architecture rather than
technological exhaustion