Over at Equitable Growth: Secular Stagnation Once Again: A Few Cocktail-Hour Thoughts on Shane Ferro vs. Diane Coyle
Over at Equitable Growth: Apropos of Shane Ferro vs. Diane Coyle...
First, "secular stagnation" was a bad phrase for Larry Summers to have chosen to label what he wants to talk about. It is true that it was the phrase used by Alvin Hansen when he worried about a very similar thing at the end of the 1930s. And it is true that the root cause of what worried Hansen was his fear that technological progress had reached its culmination point--hence that future high return investments would be scarce. But what Hansen and Summers both worry about is not the absence of rapid technological progress per se. READ MOAR
What they both worry about is the possibility of a world in which, when investors have realistic expectations, total desired investment spending is lower than total economy-wide planned saving at full employment, even were the safe nominal interest rate to fall to zero. If so, then full employment can only be attained if it is accompanied by unrealistically optimistic expectations by investors--bubbles, which then pop, doing unbelievable amounts of damage.
Such "badly behaved investment demand and savings supply functions", as Marty Feldstein called them when he taught me this stuff the first time I saw it back in the winter of 1980, can have four causes:
- Technological stagnation, which lowers the social and private rate of return on investment and pushes desired investment spending down too far.
- Limits on societal investment absorption coupled with rapid declines in the prices of investment goods, which together put too much downward pressure on the feasible profitable share of investment spending.
- Technological inappropriability, in which the market cannot figure out how to properly reward those who invest in new technologies even when they have enormous social returns, which also lowers the private rate of return on investment and pushes desired investment spending down too far.
- High income inequality, which boosts the desired savings share of production as the only things the superrich can thank of to do with their wealth is to bless their heirs or play status games with each other, which pushes planned savings up too much.
- Inflation too low, which means that even a zero safe nominal rate of interest is too high a real rate of interest to balance desired investment and planned savings at full employment.
- Broken finance, which fails to properly mobilize the risk-bearing capacity of society and so drives too large a wedge between the risky returns on real investments and the safe interest rate on the debt of trustworthy sovereigns.
Of these six, robots would prevent (1), could cause (2), and are not terribly relevant to (3)-(6).
I think the big problem is (6), aided by (5). Larry Summers seems to think the big problem is some mix of (2)-(4)--and that, for reasons I don't fully understand but are connected with bubbles and money illusion, resolving (5) by a higher inflation target is likely to make things worse...
Coyle gives the historical example of the washing machine.... Sure, if the robots come and take everyone's jobs, but then people find ways to work the same amount doing different things, productivity will increase drastically. The economy will probably boom. But this assumes that nothing blows up the global economy before we get to that point.... If low interest rates continue to create asset bubbles that then pop dramatically--which seems to be the real fear of some people who are talking about secular stagnation--the economy could be in rough shape for a long time before the robot (or demographic) saviors come.
It is possible to be afraid of robots and of asset bubbles at the same time.