What’s up with Economic growth? According to Andrew G Haldane, Chief Economist, Bank of England in a recent speech, since the financial crisis, global growth has under-performed. In the decade prior to it, advanced economy growth averaged 3% per year. In the period since, it has averaged just 1%. The world has grown fast, then slow. That has led some to fear “secular stagnation” – a lengthy period of sub-par growth. The self-same concerns were voiced at the time of the Great Depression in the 1930s. The economic jury is still out on whether recent rates of growth are a temporary post-crisis dip or a longer-lasting valley in our economic fortunes. Pessimists point to high levels of debt and inequality, worsening demographics and stagnating levels of educational attainment. Optimists appeal to a new industrial revolution in digital technology. Given its importance to living standards, this debate is one of the key issues of our time.
“Today’s great debate is where next for growth. The sunny uplands of innovation-led growth, as after the Industrial Revolution? Or the foggy lowlands of stagnant growth, as before it? Which of the secular forces – innovation versus stagnation – will dominate? And if growth is going back to the future, on which side of the Industrial Revolution will it land?
The balance of these arguments matters greatly for future well-being and public policy. Indeed, it is hard to think of anything that matters much more. More parochially, for central banks setting monetary policy one of the key judgements is the appropriate “neutral” level of interest rates. You can think of this as the interest rate that would align desired saving and investment over the medium term.
But what is the “neutral” level of interest rates today? Secular innovation might imply a level at or above its historical average of 2-3%, in line with historical growth rates. But secular stagnation may imply a level much lower than in the past, possibly even negative. In monetary policy, this is the difference between chalk and cheese, success and failure.
One interpretation is society having become significantly more patient, as in the lead up to the Industrial Revolution: higher global saving relative to investment would lower global real interest rates. If that is the cause, bring out the bunting. By lowering the cost, and raising the return to innovation, investment and growth would be stimulated. Falls in real rates would signal secular innovation. The optimists would have it.
But an alternative reading is possible. Low real rates may instead reflect a dearth of profitable investment opportunities relative to desired savings. If that is the cause, bring out the bodies. For this would imply low returns to innovation and low future growth. Falling real rates would instead signal secular stagnation. The pessimists would have it.
And looking ahead, it is possible that sociological headwind could strengthen. One of the causes of rising inequality in advanced economies is believed to be the loss of middle-skill jobs, at least relative to high and low-skill jobs. There has been a “hollowing out” in employment. Technological advance – the mechanisation of middle-skill tasks – is believed to have contributed importantly to these trends.
A second secular headwind, closely related to rising inequality, concerns human capital. Inequality may retard growth because it damps investment in education, in particular by poorer households. Studies show parental income is crucial in determining children’s educational performance. If inequality is generational and self-perpetuating, so too will be its impact on growth.
Growth is a gift. Yet contrary to popular perceptions, it has not always kept on giving. Despite centuries of experience, the raw ingredients of growth remain something of a mystery. As best we can tell historically, they have been a complex mix of the sociological and the technological, typically acting in harmony. All three of the industrial revolutions since 1750 bear these hallmarks.
Today, the growth picture is foggier. We have fear about secular stagnation at the same time as cheer about secular innovation. The technological tailwinds to growth are strong, but so too are the sociological headwinds. Buffeted by these cross-winds, future growth risks becoming suspended between the mundane and the miraculous.
