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Secular Stagnation and the Implications of the Technological Revolution

Screen Shot 2015-03-31 at 20.35.08BY JAMES RESNICK 25/03/2015

For North America and much of Europe, economic growth in the last twenty years has only really come about in the form of growth spurts accompanied by low interest rates and speculative bubbles, the first bubble being the dot-com bubble in the late 1990s, and the second being the real-estate bubble. For economists such as Larry Summers and Mohammed El-Erian, the argument goes that these volatilities, and the need for historically low interest rates, have come about because of ‘secular stagnation’[1].

Volatility and the need for historically low interest rates are a result of secular stagnation

The story goes that for some countries, they are experiencing an extended period of slow growth because of several factors. This includes the pressures of an ageing population, which results in an excess of desired saving over desired investment in an economy, as there is a greater incentive to invest if you have a large pool of labour to invest in. Similar economists argue that ‘secular stagnation’ has arisen because of a slowdown in innovation. This is particularly the argument that Robert Gordon makes, in his provocative essay titled “Is US economic growth over? Faltering innovation confronts the six headwinds”[2].

Gordon notes that there are three stages to innovative advancement: (IR=industrial revolution) IR#1 is from 1750-1830 with the development of the steam engine and the railroad; IR#2 is from 1870-1900 and includes such advancements as electricity, the internal combustion engine and running water; and IR#3 being the most recent stage from 1960 to today, which includes computers, mobile phones and the internet[3].

Screen Shot 2015-03-31 at 20.56.21Each revolution is similar in that they all significantly impact upon productivity, efficiency and hence economic growth. What makes Gordon’s essay provocative is that he argues that the innovations of IR#2 were much important and positively impacted growth, much more than the current period of IR#3. He highlights that if the pace of IR#2  had carried on to the present day, then aggregate material living standards would be much higher.

The slowdown in growth and technological innovation is argued by Gordon as a key reason for the deleterious effects of ‘secular stagnation’. However, more optimistic economists, such as Joel Mokyr and Erik Brynjolfsson, counter Gordon by arguing that the technological revolution has only just begun[4]. This is also noted by Paul Krugman in his essay ‘Is Growth Over?’ where, even though sympathising with the argument that the United States is suffering from ‘secular stagnation’, he disagrees with Gordon’s argument that technological innovation is slowing down[5].

In his article, Krugman refers to the huge potential of artificial intelligence on productivity and economic growth, which is certainly true[6]. However, one should be sceptical over whether a growingly robotised economy would be wholly beneficial. For example, the economist Robin Hanson is optimistic about an increasingly robotised economy, suggesting that “wholesale use of machine intelligence could increase economic growth rates by an order of magnitude or more.”[7] Yet, on the other hand, he notes that “wages might well fall below human subsistence levels.”[8]

There may well be a ‘secular stagnation’ because of an ageing population, but the argument that there is ‘secular stagnation’ because of an innovative slowdown isn’t convincing. The potential that IR#3 holds in transforming the world economy to a more robotised economy is monumental, but one should be cautious over whether the developments of IR#3 are truly beneficial; productivity and efficiency would improve immensely, but without caution, an unemployment rate of 75% as software entrepreneur Martin Ford predicts[9], could well become reality and the norm for the increasingly robotised economy.

JAMES RESNICK

1st year International Relations student at King’s College

References:

[1] – For Lawrence Summers – Summers, L. (2013) “On Secular Stagnation” <http://blogs.reuters.com/lawrencesummers/2013/12/16/on-secular-stagnation/>

For Mohammed El-Erian – Cassidy, J.  (2015) “Is the Economy Still Threatened By Secular Stagnation?” <http://www.newyorker.com/news/john-cassidy/economy-threatened-secular-stagnation>

[2] –  Gordon, R. (2012) “Is US economic growth over? Faltering innovation confronts the six headwinds” NBER Working Paper Series

[3] – Gordon, R. (2012),“Is US economic growth over? Faltering innovation confronts the six” <http://www.voxeu.org/article/us-economic-growth-over>

[4] – Crook, C. “ <http://www.bloombergview.com/quicktake/secular-stagnation-economy>

[5] – Krugman, P. “Is Growth Over?” <http://krugman.blogs.nytimes.com/2012/12/26/is-growth-over/>

[6] – Krugman, P. “Is Growth Over?” <http://krugman.blogs.nytimes.com/2012/12/26/is-growth-over/>

[7] – Hanson, R. “Economic Growth Given Machine Intelligence” pg.12

[8] – Hanson R. “Economic Growth Given Machine Intelligence” pg.6

[9] –  Nisen, M.“Robot Economy Could Cause Up To 75 Percent Unemployment” (2013) <http://www.businessinsider.com/50-percent-unemployment-robot-economy-2013-1?IR=T>

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