Are the Good Times Over?
STANFORD – In the 25 years before the Great Recession of 2008-2009, the United States experienced two brief, mild recessions and two strong, long expansions. Globally, incomes grew briskly; inflation abated; and stock markets boomed. Moreover, the recovery from the last major slump, in the early 1980s, brought about a quarter-century of unprecedentedly strong and stable macroeconomic performance. This time, however, the return to growth has been much more difficult.
America’s recovery since the Great Recession, has been inconsistent, with growth repeatedly picking up and then sputtering out. In fact, the US has not experienced three consecutive quarters of 3% growth in a decade. Though lower oil prices are helping consumers, this gain is partly offset by less energy investment, and the effects of the stronger dollar will be even larger.
The US is not alone. Though most European economies are now growing again, aided by lower oil prices and currency depreciation, the pace of expansion remains anemic. Similarly, Japan’s recovery remains fragile, despite strong efforts by the government. Even the major emerging economies, which were supposed to serve as global growth engines in the years ahead, are struggling: China and India have downshifted, and Brazil and Russia are contracting.
When a boom or bust lasts for such a long time, it begins to seem like it will continue indefinitely. Six years after the crisis, some prominent economists are asking whether insufficient investment and/or waning gains from technological innovation have pushed the global economy into a “new normal” of lower growth and slow, if any, gains in living standards. Some economists call this “secular stagnation” – a fancy way of saying that the good times are gone for good. Are they right?
Total economic growth amounts to roughly the sum of the growth of work hours (an increase in the number of workers or the amount of hours that they work) and productivity (output per hour of work). If productivity improves by one percentage point in a year, the improvement of living standards over the subsequent generation would be augmented by one-third. Over time, a productivity improvement of even a fraction of a percentage point would be immensely consequential.
Productivity can be enhanced by capital investment, technological innovation, and improvements in the knowledge and skills of the labor force, though economists disagree on which has the largest impact. According to my research with Larry Lau, technology has played the largest role boosting productivity in the G-7 economies since World War II.
Given this, America’s declining productivity growth – which has averaged just 0.7% annually since 2010 – has led some observers to blame the slowdown on inadequate technological advances. These pessimists, such as the economist Robert Gordon, claim that new innovations are unlikely to improve productivity as fundamentally as electricity, automobiles, and computers did in the last century.
Optimists counter that smart phones, Big Data, and expected advances in nanotechnology, robotics, and biosciences are harbingers of a new era of technology-driven productivity improvements. It may be impossible to predict the next “killer app,” they argue, but it will always be developed.
Both sides cite Moore’s Law, named for Intel’s co-founder, Gordon Moore, who noticed that the density of transistors on a chip could be doubled every 18 months. The pessimists claim that this is becoming harder and more expensive; the optimists hold that the law will remain valid, with chips moving to three dimensions.
Clearly, the trajectory of technological progress is difficult to predict. In fact, the main commercial value of new technology is not always apparent even to the inventor. When Guglielmo Marconi made the first transatlantic wireless transmission over a century ago, he was competing with the telegraph in point-to-point communication; he never envisioned popular mass-broadcast radio. Thomas Edison designed the phonograph to help the blind – and filed a lawsuit to prevent it from being used to play music.
Complicating matters further is the fact that the next wave of productivity-enhancing technological developments are likely to occur in sectors such as health care, where their economic impact is difficult to measure. Economists believe that many improvements in health-care quality – such as more effective treatments for cataracts or cardiac disease – are not accurately reflected in real GDP, and are incorrectly reported as price increases. Better measures for these changes are essential for an accurate assessment of economic progress.
To be sure, technology-driven growth carries some risks. While old fears that automation and artificial intelligence would cause widespread structural unemployment have never been borne out, technology and globalization have put downward pressure on wages for all but the most skilled workers in the advanced economies. Capital’s share of national income has increased, while labor’s share has fallen. But implementing policies that restrict potentially productivity-enhancing technologies would be a grave mistake.
To encourage more robust growth and the associated improvements in living standards, governments should ensure that the private sector has sufficient incentives for innovation, entrepreneurship, and investment in physical and human capital. For example, officials could cut red tape, rein in deficits and debt, enact tax policies conducive to capital formation, reform the education system, and invest in research and development.
Of course, no one should expect a return to the pre-crisis boom years, given the demographic pressures that almost all major economies – including China – are facing. But these incentives stand the best chance of continuing the flow of productivity-enhancing technology, from startups to the research divisions of established companies in industries from technology to energy to health care.
Michael J. Boskin, Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution, was Chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993.
Copyright: Project Syndicate, 2015.
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