Biased against stagnation

George Osborne tried yesterday to reject the idea that we've fallen into secular stagnation. I'm not convinced.

He points to some "new advances in fundamental science" and says:

We cannot even imagine the advances in all areas of science – from genetics to materials – that high powered computing will make possible in the years ahead.

This is plausible; to some extent, technical progress is inherently unpredictable. But it poses the question which Osborne didn't answer: are such advances monetizable? Capitalists don't invest because there's potential new technology. They do so because they expect to make profits. I fear that one under-rated reason for stagnation is that capitalists have wised up to William Nordhaus's famous finding - cofirmed by the experience of the tech crash in the early 00s - that "only a miniscule fraction of the social returns from technological advances" accrue to companies.

There one massive fact that Osborne ignored yesterday - that business investment has trended down as a share of GDP for years. Granted, this could be temporarily reversed if there's a surge in animal spirits - stagnation is wholly consistent with the emergence of bubbles - but Osborne gave us no new reason to think it could be more sustainably reversed.

This matters because it's plausible that Osborne's denial of stagnation rests upon some cognitive biases:

 - Bayesian conservatism. Tories, and especially those who spent their formative years in the 80s, believe that the private sector is a powerful, vigorous engine of growth. This belief can persist even after the evidence for it has weakened. There are many examples of good ideas outliving their truth and usefulness. Maybe confidence in the private sector's ability to grow is one*.

 - The optimism bias. Politicians of all parties are selected for their tendency to look on the bright side - to exaggerate their chances of success in a risky career, and to over-estimate their ability to improve human affairs. Maybe Osborne's just conforming to this pattern.

 - The halo effect. The question of whether we've entered an era of stagnation is an empirical one; we either have or haven't, whatever else you believe. However, it is associated with calls for fiscal easing. Perhaps Osborne's hostility to the latter colours his attitude to stagnation. Strictly speaking, there's no logical reason for this: one could argue - albeit at a push - that we're in stagnation but that looser fiscal policy is no answer.

Now, I don't say all this to claim that we are definitely in stagnation. Maybe we're not. Biased beliefs are sometimes right, after all. My problem is that if Osborne's arguments against stagnation are so skimpy, there'll be a suspicion that they are informed by cognitive biases rather than clear thinking.     

* We must distinguish here between the idea that free markets promote static efficiency and the idea that they create growth. You can believe the former without the latter: David Ricardo, for example, did so.

Comments

[Dave Timoney]

Osborne's error is to fail to understand the qualitative difference in technological progress that has occured over the last 30 years, namely the rise of software. Stagnation is a consequence of abundance.

http://fromarsetoelbow.blogspot.co.uk/2013/12/secular-stagnation-as-software-glitch.html

[Ralph Musgrave]

I do wish those talking about “secular stagnation” would specify what they mean. Sometimes they mean that monetary policy alone (zero interest rates in particular) can’t get us out of recessions, but fiscal policy can easily do so. And sometimes they claim that neither fiscal nor monetary will save the day.

As for Lawrence Summers, inventor of phrase, he flips from meaning to the other.

[Kevin Carson]

All the hopes for technology-based growth assume it can be enclosed, via "intellectual property," as a source of rents, and become the basis for another Kondratieff wave. Considering that new technology is also making such monopolies unenforceable, I think it's far more likely that abundance will be radically deflationary and the cash nexus will shrink.

[Luis Enrique]

There is another bias, or at least habit, and that is extrapolating from the short run to the long run. Perhaps all this talk of secular stagnation just reflects the fact we are still recovering slowly from a titanic recession.

I'm more worried about demographic drag and the burden of end of life care than about whether technological progress has shifted into a form that will somehow stop the real quantity of goods and service produced growing at the rate it has is the past

[SK]

The fact that he introduced HTB2 says it all for Osborne.
He is not worth commenting or writing about.

A lame copycat version of the Labour chancellor. No new thinking, no long term plan, no strategic. Electionism and short term only.

[Metatone]

@Luis - but given that we have this large cadre of unemployed and this need for end-of-life care, doesn't there seem some kind of solution out there somewhere?

[Metatone]

@Luis - and while I'm being grumpy, doesn't it bother you that somehow population growth begets economic growth (a la Piketty) ?

(And crucially for your concern, vice-versa.)

We debunked this with profitability vs total revenues for companies decades ago. Yet for whole economies it runs true?

[Dave Timoney]

@Luis, the modern concerns re stagnation long predate the recession of 2008. As Larry Summers himself pointed out, the warning signs have been there since the mid-80s in respect of low growth / high unemployment relative to the expectations raised by deregulation and restructuring. The bubbles have just obscured this reality.

Osborne is claiming victory because the ONS are projecting a return to the postwar trend growth rate of 2.6%, but this actually implies a weak recovery only just crawling back to the norm with no above-average bounceback as seen in previous recoveries. FlipChartRick has a good summary at: http://flipchartfairytales.wordpress.com/2014/04/08/waiting-in-vain-for-the-rebound/

There is definitely something odd going on, whether you care to call it "stagnation" or not, and it seems to be bound up with the impact of technology. The fact that some people think we are living through a radically transformative era, while others think we've literally run out of new ideas, is indicative of uncertainty and possible paradigm shifts.

[rogerh]

A neighbour works for a US chip maker - on a white collar business park here in UK. His designs are simulated in the US, sent to Singapore to prototype, to Germany for testing/approvals then to S Korea for production and on to China for inclusion in product. Poor old Osborne does not get to see much cash from this operation even though it is terribly high-tech.

More worrying is that my neighbour trained when the UK still had a big telecoms industry, his cohort is not being replaced, the replacements will likely come from Singapore or S Korea or China where the skills are visibly valuable. My neighbours kids are training to be dentists and accountants - useful but unlikely to generate forex. Worse, even these trades look likely to go the way of the barristers.

I don't agree we just have to wait and all will be well, my neighbour is at the upper end of the Bell Curve and he and his ilk are getting pushed out, we truly are crowding around the few last waterholes.

[Luis Enrique]

Metatone

Think about the quantity of goods and services produced, other than end of life care. To crystallise ideas, suppose only good produced is food, economy consists of 10 people, 3 children, 5 farmers, 2 pensioners, 5 units do food shared between 10. Now 2 children, 3 pensioners, 2 end of life carers, 3 farmers, 3 units of food to share.

[Luis Enrique]

Metatone,

Also, population growth obviously causes economics growth, with possible exception of land constrained agricultural economics. Why is GDP of USA hundreds of times larger than Singapore? It's not because USA hundreds of times more productive. If on the other hand we are talking about GDP per captia, I don't think anybody claims pop growth does much for that. I

And I agree some unemployed people,could be found work as carers. Otoh unemployment has always coexisted with sectors that are large employers .

[Luis Enrique]

Fate, yes, I'm not claiming the idea has no basis other than the experience of the recent expression. But the interpretation of pre crash economy as low growth high unemployment is debatable, and recent experience may affect how we interpret

[Luis Enrique]

Recent recession.

[Yet another Chris]

I think RogerH is probably on the money. Along with other things, we have exported our business investment.

[Donald A. Coffin]

Taking a somewhat longer perspective of (gross) investment as a % of GDP (at least for the US, I find a different trend. (I can't post the relevant chart here, but have posted in here: http://signsofchaos.blogspot.com/2014/04/gross-investment-as-percent-of-gdp.html

It seems to me that the recent downturn in I as a % of GDP, at least in the US, continues to be more of a cyclical phenomenon than a secular trend.