I’m taking my charts today from the just-published Report of the Commission on Inclusive Prosperity, chaired by Larry Summers and Ed Balls. Summers, one of the highest profile economists in the world, was in London yesterday (on the way to Davos), promoting the report itself and describing the challenge of how to combat secular stagnation. Yesterday, I listened to Summers at a lecture held at the LSE, a podcast of which can be found here.
First, a restatement of the problem. Growth has slowed in almost all advanced countries (click for larger image):
And what growth there has been has gone to the rich:
In short, for the bottom 90%, productivity and income have diverged.
While admitting there are supply side factors causing the economic slowdown (such as poor demographics), Summers places most emphasis on the demand side as the root cause of the problem, particularly with repsct to investment.
Critically, the relative price of investment goods has collapsed, making investment a meagre source of effective demand. By way of example, Summers points to the behemoth of the 1970s, IBM. The computer giant of its time had a repeated need to access capital markets in order to finance its investment plans and grow. Apple, however, generates more cash than it knows what to do with. Indeed, it is a source of liquidity in the capital markets through carrying out continued share buybacks.
Similarly, Summers notes that a company used to be partly valued on how much ‘stuff’ it had on its balance sheet, but now this is almost an irrelevance. So we have a situation where Whatsapp is worth $17 billion, with minimum assets and employees, but Sony, with an army of employees and a raft of factories, is only worth $16 billion. As a result, the price of money has fallen to zero.
Summer’s prescription: if the private sector doesn’t want to invest regardless of how low interest rates go, the state should step in, taking advantage of bargain basement borrowing rates to massively upgrade its infrastructure.
I am broadly sympathetic. However, I would point out that another state suffering secular stagnation, Japan, has tried the government-financed mega infrastructure investment strategy before. Indeed, for a time, academics dubbed Japan the ‘construction state’. This frenetic activity, however, did little to raise long-term growth rates. Sometimes, when growth has gone, it’s gone.