How To Exit Our Economic Era Of Slow Growth
Will slow growth rates persist in a global dynamic of 'secular stagnation?' Or will the IT revolution set off new bursts of productivity?
PARIS — Has painfully slow economic growth become our fate? A decade after the financial meltdown of 2007-2008, this question hangs over us, even after momentarily fading amid last year's global recovery. But now, the list of concerns is again expanding: Brexit, the Italian budget, monetary tightening in the United States, President Trump's protectionism, financial slides in Turkey and Argentina, German political fragmentation, the Saudis drifting off course, rising radicalism in Brazil and inconsistent economic performance in China.
Beyond the political uncertainties and growing inequalities that put pressure on demand, one must always consider growth's most potent engine: the efficiency of production. In France, one clearly observed progress in productivity at work in the 20 years preceding the crisis, at an annual rate of 1.3%. That has dropped to 0.9% since 2010, and a closer look reveals the break occurring in 2003-4. One finds similar shifts around the same time in neighboring countries.
Economists have been fiercely debating the origins of this disruption. Three researchers at the Bank of France, Gilbert Cette, Rémy Lecat, and the young and brilliant Antonin Bergeaud, are providing a hopeful sign in these generally less-than-cheerful debates with their new book, Le Bel Avenir de la croissance (Growth's Beautiful Future).
The IT revolution goes deeper than electricity.
One of the world's great productivity specialists, Robert J. Gordon of Northwestern University in Chicago, set the ball rolling five years ago with a pessimistic microeconomic proposition: that we have exhausted technical progress. The finest smartphone will never change our lives as much as the modern plumbing that brought water into our home, Gordon observes. Two economists from MIT in Boston, Erik Brynjolfsson and Andrew McAfee, replied in early 2014 with another microeconomic but optimistic argument: that IT innovations will unleash a tremendous wave of productivity. It is the perspective echoed in debates on AI's attendant hopes and anxieties over the future of work.
The debate is also macroeconomic. In 2013, former U.S. Treasury Secretary, Lawrence Summers, forwarded his own pessimistic argument. A former president of Harvard University, Summers believes we are in "secular stagnation," and an aging population in advanced countries is swelling savings. Investments, he says, are not enough to absorb this money, and interest rates, which assure equilibrium between the two, should be negative. And as this is not acceptable to savers, firms are not investing enough.
The Bank of France economists, however, state very cautiously an optimistic macroeconomic argument; the new digital wave could generate benefits as potent as those of electricity in the 20th century. Those are not yet here, but "historically, technologies have effectively needed decades to diffuse and be utilized in a fully efficient manner."
The Bank of France — Photo: Guilhem Vellut
Bergeaud, Cette and Lecat have even worked out the numbers. With secular stagnation, the annual growth rate in the next half-century will not exceed 1.5%, whether in France or the United States (though one might easily consider that figure excessive). In case of an effective technological revolution, the figure could more than double to reach around 3% a year.
At its core, however, it is not just about rates. These researchers insist there must be big changes to capture the benefits, and it will be hard to thrive in the digital revolution with a state structure and social contract dating from the time of heavy industry. The efficient use of "the most advanced technologies needs certain forms of organizational flexibility that are potentially thwarted by ponderous labor market regulations," they write.
Organizations must fully adapt to adequately profit from an industrial revolution. In the 20th century, industrialists built new factories to make full use of electricity. The destruction of World War II hastened movement in Europe, and both states and peoples created new institutions like social security.
In the 21st century, people will have to go much further by reinventing production, enterprise, social security, public intervention and education. The IT revolution goes deeper than electricity, and it is not just an external shock restricted to the physical realm. It impacts our internal capabilities — not just the way we act, but how we think. Inevitably, it must also be part of an ecological revolution. As for those people unable to adapt, their fate is to vanish from history.