As one year of sluggish growth spills into the next, thereis growing debate about what to expect over the coming decades. Was the globalfinancial crisis a harsh but transitory setbackto advanced-country growth, or did it expose a deeper long-term malaise?
Recently, a few writers, including internet entrepreneur PeterThiel and political activist and former world chess champion Garry Kasparov, have espoused a fairly radical interpretation of theslowdown. In a forthcoming book, they argue that the collapse of advanced-country growth is not merely aresult of the financial crisis; at its root, they argue, these countries’weakness reflects secular stagnation intechnology and innovation. As such, they are unlikely to see any sustained pickup in productivity growth without radical changesin innovation policy.
Economist Robert Gordon takes this idea even further. He argues that the period of rapid technological progressthat followed the Industrial Revolution may prove to be a 250-year exception tothe rule of stagnation in human history. Indeed, he suggests that today’stechnological innovations pale in significance compared to earlier advanceslike electricity, running water, the internal combustionengine, and other breakthroughs that are nowmore than a century old.
I recently debated the technological stagnation thesis withThiel and Kasparov at Oxford University, joined by encryptionpioneer MarkShuttleworth. Kasparov pointedly asked what products such as the iPhone 5really add to our capabilities, and argued that most of the science underlyingmodern computing was settled by the seventies. Thiel maintained that efforts tocombat the recession through loose monetary policy andhyper-aggressive fiscal stimulus treat the wrong disease, and thereforeare potentially very harmful.
These are very interesting ideas, but the evidence stillseems overwhelming that the drag on the global economy mainly reflects theaftermath of a deep systemic financial crisis, not a long-term secularinnovation crisis.
There are certainly those who believe that the wellsprings of science are running dry, and that, whenone looks closely, the latest gadgets and ideasdriving global commerce are essentially derivative.But the vast majority of my scientist colleagues at top universities seem awfully excited about their projects innanotechnology, neuroscience, and energy, among other cutting-edge fields. Theythink they are changing the world at a pace as rapid as we have ever seen.Frankly, when I think of stagnating innovation as an economist, I worry abouthow overweening monopoliesstifle ideas, and how recent changes extending the validity of patents have exacerbatedthis problem.
No, the main cause of the recent recession is surely aglobal credit boom and its subsequent meltdown. The profound resemblance of thecurrent malaise to the aftermath of past deep systemic financial crises aroundthe world is not merely qualitative. The footprints of crisis are evident inindicators ranging from unemployment to housing prices to debt accumulation. Itis no accident that the current era looks so much like what followed dozens ofdeep financial crises in the past.
Granted, the credit boom itself may be rooted in excessiveoptimism surrounding the economic-growth potential implied by globalization andnew technologies. As Carmen Reinhart and I emphasize in our book This Time is Different,such fugues of optimism often accompany credit run-ups, and this is hardly thefirst time that globalization and technological innovation have played acentral role.
Attributing the ongoing slowdown to the financial crisisdoes not imply the absence of long-term secular effects, some of which arerooted in the crisis itself. Credit contractions almost invariably hit smallbusinesses and start-ups the hardest. Since many of the best ideas andinnovations come from small companies rather than large, established firms, theongoing credit contraction will inevitably have long-term growth costs. At thesame time, unemployed and underemployed workers’ skill sets are deteriorating.Many recent college graduates are losing as well, because they are less easilyable to find jobs that best enhance their skills and thereby add to theirlong-term productivity and earnings.
With cash-strapped governments deferringurgently needed public infrastructure projects, medium-term growth also willsuffer. And, regardless of technological trends, other secular trends, such asaging populations in most advanced countries, aretaking a toll on growth prospects as well. Even absent the crisis,countries would have had to make politically painful adjustments to pension andhealth-care programs.
Taken together, these factors make it easy to imagine trendGDP growth being one percentage point below normal for another decade, possiblyeven longer. If the Kasparov-Thiel-Gordon hypothesis is right, the outlook iseven darker – and the need for reform is far more urgent. After all, most plansfor emerging from the financial crisis assume that technological progress willprovide a strong foundation of productivity growth that will eventuallyunderpin sustained recovery. The options are far more painful if the pie hasceased growing quickly.
So, is the main cause of the recent slowdown an innovationcrisis or a financial crisis? Perhaps some of both, but surely the economic trauma of the last few years reflects, first andforemost, a financial meltdown, even if the way forward must simultaneouslytreat other obstacles to long-term growth.