Is Secular Stagnation the Future for Europe? Nicholas Crafts Productivity Puzzles in Europe, CEPREMAP, Paris, January 23, 2015

Secular Stagnation 2 (possibly related) concepts Short-medium term: significantly negative real interest rates needed to prevent demand shortfall (in liquidity trap) Medium-long term: very low natural rate of growth (adverse demography, slow technological progress) Summers (2013) thinks we face the first; Hansen (1939) thought the second of these afflicted the USA and would seriously depress investment (and demand)

Balanced Growth Rate of growth of the capital stock equals the natural rate of growth ΔK/K = s/v = n + μ If the capital to output ratio is 3, a fall of 1 percentage point in (n + μ) implies a fall of 3 percentage points in investment/GDP, ceteris paribus Presumably, downward pressure on real interest rates.

Europe is More Vulnerable than United States European demographics less favourable Productivity growth in Europe lower than USA Debt overhang in Europe In a depressed economy, Fed better than ECB

Why Was Alvin Hansen Wrong? Regime change stimulated strong recovery post-1933 (Eggertsson, 2008) USA had strong TFP Growth from the 1920s through the 1960s Europe adopted better supply-side policies and enjoyed a ‘Golden Age’ of catch-up growth These boom years saw high investment, rapid capital stock growth and full employment

1929 III I I II III IV I II III IV I II III IV97.4 Real GNP in USA Source: Balke and Gordon (1986)

‘Refined’ TFP Growth in USA (Bakker et al. 2014; BLS, 2014)

Eurozone Today Still not out of a very lengthy recession This may largely reflect reduction in post-crisis level of potential output rather than permanently lower trend growth Nevertheless, the architecture of the Eurozone makes escaping from the doldrums quite difficult 2015 is more like the gold bloc in the 1930s than the sterling bloc

Real GDP in Two Crisis Periods Notes: ‘sterling bloc’ comprises Denmark, Norway, Sweden and UK, all of which left the gold standard and devalued in September 1931; the ‘gold bloc’ comprises Belgium, France, Italy, Netherlands and Switzerland, all of which stayed on the gold standard until autumn 1936 apart from Belgium which exited in March Source: derived using Maddison (2010) updated with The Maddison Project (2013); OECD (2013)

What Does OECD Project for Post- Crisis Europe? Crisis affects output levels but not trend growth rate Basically, it is pre-crisis ‘business as usual’ Catch-up growth resumes and slow convergence towards ‘best-practice’ supply-side policy continues

Pre-Crisis Growth, (% per year) Real GDP EmploymentGDP/ Worker TFP, United States Euro Area France Germany Greece Ireland Italy Portugal Spain Sources: The Conference Board (2014) and OECD (2014)

OECD Future Growth Projections, (% per year) Real GDPEmploymentGDP/WorkerTFP United States Euro Area France Germany Greece Ireland Italy Portugal Spain Source: OECD (2014)

Future Growth in the Leader Most projections a bit less optimistic than OECD; GDP growth at 2.0%, GDP/HW growth at 1.5% (Fernald, 2014) Even a famous pessimist sees 1.3% labour productivity growth; closer to a post-Golden Age normal than secular stagnation (Gordon, 2014) ICT revolution not yet complete (Byrne et al., 2013)

ICT Effects and Long-Run Growth if ∆p/p = - 7% (% per year) ICT-Use Own βICT-Use Swedish βICT-Output France Germany Ireland Italy Spain UK USA Source: Oulton (2012)

TFP Growth in the Long-Term Fernald and Jones (2014) note positive and negative arguments but stress end of ‘transitory gains’ in USA from HK and R & D Important positives include robots and the rise of research in China (16% world R & D in 2012) Key implication of ICT revolution is big rise in productivity of R & D (Mokyr, 2014)

Machine Learning/Mobile Robotics 47% American employment has ≥ 0.7 chance of being computerized by 2035; robot prices will fall fast (Frey & Osborne, 2013) ‘Polanyi’s Paradox’ (Autor, 2014) will recede as many more tasks can be ‘routinized’ Creative intelligence, social intelligence, and perception and manipulation tasks will remain non-susceptible

Long-Term Secular Stagnation in Europe? Good News: considerable scope for catch-up including in IT and no reason to think growth in leader will evaporate Bad News: European catch-up in GDP/Person ended in the early 1970s and in GDP/HW in the mid-1990s; pre-crisis productivity performance very poor Very Bad News: the crisis may have adverse medium-term effects on supply-side policy

Level of Real GDP/Hour Worked, 1995, 2007 and 2013 (USA = 100 in each year) France Germany Italy Spain UK Source: The Conference Board (2014)

Supply-Side Policy in Bad Times 1930s’ protectionism resulted from unavailability of macroeconomic policy (Eichengreen and Irwin, 2010) 1930s’ stagnation in Europe highly conducive to right- wing extremism (de Bromhead et al., 2013); today’s populism is also not market-friendly Mild protectionism and lower levels of European economic integration are apparent already (Evenett, 2014); cf., lack of progress on the Single Market → OECD’s view of future TFP growth may be too optimistic

Supply-Side Reforms These are mainly country-level policies that could stimulate private-sector investment and TFP growth and speed up diffusion of new technologies (e.g., ICT) As well as infrastructure, human capital and R & D, competition, implementing Single Market, regulation, and taxation policies matter for medium-term growth Problem is that full impact is long-term; but over 5 years there could be appreciable stimulus

Impact after 10 Years on GDP (%): Structural Reforms and Single Market OECD ReformsFull Single Market France Germany Italy Spain UK Sources: Aussilloux et al. (2011); Bouis and Duval (2011)

Short-Term Secular Stagnation at the ZLB? De-leveraging has a long way to go (Buttiglione et al. (2014) Neutral real interest rate is negative now (Rawdanowicz et al., 2014) 3 ways to address the problem Unconventional monetary stimulus Fiscal stimulus Supply-side policies that crowd in private sector spending (and improve productivity)

Why does the Eurozone find this So Difficult? We know these policies have worked in the past BUT today Wrong sort of central bank Absence of fiscal union Politics of supply-side reform →Europeans have good reasons to be afraid of secular stagnation in both the short and the long term; the American hypochondriacs didn’t and don’t

Is Secular Stagnation the Future of Europe? I don’t know BUT If so, a result of policy failure and flaws in the institutional architecture rather than technological exhaustion