Alan Greenspan, the former chairman of the US Federal Reserve whose low-interest policies (some say) helped inflate the dot-com and mortgage bubbles of 2000 and 2008, did a fascinating interview with Gold Investor recently. In it, Greenspan produced an incredibly cogent explanation of the role that reduced long-term productivity has had in fuelling populism, Brexit and Trump.
Before we deliver Greenspan’s quote, some background:
“Productivity” is one of the least-sexy areas of macroeconomics, even though right now it is one of the biggest issues bedevilling it.
Here’s a chart from the Resolution Foundation showing the phenomena:
The “productivity puzzle” is this: The amount investors get in return, in aggregate, for investing in new workers is in long-term decline. Productivity growth is in decline globally and heading toward zero. This is counterintuitive because new technology ought to make workers more productive and more efficient. A single employee with a laptop can do more today than a roomful of secretaries, mathematicians, and writers could in the 1960s. We ought to be getting more bang for our bucks. Fix productivity, and you fix everything, economists believe — including GDP growth, workers’ pay, investment returns, and so on.
But instead we’ve got stagnating incomes, low growth, and low productivity for money invested.
The productivity decline isn’t a complete mystery, of course. We know it is a mixture of deflationary forces, an ageing population, excessive debt, and increased inequality. But putting that all together in a simple, elegant way is tough. That’s why this answer from Greenspan is so good. He was asked whether he was concerned about Stagflation.
We have been through a protracted period of stagnant productivity growth, particularly in the developed world, driven largely by the ageing of the ‘baby boom’ generation. Social benefits (entitlements in the US) are crowding out gross domestic savings, the primary source for funding investment, dollar for dollar. The decline in gross domestic savings as a share of GDP has suppressed gross non-residential capital investment. It is the lessened investment that has suppressed the growth in output per hour globally. Output per hour has been growing at approximately 1⁄2% annually in the US and other developed countries over the past five years, compared with an earlier growth rate closer to 2%. That is a huge difference, which is reflected proportionately in the gross domestic product and in people’s standard of living.
As productivity growth slows down, the whole economic system slows down. That has provoked despair and a consequent rise in economic populism from Brexit to Trump. Populism is not a philosophy or a concept, like socialism or capitalism, for example. Rather it is a cry of pain, where people are saying: Do something. Help!
That’s it, the whole thing in a nutshell. There are too many retirees for existing workers to adequately support them, and that’s an aggregate drain on savings. Savings fuel investment, so drained savings hurts investment. No investment, no jobs, no nothing — and everybody’s angry.
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