Wednesday, 15 October 2014

Technology, Stagnation and Drug Abuse

I've been tracking the "modern technology is rubbish" meme for some years now. It originated as an ironic response to the dotcom bust, as if everyone awoke with a hangover and memories of an embarrassing night out, but really came to the fore after the 2008 crash revealed that the "new economy" owed more to an out-of-control habit of rising household debt than accelerating productivity. The meme was given a further boost by the reintroduction of the idea of secular stagnation to economic debate, but in recent months it has been challenged in the zeitgeist stakes by the emergence of the "eve of war" meme. This might appear to be little more than the product of the Great War centenary, amplified by trouble in Ukraine and the Middle East, however there is also a fear that the continuing ill health of the global economy since 2009 points to another parallel: "The problems created by the first world war were never properly dealt with, and it was only after the Great Depression and a second conflict that policies changed and global institutions were made fit for purpose. There is a real danger of history repeating itself".

There have been two main flavours of the "modern technology is rubbish" meme. "Techno-dammerung" is a variant on the age-old belief that everything is going to the dogs and we reached our peak sometime in the last generation. This is nostalgic not only for old certainties but for old fantasies and ambitions, hence the laments for the non-appearance of jet-packs and flying-cars alongside the misty-eyed recollection of chopper-bikes and school milk. "Trivialisation" holds that we have turned technology to self-indulgent and ultimately foolish ends, such as social media, rather than investing in productivity enhancements. This is a moral critique of decadence that has its roots in earlier theories of the structural deformation of media ("amusing ourselves to death") and is related to the persistent memes of "information overload" and "dumbing down". It's not quite Sodom and Gomorrah, but it's in the same neighbourhood.

The techno-twilight version also finds common cause with the idea, popularised most recently by Thomas Piketty, that the 1945-75 period was an exceptional golden age and that the future promises increasing inequality. In other words, the babyboomer generation was peak social democracy: "My children have the expectation that they won't be as rich as me. They won't have the life chances, they won't have the disposable income. There is an underlying sense that what has gone on might be a secular, long-term change". The meme, in both its flavours, informs the current fear of secular stagnation (persistent low economic growth), though I think the worry over the trivial nature of modern technology may be partly a misunderstanding of the power of software by academics raised in a hardware age. A recent paper rounding up current thinking on "secstag" identified three characteristics, each of which has a technological dimension.

1. Diminished long-run growth potential. This is the structural perspective on stagnation, which points to multiple causes: a lower rate of technological progress; the end of the historic growth in tertiary education (i.e. "peak graduate"); an ageing population; growing inequality; and the unsustainability of public debt. The first two are assumed to depress productivity growth through insufficiently rapid capital-labour substitution and a falling off in the rate at which the workforce composition moves from unskilled to skilled. The last three tend to depress aggregate demand (i.e. current consumption) and boost savings, with the erosion of the welfare state specifically prompting greater precautionary saving.

The rate of technological progress is also influenced by the trend towards monopoly, which discourages innovation, protects incumbents against new market entrants and promotes rent-seeking over investment. This trend is partly an inescapable factor of technological progress (scale economies lead to physical monopolies such as roads, railways and water), the network effects of software (i.e. the value of a common search engine or microblogging platform has led to monopoly not greater competition), and neoliberal practice (in the form of privileged firms being granted government monopolies via privatisation).

2. Persistent GDP gaps. This is essentially the Keynesian analysis. High under- and unemployment at the zero lower bound (i.e. central bank interest rates are at or near zero and can't be pushed lower) makes conventional monetary policy (lowering interest rates to stimulate investment) redundant. Consequently, we may need bubbles to kick-start any sort of growth, and thereby boost employment and wages. But like any drug, the comedown is a kicker. Balance sheet repair (i.e. paying down high household debt after a bubble) discourages spending, so even negative interest rates (penalising saving) or financial repression (keeping interest rates below inflation, as we have done) won't necessarily boost demand. Government-led investment, at a time of very low interest rates, would make a lot of sense, but this is off the agenda while reducing public debt and the deficit are defined as political imperatives.

There have been two major bubbles since 1980: technology and housing. Though the former is seen largely in terms of the dotcom bubble of the late 90s, it was actually the culmination of a longer underlying swell that started in the mid-80s with the introduction of the PC. The problem has been that the growth in IT capital investment since 2000 has slowed, not because of lower activity or trivialisation but because of the compositional shift from hardware to software. Similarly, house prices have been rising since the mid-80s, despite corrections in the early 90s and after 2008, and while the market has been extensively rigged for political reasons (most notably in the UK), there are genuine secular forces at work too, notably growing longevity (leading to later retirement and longer working lives) and increasing female participation in the workforce (which may now be exhausted). Persistently low interest rates will also keep house prices high, relative to income, which brings us to ...

3. Low interest rates. This partly repeats the point about long-run growth potential, namely that demography, inequality and anxiety over public services increases the supply of loanable funds in developed economies. However, it also notes that growth in developing economies, where pensions and healthcare may not be funded via tax, creates a surplus of savings that are exported to developed economies, thus acting to keep interest rates low regardless of domestic policy. On top of this, there has been a decline in the number of safe assets, due to the crash of previously triple-A mortgage-backed securities, while demand for them has increased due to tighter post-crash regulation of banks (i.e. they need more safe assets for their capital buffers), which drives rates even lower.

The compositional change in technology (i.e. more software) may also be lowering demand for loanable funds at the same time that R&D is declining. The latter is due to privatisation (the entrepreneurial state not being fully replaced by the private sector) and financial engineering, which encourages mergers and acquisitions rather than research competition. With technology being insufficiently expensive (or wasteful) as an investment opportunity, and public infrastructure and housing under-resourced, more and more capital is diverted elsewhere. As Larry Elliott has noted of the IMF, "It knows that much of the cash created by central banks has found its way, via the shadow banking system, into emerging markets and developing countries. It knows that investors are complacent about the risks. It knows that in a rush for the exit, many of these investors would be badly burned".

What the "modern technology is rubbish" meme is really telling us is that technology is, in aggregate, cheaper than ever. R&D is very expensive, but the hyper-efficiency of modern hardware and software means that the exploitation of that initial investment requires proportionately less capital than it used to. Historically, capital investment has been risky because it has been vulnerable to catastrophic loss, such as merchant ships sunk at sea, mines and oilfields nationalised by former colonies, and factories bombed to smithereens. The gradual decline of such threats after WW2, combined with the falling price of capital opportunities due to technology, has produced both a surplus of capital and an insane lack of caution (probably exacerbated in some cases by cocaine) among those who manage its investment.

In a stagnant economy, wages aren't going to rise much, if at all, and non-wage income will suffer from low interest rates unless diverted to shares, property or overseas markets. Meanwhile, capital continues to accumulate, which inevitably forces politicians to consider moving towards increased taxes on assets over income and profit, no matter how much they may publicly denigrate "mansion taxes" and seek to preserve inheritance. In fact, what we need are the "unrealistic" confiscatory taxes advocated by Piketty, not simply to redistribute income and narrow inequality, but to take large amounts of capital out of private sector circulation where it gives rise to systemic risk. This expropriated capital should be used to repair the public fabric, but some of it could also be used to pay down public debt, though investing it in productive capital formation to increase tax revenues is ultimately a more efficient way of paying down the debt and evaporating the deficit.

What the "eve of war" meme is telling us is that policy-makers increasingly doubt that the current situation can persist for much longer, though they'll attempt to sit on their hands as long as they can. As they showed in the aftermath of 2008, the only priority is the preservation of accumulated wealth. We don't know how this will play out, though a capital crisis in an emerging economy that wreaks havoc in the shadow banking sector currently looks more likely than a sovereign default or a run on a regulated bank. It is also possible that policymakers might let the hedge funds and their ilk crash and burn, sacrificing some of the rich for the benefit of the rest, and that contagion of the regulated banking sector could be prevented, but that would be a peculiarly inefficient way of letting air out of the system. For all his alleged utopianism, Thomas Piketty's suggestion that we cut to the chase and confiscate the stash makes increasing sense macroeconomically as well as socially.

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