Last week Larry Summers brought the idea of secular stagnation right into the mainstream (of the little read econoblogosphere). In my eyes it was a big presentation in a “only Nixon can go to China” kind of way. Larry Summers is a creature of technocratic centrism in America, ex-President of
Yale (whoops, thanks Tim/a>) Harvard and creature of Wall Street. When Unlearning Economics declares capitalism fundamentally flawed I meh, when Larry Summers does it, I’m more curious. Not because I like Larry more but because of the opposite, Larry’s an arsehole.
“Many people think monetary policy was too easy [before the crisis], everybody believes that there was a vast amount of imprudent lending going on and almost everybody believes that wealth as it was experienced by households was in excess of reality. Was there a great boom? Capacity utilisation wasn’t under any pressure, unemployment wasn`t at any remarkably low level and inflation was entirely quiescent. Somehow even a great boom was unable to produce any excess in aggregate demand…
Suppose then that the short term real interest rate that was consistent with full employment had fallen to negative two or negative three percent. Even with artificial stimulus to demand you wouldn’t see any excess demand. Even with a resumption in normal credit conditions you would have a lot of difficulty getting back to full employment.”
Larry Summers – November 8, 2013
Marco Nappolini at Pieria suggest that increased vulnerability to energy costs has reduced the incentive to increased fixed business costs by hiring permanent employees. Excess capacity and the end of scarcity have led to a situation where investment is only profitable at very negative interest rates. Only measured against very inhospitable risk-free returns does any sort of investment make sense. Even then it only makes sense inasmuch as you mitigate your losses, rather than capture the superprofits which once supposedly animated capitalist.
This situation has been characterised by Paul Krugman as “When prudence is folly.” Responsibly saving when interest rates are trapped at zero just reduces demand, and depresses your returns. In essence because capacity and savings are abundant further investment or saving only reduces current spending further and makes further investment and saving even less appealing. Interest rates stay at zero and we just stay far from full employment for a long time.
As Larry Summers says in his talk. This has been resoundingly rejected by the economics profession for a number of years. At least since the monetarist revolution in the 70s/80s economics have been comfortable arguing that aggressive monetary and fiscal stimulus can produce the necessary demand to restart spending, saving and investment at the necessary levels to return economies to full employment. The nature of investment and technologies may have changed and I want to discuss a little the nature of that change and the response already in train.
The extended (for blogs anyway) Skidelsky quote on Keynes explains that he thought eventually capitalism would lose its vigour and that some “socialisation of investment” would be required. You can only read the bolded bits, that’s why I do on other people’s long blockquotes.
The problem of maintaining full employment arises from ‘the association of a conventional and fairly stable long-term rate of interest with a fickle and highly unstable marginal efficiency of capital’ (Keynes, 1973A, p. 204). His solution to the problem is to use monetary policy to establish a permanently low long-term rate of interest. For ‘any level of interest which is accepted with sufficient conviction as likely to be durable will be durable…’ (Keynes, 1973A, p. 203). For this reason, he did not want to use interest rates to manage the business cycle: the exact opposite of present practice. Nevertheless, he believed that it ‘seems likely that the fluctuations in…the marginal efficiency of capital…will be too great to be offset by any practicable changes in the rate of interest’ (Keynes, 1973A, p. 164). Hence, apart from keeping interest rates permanently low, investment needed to be ‘socialised’. Keynes wrote: ‘I expect to see the State…taking an ever greater responsibility for directly organising investment’ and ‘I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment’ (Keynes, 1973A, pp. 164, 378).By ‘socialisation of investment’ Keynes did not mean nationalisation. Socialisation of investment need not exclude ‘all manner of compromise and devices by which public authority will co-operate with private initiative’ (Keynes, 1973A, p. 378). This single throw-away line in the General Theory reflects Keynes’s thinking on ‘public-private partnerships’, which came out of his involvement in Liberal politics in the 1920s (Skidelsky, 1992, chs 7 and 8). In essence, he sought to expand the public-utility component of investment to give greater stability to the investment function. Today, he would have seen the big institutional investors like pension funds as a major support for stability. A guaranteed stream of investment would reduce fluctuations to modest dimensions, which could be readily controlled, if so wished, by speeding up or slowing down elements in the investment programme. Such investment would not necessarily be profit-maximising. But provided it yielded positive returns, there would be a gain. If markets had perfect information, public investment would be inefficient. But with uncertainty, there is a gain as against having no state investment at all, because of the losses due to uncertainty.
I am here to present evidence that this is already happening and is uncontroversial in the heart of government. Within both DECC and the Department of Transport the above is taken for granted. I think as we move towards an economy in which networks and the free flow of data become ever more important this trend will continue and because the benefits are hard to capture it will look a lot like secular stagnation. One such example is the smart meter roll-out:
Between now and 2020 energy suppliers will be responsible for replacing over 53 million gas and electricity meters. This will involve visits to 30 million homes and small businesses.
DECC estimate that the programme will cost £12 billion and produce £18 billion of benefits. The programme involves all energy suppliers and network operators working together with government to set up a new national communication grid to exchange real time data on energy usage. There are no comparable Key Public Infrastructure projects anywhere close to it in scale or scope in the world. All work is taking part because the government has demanded it under advice from industry and the public-utility component of investment has been extended to give greater stability to the investment function.
The costs are almost certainly an underestimate, they almost always are. The benefits are based on headline savings. Shifting of consumption, reducing energy consumption, making investment in the grid more efficient etc. They are almost certainly an underestimate. Smart gadgets, smart homes, and the potential to totally disintermediate electricity sale will be opened up by this investment.
Power is a commodity. It should be pretty unprofitable, but it is not. The data produced by its consumption is valuable though. The smart meter roll-out infrastructure will allow the entry of people good at data into a commodity business. Google selling electricity and using your data to make your life better is a business proposition that will totally destroy the incumbents. The benefits could be huge but the investment had to be socialised.
There’s a similar problem with rail smart ticketing in the UK. The benefits to smart ticketing vastly outweigh the costs, but rail operators are unable to capture the majority of them. Indeed as it becomes easier to track people on the railways it might be easier for the services rail companies offer to be replaced by new entrants. The data produced will enable passengers to track their own journeys and work out how valuable they are. Jeffrey Sachs (via Mark Thoma and Arnold Kling) pushes back against Summers and writes that investment is only sluggish because regulation and policy is holding it back. I think that is unrealistic. In lots of areas policy is already helping to address the problem of secular stagnation with the socialisation of investment.
Technology is changing and reducing the return on investment which can be monetised by those making the investment. The benefits from networks, twitter or the internet of things will be broad, ubiquitous and difficult to monetise. Because this investment won’t produce a good return for those carrying it out it will look a lot like secular stagnation. The new world will be built on smart networks (and intuitive marketing much to Alex’s horror) and the private sector cannot trusted to carry this out. The need to socialise investment is driven by secular stagnation and the difficulties encountered in monetising investments reliant on network effects.