Are Low Interest Rates and Cheap Capital Creating a Global Zombie Economy?

 

The downshift in US productivity growth started before the Great Recession. And it didn’t happen in just the US. Those are two factors any explanation needs to grapple with. Check out this table from “Total Factor Productivity in Advanced Countries: A Long-term Perspective” by French researchers Antonin Bergeaud, Gilbert Cette, and Rémy Lecat:

Note that I have highlighted the total factor productivity statistics for each of the advanced economies: US, UK, EA, and Japan. Obvious is a big decline in TFP — used as a measure of innovation, whether technological or better management — since the mid-2000s. Explaining that slowdown remains a live issue. From the paper (bold is mine):

The productivity slowdown appears to be a diffusion problem from the best performances at the frontier to the laggard firms. This diffusion problem seems to hinge on the nature of innovations at the current juncture, with intangible capital being more difficult to replicate, or on a winner-takes-all phenomenon in ICT sectors.

The puzzle is why such innovation diffusion difficulties appear to have become worse simultaneously in all developed countries, which are at different stages of development. Work in progress at the Banque de France on French firms confirms the OECD results but suggests complementary explanations. The cleansing mechanisms may indeed have become weaker. One explanation being tested is that this weaker cleansing mechanism could at least partly be explained by a decline in real interest rates and less expensive capital, which allow low-productivity firms to survive and highly productive firms to thrive.

Policies can influence TFP and GDP per capita growth. Relevant policies are ones that support innovation and foster greater productivity benefits from technological shocks. Examples are policies to reduce anti-competitive barriers on the product market, introduce more flexibility into the labour market, and increase the education level of the working age population . The challenge in the coming years for the four economic areas considered in this analysis will be not to miss the opportunities arising from a possible new TFP growth wave linked to a new technology shock.

This is good stuff. It reinforces other research suggesting there’s lots of innovation happening, it’s just not being broadly employed. So it’s maybe more a lack of dynamism issue — not enough competition or labor market churn — than a lack of invention issue.

Oh, and this: Creative destruction. Or as the phenomenon is described in the above block quote: ” … [a] weaker cleansing mechanism could at least partly be explained by a decline in real interest rates and less expensive capital, which allow low-productivity firms to survive and highly productive firms to thrive.” (Interesting also that some analysts want even looser monetary policy as a way of boosting productivity.)

Fascinating. Here is economist Timothy Taylor — whose invaluable Conversable Economist blog brought the French study to my attention — on that point:

In other words, when interest rates are so very low, the pressures to lend mostly to those firms with really good economic prospects is diminished, and lower-productivity firms feel less pressure to upgrade. I’m not confident that this answer applies very well for the US economy, but then, I’m not sure what other answers to offer, either.

There are 10 comments.

  1. Member

    Monetary policy doesn’t have that big an effect on real interest rates. Most of the decline is due to the so-called “global savings glut.” Demographically speaking it’s highly unlikely it’ll last much longer; as I recall, most analysts have global real interest rates rising starting around 2018-mid 2020s. The major high-savings countries all have aging populations, which will limit their net savings in the future.

    I think Japan proves that once a country is far enough along in the process of demographic aging, the demand for capital starts rising again due to a shortage of workers, and also the need to take care of so many elderly people with so few prime-age workers.

    • #1
    • July 31, 2017 at 12:48 pm
    • 1 like
  2. Coolidge

    James Pethokoukis: Are Low Interest Rates and Cheap Capital Creating a Global Zombie Economy?

    I think you have cause and effect reversed. The zombie economy is what allows the low interest rates.

    • #2
    • July 31, 2017 at 1:12 pm
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  3. Member

    ctlaw (View Comment):

    James Pethokoukis: Are Low Interest Rates and Cheap Capital Creating a Global Zombie Economy?

    I think you have cause and effect reversed. The zombie economy is what allows the low interest rates.

    The giant scam handout for the uber wealthy and banking systems is alive and well. They’re just figuring out how to screw the masses the next time it goes under , which will be within a few years.

    • #3
    • July 31, 2017 at 1:14 pm
    • 1 like
  4. Member

    James Pethokoukis: Creative destruction. Or as the phenomenon is described in the above block quote: ” … [a] weaker cleansing mechanism could at least partly be explained by a decline in real interest rates and less expensive capital, which allow low-productivity firms to survive and highly productive firms to thrive.”

    This is a recipe for disaster. We learned as much from the science of forestry. We used to fight every fire with a maximum effort. Until we learned that fire was part of the lifecycle of a healthy forest. It periodically clears underbrush and takes down unhealthy trees, making room for new healthy growth. By stomping on every fire, large and small, we allowed too much underbrush and sickly trees … Setting the stage for some really massive conflagrations.

    What Fire is to a forest, recession is to an economy. Nasim Taleb puts forth this analogy… “Why is the food in NYC so good? Because bad restaurants don’t last long.”

    But, for the most part, we treat recessions the same way we used to treat fire. Each one gets a maximum response. And firms that should fail get saved. Bad ideas kept on life support. But all we accomplish is to set the stage for a downturn of such magnitude it can’t be stopped.

    • #4
    • July 31, 2017 at 1:51 pm
    • 2 likes
  5. Member

    We have gone from a free market /capitalist economy to a heavily managed one, where the large corporate entities and banks are protected by the political class at all costs and where new start ups the competition against those large existing corporate entities are likewise heavily discouraged.

    To expect productivity growth is such an economy is a delusion. The deck is heavily stacked with mountains of regulation and restrictions on new start up lending against great leaps in productivity spawned by new revolutionary start-up technology which would threaten the established order. Such great leaps in productivity just ain’t gonna happen in our great new managed economy.

    As a consequence we are on a slow road to a sudden collapse someday- perhaps our near future. All hail our new entrenched overlords!

    • #5
    • July 31, 2017 at 2:28 pm
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  6. Member

    ctlaw (View Comment):

    James Pethokoukis: Are Low Interest Rates and Cheap Capital Creating a Global Zombie Economy?

    I think you have cause and effect reversed. The zombie economy is what allows the low interest rates.

    I would say the causal arrow is difficult to discern. George Gilder’s The Scandal of Money makes a good case that central bank manipulation of currencies is a proximate cause of productivity growth. Although he also put significant blame on currency traders that collectively trade a world GDP’s worth of currency weekly.

    • #6
    • July 31, 2017 at 4:47 pm
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  7. Member

    He never seems to focus on barriers to entrepreneurial activity, which provides demand for credit, nor on the Fed’s effort monetize Federal debt, the supply. So low interest rates are a surprise?. The Fed, turning neo classical economics on its head, believes supply of money creates its own demand. Say’s law pertained to production, not money, except to the cronies who get the arbitrage.

    • #7
    • July 31, 2017 at 6:19 pm
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  8. Member

    Remember that central bank-driven credit expansions don’t really increase net debt, because of inflation. Debt bubbles happen when there is excess, idle resources somewhere in the world, who can produce cheap goods/resources and then lend them to other countries (this is what China did until 2012 or so).

    Ultimately, interest rates are determined by the supply of economic savings and the demand for capital investment, not anything any one government in the world does. U.S. debt didn’t explode 1965-1980 because, even though the central bank was creating lots of debt, that debt created lots of inflation that canceled itself out. What instead happened is the cost of capital minus the inflation rate (the real interest rate) rose, and we got stagflation.

    The really dangerous policies are the ones that produce excess physical savings, and they threaten not just the countries that do them, but everyone else in the world too. Thus, China in the 2000s or Germany in the 2010s were/are much more of a threat than the Fed ever was to global monetary stability.

    • #8
    • July 31, 2017 at 10:00 pm
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  9. Coolidge

    Yes, Low interest rates lead to a zombie economy of near zero growth, and limited employment prospects.

    Because of the expectation of low interest rates, a lender cannot pitch a high rate to finance a high risk business like a start up restaurant. (remember most restaurants fail in the first year) Which explains the statistic, that since 2008 the business birth/death index has been contracting. More business are closing than opening.

    As long as new business start ups are below the replacement rate, employment growth will be slow.

    • #9
    • July 31, 2017 at 11:29 pm
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  10. Member

    Joseph Eagar (View Comment):

    What are excess savings? I hear that a lot these days. We didn’t use to hear it. We’d hear about weak demand, or fear of deflation, but excess savings not so much. Banks buy Treasury debt and the Fed then buys that debt increasing the monetary base. They have not created the debt, they have monetized it. But the monetary base is not expanding as it would were there robust demand for credit. There is weak demand for credit because that expanding government spending, regulation and the uncertainty it has created through things such as Dodd Frank and Obamacare, the nationalization of G.M., violation of property rights, New Deal anti market rhetoric, and, like Japan, the failure to let the overbuilt real estate market clear. Obviously we do not have excess savings. Is it just Germany and China and lesser countries here and there? What is the origin of that excess and what are it’s effects on Germany and China? What is driving the weak demand for those savings here and the rest of the world.

    • #10
    • August 1, 2017 at 4:09 am
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