Creating Competitive Advantage Policy Lessons from History.pptVIP

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 ‘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 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 Future Growth in the Leader Most projections a bit less optimistic than OEC