Is Slow Economic Growth the 'New Normal' for Europe?

By Crafts, Nicholas | Atlantic Economic Journal, September 2017 | Go to article overview

Is Slow Economic Growth the 'New Normal' for Europe?


Crafts, Nicholas, Atlantic Economic Journal


Introduction

At the turn of the century, in the excitement of the so-called "new economy", optimism abounded about the prospects for future economic growth. Alan Greenspan (2000) said in a speech that "When we look back at the 1990s from the perspective of, say, 2010 ... we may conceivably conclude ... that, at the turn of the millennium, the American economy was experiencing a once-in-a-century acceleration of innovation which propelled forward productivity ... at a pace not seen in generations, if ever." (1) Within a few years, this was revealed to be (widely shared) wishful thinking. Now, prompted by Larry Summers (2014), the talk is of "secular stagnation", and the future is feared to be one of slow growth in which productivity advancement will be very weak. This is understandable given the productivity slowdown in the Organization for Economic Cooperation and Development (OECD) countries since the onset of the financial crisis. The level of labour productivity, both in Europe and in the United States, is well below what would have been expected on the basis of pre-crisis trends.

Current mainstream projections for medium-term growth in the United States and Western Europe are displayed in Table 1 and placed in the context of earlier, pre-crisis growth rates. Although recovery from the dismal performance of the least few years is envisaged, the scaling down of projected growth compared with pre-2007 is quite marked. Compared with growth during the years 1995-2007, future American and European growth of real gross domestic product (GDP) per person is seen as likely to be halved or worse. In each case, a serious weakening of labour productivity growth is expected. Compared with the "golden age" of the 1950s and 1960s, the slowdown is even more pronounced, especially for Europe.

It is, of course, not unprecedented for economists to make inaccurate predictions about future growth or to be slow to appreciate the scope for improved productivity performance. Alvin Hansen (1939), the founding father of the idea of secular stagnation, is a spectacular example. He thought technological progress was too weak to generate economic growth at a rate that would encourage investment and avert a future of sustained high unemployment. In fact, the halcyon period of American economic growth in the post-war economic boom was on the horizon in an economy which was already experiencing very rapid total factor productivity (TFP) growth. In 1987, on the eve of the information and communication technology (ICT) revolution, Robert Solow lamented that, paradoxically, the computer could be seen everywhere except in the productivity statistics.

A similar disconnect seems to be around at present. Excitement about (or fear of the consequences of) robots is apparent from a casual reading of newspapers. The academic world has some well-known techno-optimists, including Brynjolfsson and McAfee (2014), who stand out for their projections of the implications of what they call the "second machine age", based on artificial intelligence, robotics and the digital revolution. They suggest that this will have a larger impact than anything since the industrial revolution and will deliver an unprecedented rate of technological advancement.

There are several possible explanations for this new productivity paradox which I shall examine in what follows. These include measurement issues, implications of the financial crisis, changes in supply-side policy, unreliability of productivity-growth projections, the absence of great inventions, and lack of business dynamism. Evaluating these competing hypotheses is central to beliefs about future European growth prospects.

Growth is Under-Estimated

Despite scepticism in some quarters, the accounting framework of GDP remains an appropriate measure of flows of production. It is not a measure of well-being or of nonmarket production, both of which may be augmented considerably by the new technologies of the digital age. …

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