Larry Summers

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Andrew McAfee, co-author with Erik Brynjolfsson of 2014’s great Second Machine Age, recently argued in a Financial Times blog post that the economy’s behavior is puzzling these days. It’s difficult to find fault with that statement.

Inflation was supposed to be soaring by now, but it’s not. Technology was going to make production grow feverishly, but traditional measures don’t suggest that. Job growth and wages were supposed to return to normal once the financial clouds cleared, though that’s been largely a dream deferred. What gives?

In a sequel of sorts to that earlier post, McAfee returns to try to suss out part of the answer, which he feels might be that the new technologies have created an abundance which has suppressed inflation. That seems to be certain feature of the future as 3D printers move to the fore, but has it already happened? And has this plenty made jobs scarcer and suppressed wages? An excerpt:

In a Tweetstorm late last year, venture capitalist Marc Andreessen argued that technological progress might be another important factor driving prices down. He wrote: “While I am a bull on technological progress, it also seems that much of that progress is price deflationary in nature, so even extremely rapid tech progress may not show up in GDP or productivity stats, even as it = higher real standards of living.”

Prof [Larry] Summers shot back quickly, noting: “It is… not clear how one would distinguish deflationary and inflationary progress. The price level reflects the value of goods in terms of money, so it is hard to analyze without thinking about monetary and financial conditions.” This is surely correct, but is Prof Summers being too dismissive of Mr Andreessen’s larger point? Can tech progress be contributing to price declines?

Moore’s law — that computer processing power doubles roughly every two years — has made computers themselves far cheaper. It has also pretty directly led to the shrinkage of industries as diverse as encyclopedias, recorded music, film photography and standalone GPS devices. An intriguing analysis by writer Chris Goodall found that the “UK began to reduce its consumption of physical resources in the early years of the last decade.” Technological progress, which by its nature allows us to do more with less, is a big part of this move past “peak stuff.”

It’s also probably a big part of the reason that corporate profits remain so high, even while overall economic growth stagnates.

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"The correlation between growth rates in one decade and growth rates in the next decade is remarkably low." (Image by World Economic Forum.)

Larry Summers isn’t the most popular guy, but I think his comments on China make a lot of sense. An excerpt from an exit interview he did with International Economy:

International Economy: Let’s start with China. The Chinese governmentv is hinting that it plans to spend another $1.5 billion on new technologies. Housing and retail spending, the preoccupations in the United States, are not part of that spending. In the meantime, China’s military has been engaged in a lot of bravado. How do you size up this brave new world?

Larry Summers: President John Kennedy died believing that Russia would be richer than the United States by 1985. Every issue of the Harvard Business Review in the early 1990s contained some joke or allusion to the effect that the Cold War has ended and Japan and Germany have won. Ezra Vogel’s 1979 book Japan as Number One was a bestseller. But none of these prophecies proved to be correct. In fact, looking at the history of growth rates in all countries, the correlation between growth rates in one decade and growth rates in the next decade is remarkably low. Extrapolative forecasting is perilous.

If concern about China leads the United States to strengthen our education system, invest more heavily in research and development, and contain our borrowing, then it could be very constructive. At the same time, it is easy to exaggerate what is happening in China. The average Chinese citizen is not nearly as rich as an average American was even two or three generations ago. The Chinese government is riding a tiger given all of the changes that are underway in that society.” (Thanks Marginal Revolution.)

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