March 7, 2019 11:54:34 pm
Written by Neil Irwin
If a group of time-travelling economists were to visit from the year 2000 and wanted to know how the economy had changed since their time, what would you tell them?
You might mention that economic growth has been slower than it used to be across much of the advanced world, and global inflation and interest rates have been lower. An aging population is changing the demographics of the workforce. Productivity growth has been weak. Inequality has risen. And the corporate world is more and more dominated by a handful of “superstar” firms.
The time-travelling economists would find that list rather depressing, but also would tend to view each problem on the list as discrete, with its own cause and potential solutions. “What terrible economic luck,” they might say, “that all those things happened at the same time.”
But what if those megatrends are all the same problem?
Maybe, for example, inequality is contributing to weak growth and low rates because the rich tend to save money rather than spend it. Maybe productivity has been weak not by coincidence, but because weak growth has meant companies have not been forced to innovate to meet demand. Perhaps industry concentration has left companies with more power to set wages, resulting in more inequality and lower inflation.
Those theories may not be definitively proven, but there is growing evidence supporting each. Much of the most interesting economic research these days is trying to understand and prove potential connections between these dysfunctions.
In recent weeks, for example, one groundbreaking paper proposes that low-interest rates are fueling a rising concentration of major industries and low productivity growth. Another offers evidence that ageing demographics are an important factor in weak productivity.
Even if you do not fully buy every one of these interrelationships, taken together, this work suggests we have been thinking about the world’s economic woes all wrong. It is not a series of single strands, but a spider web of them.
Imagine a person with a few separate problems — some credit card debt, say, and an unhappy marriage. That person might be able to address each problem on its own, by paying down debt and going to counselling.
But things are thornier when a person has a long list of problems that are interrelated. Think of someone with mental health problems, a drug addiction, and an inability to maintain family relationships or hold a job. For that person you cannot just fix one thing. It is a whole basket of problems.
The implication of this new body of research is that the global economy, like that troubled person, needs a lot of different types of help all at the same time.
But for now, the challenge is just to understand it.
Why Low-Interest Rates Can Favor Market Leaders
Atif Mian, an economist at Princeton University, was recently having dinner with a colleague whose parents owned a small hotel in Spain. The parents had complained vociferously, Mian recalled the friend saying, about the European Central Bank’s low-interest rate policies.
That did not make sense, Mian thought. After all, low-interest rates should make it easier for small business owners to invest and expand; that is one of the reasons central banks use them to combat economic weakness.
The owners of the small hotel did not see it that way. They thought that big hotel chains were the real beneficiaries of low-interest rate policies, not a mom-and-pop operation.
Mian, along with his Princeton colleague Ernest Liu and research partner, Amir Sufi at the University of Chicago, tried to figure out if the relationship between low-interest rates and business investment might be murkier than textbooks suggested.
Imagine a town in which two hotels are competing for business, one part of a giant chain and one that is independent. The chain hotel might have some better technology and marketing to give it a steady advantage, and is therefore able to charge a little more for its rooms and be a little more profitable. But it is basically a level playing field.
When interest rates fall to very low levels, though, the payoff for being the industry leader rises, under the logic that a business generating a given flow of cash is more valuable when rates are low than when they are high. (This is why low interest rates typically cause the stock market to rise.)
A market leader has more to gain from investing and becoming bigger, and it becomes less likely that the laggards will ever catch up.
“At low interest rates, the valuation of market leaders rises relative to the rest,” Mian said. “Amazon becomes a lot more valuable as interest rates fall relative to a smaller player in the same industry and that gives a huge advantage to Amazon.”
In turn, the researchers argue, that can cause smaller players to underinvest, lowering productivity growth across the economy. And that can create a self-sustaining cycle in which industry leaders invest more and achieve ever-rising dominance of their industry.
The researchers tested the theory against historical stock market data since 1962 and found that falling interest rates indeed correlated with market leaders that outperformed the laggards.
“There’s a view that we can solve all of our problems by just making interest rates low enough,” Mian said. “We’re questioning that notion and believe there is something else going on.”
How an Aging Population Affects Productivity
In another effort to apply a new lens on how major economic forces may interact, economists at Moody’s Analytics have tried to unpack the ties between demographic change and labor productivity.
No one disputes that the aging of the current workforce is reducing growth rates. With many in the large baby boom generation retiring, fewer people are working and producing, which directly reduces economic output.
In terms of company efficiency, though, you could imagine that an aging workforce could cut in either direction. Savvy, more experienced workers might be able to generate more output for every hour they work. But they might be less willing to learn the latest technology or adapt their work style to changing environments.
Adam Ozimek, Dante DeAntonio and Mark Zandi analyzed data on workforce age and productivity at both the state and industry level, with payroll data on millions of workers. They found that the second effect seems to prevail, that an aging workforce can explain a slowdown in productivity growth of between 0.3 and 0.7 percentage points per year over the last 15 years.
Ozimek says companies may not want to invest in new training for people in their early 60s who will retire in a few years.
“It’s possible that older workers may still be the absolute best workers at their firms, but it could be not worth it to them or the company to retrain and learn new things,” he said.
The research implies there could be a downward drag on productivity growth for years to come.
These findings are hardly the end of the discussion on these topics. But they do reflect that there can be a lot of nonintuitive connections hiding in plain sight.
Everything, it turns out, affects everything.
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