Hamish McRae: Will IT advances help us to escape stagnation?

IT his looks like being a tricky week for financial markets, and that has nothing to do with Brexit.

Rather the concern is that, as interest rates rise — as eventually they must — there is insufficient natural buoyancy in the developed world to keep growth moving.

The challenge is “secular stagnation”, an expression popularised by Larry Summers, Harvard economics professor and former Treasury Secretary in Bill Clinton’s cabinet. He became president of Harvard, where he was played by Douglas Urbanski, dressing down the Winklevoss twins in the film The Social Network.

They tried to involve him in their tussle against Mark Zuckerberg, founder of Facebook, and he showed them the door. There is a nice irony here because social networks, and especially Facebook, may turn out to be one of the facets of our changing economy that helps save us from secular stagnation.

This is a challenge for the entire developed world, not just us, the concern being that we are facing a prolonged period of little or no economic growth and accordingly no rise in living standards. Evidence supporting this would be that US median incomes have not risen for a generation and here we have only recently got back to the levels of income-per-head that we had reached at the peak of the boom in 2007.

The principal argument against it is that we are undermeasuring the increases to our standard of living resulting from the IT revolution. So many of the services we now access are free at point of use and don’t appear in GDP, but they do improve our standard of living. The most vocal supporter of this undermeasuring argument is Hal Varian, chief economist at Google.

While there must be some truth in the undermeasuring case, stagnation does remain a profound worry. The country that has longest experience of this condition, Japan, has seen little or no increase in living standards for a generation. But which countries are most at risk?

There is a new study on this by Oxford Economics, looking at a string of conditions that might lead to, or at least exacerbate, this condition. These include the share of the population over 65, slowing population growth, slowing labour productivity, increase savings and increased income inequality. So which countries are least at risk, which most?

Stand by for a surprise. The study ranks the UK least at risk from secular stagnation, followed by Australia, France, Canada and the US. At the other end of the scale, the most threatened countries are Sweden, Switzerland, Ireland, Spain and Portugal in that order. For those of us who rather admire the Swedish and Swiss economies but worry about France, this is a bit of a puzzle. It is an interesting exercise but can it be right?

The explanation is partly demography. All the countries at the top of the league (i.e. least threatened) have relatively favourable demographic profiles. France scores well and it has the highest fertility among the developed nations. The UK also scores well, partly because we too have relatively favourable demographics but also because we don’t save very much and are saving even less than we used to. Countries that save a lot, such as Japan, are more likely to grow slowly whereas those that spend drive economic growth. We also score well (and for many people this really will be a surprise) from declining inequality of incomes. Ireland scores well on this but not well enough to offset other negative factors. That is in contrast to Sweden, which is becoming much less equal on this tally.