Monday, 17 February 2014

A theory of troubles


Economic puzzles have been in no short supply in recent decades. New ones keep appearing without waiting for old ones to be solved. The productivity puzzle that began in the 1970s persists, thanks to the apparent fizzle in productivity growth since the internet boomlet of 1996-2004—and despite what looks to many like an ongoing acceleration in technological discovery. The British economy has developed its own acute version of the productivity puzzle; over the course of the financial crisis and recovery productivity collapsed, shielding the economy from labour-market carnage. There are puzzles of wage stagnation and falling labour-force participation. There are savings glut puzzles and secular stagnation puzzles. The common thread linking the puzzles is that they almost always mean trouble of one sort or another.

Many stories have been presented to explain some of these phenomena (and others, as well, like rising inequality and the striking emergence of jobless recoveries). But not much effort has been made to tie these stories together into a broader narrative of what is happening to (primarily) rich economies and what might usefully be done about it. The nearest thing to an attempt is the secular stagnation narrative that, while not originating with him, has been popularised in recent months by Larry Summers. In this post I hope to...

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