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Kenneth Rogoff: Financial crisis - or innovation crisis?

Source : BUSINESS_STANDARD
Last Updated: Fri, Dec 07, 2012 21:01 hrs

p ppAs one year of sluggish growth spills into the next there is growing debate about what to expect over the coming decades Was the global financial crisis a harsh but transitory setback to advanced-country growth or did it expose a deeper long-term malaiseppRecently a few writers including internet entrepreneur Peter Thiel and political activist and former world chess champion Garry Kasparov have espoused a fairly radical interpretation of the slowdown In a forthcoming book they argue that the collapse of advanced-country growth is not merely a result of the financial crisis at its root they argue these countries&rsquo weakness reflects secular stagnation in technology and innovation As such they are unlikely to see any sustained pickup in productivity growth without radical changes in innovation policyppEconomist Robert Gordon takes this idea even further He argues that the period of rapid technological progress that followed the Industrial Revolution may prove to be a 250-year exception to the rule of stagnation in human history Indeed he suggests that today&rsquos technological innovations pale in significance compared to earlier advances like electricity running water the internal combustion engine and other breakthroughs that are now more than a century oldppI recently debated the technological stagnation thesis with Messrs Thiel and Kasparov at Oxford University joined by encryption pioneer Mark Shuttleworth Mr Kasparov pointedly asked what products such as the iPhone 5 really add to our capabilities and argued that most of the science underlying modern computing was settled by the 1970s Mr Thiel maintained that efforts to combat the recession through loose monetary policy and hyper-aggressive fiscal stimulus treat the wrong disease and therefore are potentially very harmfulppThese are very interesting ideas but the evidence still seems overwhelming that the drag on the global economy mainly reflects the aftermath of a deep systemic financial crisis not a long-term secular innovation crisis There are certainly those who believe that the wellsprings of science are running dry and that when one looks closely the latest gadgets and ideas driving global commerce are essentially derivative But the vast majority of my scientist colleagues at top universities seem awfully excited about their projects in nanotechnology neuroscience and energy among other cutting-edge fields They think they are changing the world at a pace as rapid as we have ever seen Frankly when I think of stagnating innovation as an economist I worry about how overweening monopolies stifle ideas and how recent changes extending the validity of patents have exacerbated this problemppNo the main cause of the recent recession is surely a global credit boom and its subsequent meltdown The profound resemblance of the current malaise to the aftermath of past deep systemic financial crises around the world is not merely qualitative The footprints of crisis are evident in indicators ranging from unemployment to housing prices to debt accumulation It is no accident that the current era looks so much like what followed dozens of deep financial crises in the pastpp Granted the credit boom itself may be rooted in excessive optimism surrounding the economic-growth potential implied by globalisation and new technologies As Carmen Reinhart and I emphasise in our book emThis Time is Different emsuch fugues of optimism often accompany credit run-ups and this is hardly the first time that globalisation and technological innovation have played a central roleppAttributing the ongoing slowdown to the financial crisis does not imply the absence of long-term secular effects some of which are rooted in the crisis itself Credit contractions almost invariably hit small businesses and start-ups the hardest Since many of the best ideas and innovations come from small companies rather than large established firms the ongoing credit contraction will inevitably have long-term growth costs At the same time unemployed and underemployed workers&rsquo skill sets are deteriorating Many recent college graduates are losing as well because they are less easily able to find jobs that best enhance their skills and thereby add to their long-term productivity and earningsppWith cash-strapped governments deferring urgently needed public infrastructure projects medium-term growth also will suffer And regardless of technological trends other secular trends such as ageing populations in most advanced countries are taking a toll on growth prospects as well Even absent the crisis countries would have had to make politically painful adjustments to pension and healthcare programmesppTaken together these factors make it easy to imagine trend GDP growth being one percentage point below normal for another decade possibly even longer If the Kasparov-Thiel-Gordon hypothesis is right the outlook is even darker &mdash and the need for reform is far more urgent After all most plans for emerging from the financial crisis assume that technological progress will provide a strong foundation of productivity growth that will eventually underpin sustained recovery The options are far more painful if the pie has ceased growing quicklyppSo is the main cause of the recent slowdown an innovation crisis or a financial crisis Perhaps some of both but surely the economic trauma of the last few years reflects first and foremost a financial meltdown even if the way forward must simultaneously treat other obstacles to long-term growthhr pp alignrightemThe writer a former chief economist of the IMF is professor of Economics and Public Policy at Harvard Universitybr Project Syndicate 2012 emp


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