What shape will the global economy take after the lock downs are fully relieved? Will households and firms be allowed to act more freely in their own interest and in that of the greater society?
But how fast will the global economy grow when something like normality resumes? A persistently mere one or two percent extra output a year is what we would call secular stagnation. There are those who argue that we have entered an extended period of economic stagnation. Some also argue that demand will have difficulty in keeping up with the modest extra supplies of goods, services and labour; that monetary policy has shot its bolt because interest rates cannot go much below zero.
If there is to be economic stagnation, it will be for a want of willingness to supply, not from any permanent lack of demand. Stimulating demand is the easy part.
We should dismiss such underconsumption theories. Monetary stimulus comes not only from lower interest rates but also in the form of increases in the supply of money itself, as is now being demonstrated by the central banks in the developed world who are creating extra money at a rate never attempted before. This policy is having a demonstrably helpful (in the form of extra spending) impact on asset prices. If there is to be economic stagnation, it will be for a want of willingness to supply, not from any permanent lack of demand. Stimulating demand is the easy part.
The current very low interest rates, both short and long, in the developed world, mean that the return on savings or investing them in real assets is expected to remain low for an extended period of time. The expected returns on capital formation by firms and governments must accordingly be equally low. Slow growth in output and low returns on investing in additional output go together.
But does this relative abundance of savings and lack of demand for them represent a permanent state of economic affairs? Is the monetisation of debt not a large part of the explanation for low interest rates? More fundamentally, is improved technology now something of the past rather than the future? Are higher taxes and more interfering regulations going to stultify the inventors, innovators and the entrepreneurs, who are the true source of economic progress, in their quest to get more out of less?
Robotics and artificial intelligence (AI) still promise to eliminate the drudgery and danger in work. Given enough time, all work may be done by robots, built supervised and repaired by other robots.
Progress in science and its application in production and distribution is surely not stagnant. Perhaps growth itself has become less capital intensive: we are getting more out of the machines than we used to, so reducing the real amount that has to be invested. Robotics and artificial intelligence (AI) still promise to eliminate the drudgery and danger in work. Given enough time, all work may be done by robots, built supervised and repaired by other robots. In this way, they will provide their human owners at some future point in time with an abundance of goods and services that would make work, incentives to work, inequality and so economic growth itself superfluous. The economic problem of scarcity will then have been solved.
Realising eventual abundance means doing everything now to encourage the demand for and supply of capital, and innovation in the application of savings to capital formation. This would include encouragement to take risk in science and knowledge and in its application by enterprises of all kinds. Incentives that reveal inequalities of economic outcomes are still necessary to the economic purpose. Low interest rates, for now, are also part of the encouragement needed. Higher real interest rates would then be welcome, indicating that the demand for capital for productive purposes had increased and that growth was picking up.
The current low global cost of capital moreover encourages a flow of capital to those parts of the world where interest rates are much higher. That is because savings and capital are still scarce and well rewarded in these countries, and potential supplies of labour are relatively abundant. Accordingly, these are countries where the standard of living and production per person employed compares poorly with the developed world. As is the case in South Africa where secular stagnation, alas, has become a predicted reality. The global abundance of capital is our opportunity to attract capital our way to improve the output of workers and their incomes. If only we could play by the well-recognised rules that encourage capital inflows. Adopting those rules with enthusiasm will avoid post Covid-19 stagnation.
About the author
Prof. Brian Kantor
Brian Kantor is a member of Investec's Global Investment Strategy Group. He was Head of Strategy at Investec Securities SA 2001-2008 and until recently, Head of Investment Strategy at Investec Wealth & Investment South Africa. Brian is Professor Emeritus of Economics at the University of Cape Town. He holds a B.Com and a B.A. (Hons), both from UCT.
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