They get the blame for a lot these days. Asset bubbles, moral hazard, banking crises, deflation, inflation. It’s all the fault of the central bankers.
Some of the criticism is warranted. Some of it is not. As Sebastian Mallaby concluded in his excellent biography of Alan Greenspan, central bankers don’t have the power many people attribute to them. One contributor to the financial crisis was the widespread assumption that Greenspan had the power to avert it.
But I would like to lay one more issue at the central bankers’ feet. Is the long term decline in productivity growth a consequence of modern monetary policy?
Before I speculate on that question, a quick aside.
The importance of productivity
Productivity is the most important factor in increasing standards of living. We can argue about whether one country is taking more than their fair share of the pie. We can argue about how the pie should be split between capital and workers, between the educated and not so educated. But there is only one way of growing the average economic pie per person, and that is to produce more with the same amount of inputs. We need to get more “productive”.
The capitalist system has been wonderfully adept at achieving this over the past few centuries. The profit motive encourages new inventions and ideas that increase output per person. Competition forces people to come up with more efficient ways of doing things.
Since the early 1970s, however, the rate of productivity growth has been declining in the developed world. There are many theories as to why. Some argue that all the big ideas have already been found. Is the iPhone, for example, that big of a deal relative to the automobile? Others suggest we simply aren’t measuring the modern economy well. Where, for example, does the US$30bn of joy that Snapchat brings to the world show up in GDP figures?
One theory I haven’t seen, though, is that the central bankers are to blame. I don’t mean that directly. Glenn Stevens wasn’t running around personally knocking good ideas on the head. But indirectly, through stifling the economic cycle, have central bankers been stifling productivity growth?
Last night I was chatting with Gareth about Subsea7. This former member of our International Fund is shaping up alongside Sotheby’s as one of the worst sales of 2016. After reporting another stellar result, the oil and gas services provider’s share price popped another 10% last Thursday night (it is up some 30% since we sold it).
The performance is solely due to better than expected margins. The company has slashed costs and squeezed every last cent out of its legacy contracts. Why, Gareth asked, can’t these companies be run so efficiently during the good times?
Greed is a reliable incentive. But fear is a far more powerful one. We all strive to get better. Most of us want to make money. But when we are faced with losing our job, business or savings, we suddenly realise how much more we are capable of. We start coming up with new ways of doing things that save us a lot of money.
This applies to individuals, it applies to businesses, and I think it applies to entire economies.
Recessions and productivity
Since the Bretton Woods global monetary system broke down in the early 1970s, central banks have been actively using monetary policy to tame the economic cycle. Every time growth slows, they slash interest rates in order to avoid an economic contraction. It has been mostly successful. Prior to 1970, a recession occurred roughly once every 5 years in the US. Since 1970 it has been once a decade. In Australia, of course, we have racked up 25 years and counting without an official recession.
Could this be a cause of the decline in productivity? Perhaps recessions are an important source of efficiency gains. Perhaps they are also an important source of new business formation. I know a lot of people with plans to start new businesses but giving up the security of a high-paying job has been an insurmountable hurdle. Keeping the economy afloat keeps all of these people in jobs.
I’m not for a second saying that is a bad thing. Lower productivity growth might be a trade-off worth accepting in exchange for less economic instability. But I would like to see someone test the idea.
If nothing else, it would give one more woe to the whipping boy.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.