Understanding the Stagnation of Modern Economies

Department of Economics and Economica public lecture Understanding the Stagnation of Modern Economies Professor Robert Hall Robert and Carole McNeill Senior Fellow, Hoover Institution Professor of Economics, Stanford University Professor Francesco Caselli Norman Sosnow Professor of Economics, LSE Chair, LSE Hashtag for Twitter users: #LSEPhillips

Understanding the Stagnation of Modern Economies Robert E. Hall Hoover Institution and Department of Economics Stanford University The Phillips Lecture London School of Economics 28 April 2016 1

Allocation of 10.0 percentage points of shortfall in real GDP, 2010 4 Excess unemployment 3.3 3 Shrunken labor force 1.3 Shrunken labor force 2 Reduced productivity growth 3.1 1 Depleted capital stock 2.3 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2

Allocation of 15.4 percentage points of shortfall in real GDP, 2015 4 0.5 Excess unemployment 3 Shrunken labor force 3.3 Shrunken labor force 2 Reduced productivity growth 6.6 1 Depleted capital stock 5.1 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 3

Topic 1: Output 21 Trillions of 2009 dollars 20 19 18 17 Detrended real GDP 16 15 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 4

Topic 2: Unemployment 12 10 Percent of labor force 8 6 4 2 0 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 5

Unemployment and productivity 12 1.1 Percent of population working or looking for work 10 8 6 4 2 Output per worker (inverse, right scale) Unemployment rate (left scale) 1.0 1.0 0.9 0.9 0.8 Reciptorcal of index of real output per worker 0 0.8 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 6

Unemployment and the stock market 12 3.5 Percent of population working or looking for work 10 8 6 4 2 Unemployment rate (left scale) Stock market (inverse, right scale) 3.0 2.5 2.0 1.5 1.0 0.5 Reciptorcal of index of real value of the stock market 0 0.0 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 7

Direct Effect of Unemployment 21 Detrended Real GDP, trillions of 2009 dollars 20 19 18 17 16 Real GDP Adjusted for direct effect of unemployment 15 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 8

Topic 3: Shrinkage of the labor force 90 80 Men Percent 70 60 Percent of population working or looking for work 50 Women 40 30 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 9

Role of family income from Hall and Petrosky-Nadeau (2016) 1st 2nd 3rd 4th Total 1.5% 1st (poorest) 0.5% 2nd 0.7 0.3-0.5% 3rd -1.5% -1.5-2.5% 4th (richest) Total -2.0-2.6 10

Changes in weekly hours of time use, 2003 to 2013, people 15 and older Personal care Household work Market work Education Leisure Other Men 1.3 0.1-2.5 0.2 1.3-0.4 Women 1.6-0.7-0.8-0.1 0.8-0.8 11

Topic 4: Total Factor Productivity 1.30 1.25 1.20 1.15 1.10 Index 1.05 1.00 0.95 Detrended index of output per unit of Input 0.90 0.85 0.80 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 12

Declining IP investment 3.1 2.6 2.1 Index 1.6 1.1 Detrended Index of investment in intellectual property including R&D 0.6 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 13

Technology diffusion is sensitive to macro conditions Figure 4: Diffusion Speed for 3 Internet Technologies in the UK, 2004-2013 from Anzoategui et al. 1 Diffusion Speed for 3 Internet Technologies in UK 0.8 0.6 0.4 0.2 0-0.2-0.4-0.6-0.8 2004 2005 2006 2008 2009 2010 2012 14

Topic 5: Capital Depletion Index 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 Detrended index of busines capital 0.85 0.80 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 15

Business Earnings as a Ratio to the Value of Capital 0.35 Ratio of capital earnings to value of capital 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 16

Topic 6: The Lower Bound on the Nominal Interest Rate 4.5 4.0 3.5 3.0 Percent per year 2.5 2.0 1.5 1.0 0.5 Short term future interest rate implied by yields on longer term treasury bonds 0.0 2016 2020 2024 2028 2032 2036 2040 2044 18

Monetary policy has much less scope for stimulus 18 Percent per year 16 14 12 10 8 6 Federal Reserve Policy Interest Rate 4 2 0 1955 1961 1967 1973 1979 1985 1991 1997 2003 2009 2015 19

Sources Diego Anzoategui, Diego Comin, Mark Gertler, and Joseba Martinez, Endogenous Technology Adoption and R&D as Sources of Business Cycle Persistence, February 2016 Robert Hall, High Discounts and High Unemployment, Understanding the Decline in the Safe Real Interest Rate, Macroeconomics of Persistent Slumps (chapter for new Handbook of Macroeconomics) Robert Hall and Nicolas Petrosky-Nadeau, Changes in Labor Participation and Household Income, FRBSF Economic Letter 2016-02, February 2016 20