Oops: Low Interest Rates a “Factor” in Slowdown of Economic & Productivity Growth: NBER

Powell, Draghi, Kuroda, et al.: Did ya see this NBER study?

This is something we have seen since the Financial Crisis all around us: The concentration and consolidation of corporate market power in entire industries, largely via mergers and acquisitions, made possible by abundantly available funding at ultra-low interest rates for the largest companies; and the concurrent slow-growth economy dogged by perplexingly slow productivity growth. This has occurred across the board for years in developed markets with zero or negative-interest-rate policies, such as the US, the Eurozone, and Japan.

But now the National Bureau of Economic Research (NBER) – which also calls out the official US recessions – released a study that gives an additional major reason for how low long-term interest rates lead to concentration of corporate power that then drags down productivity growth and economic growth on the production side of the economy.

The study “provides a new theoretical result that low interest rates encourage market concentration by giving industry leaders a strategic advantage over followers, and this effect strengthens as the interest rate approaches zero,” the authors say.

Via this market concentration, low interest rates are then associated with “reduced dynamism, a widening productivity-gap between industry leaders and followers, and slower productivity growth.”

The authors point out just how counter this is to traditional economic thinking, where low interest rates are considered an expansionary mechanism for the production side of the economy. They cite the example of a firm facing an investment decision. Declining interest rates increase the net present value of future cash flows (this is classically how a company is valued). This motivates the firm to invest immediately to increase future cash flows. This is why traditionally lower interest rates are associated with higher growth on the production side.

Then they question this traditional theory and the “existing literature” upon which part of the current low-interest rate monetary policies are based:

However, these models do not take strategic competition and market structure into account. Is it reasonable to assume that a significant reduction in the long-term interest rate would have no impact on the competitiveness of an industry?

Based on their model, the authors conclude:

The focus of this paper is on understanding how the production side of the economy responds to a reduction in long-term interest rates driven by consumer-side forces. The existing literature in growth either assumes no production-side response to declining interest rates, or a positive response driven by an increased incentive to invest in the face of a higher discounted present value of future profits.

Where the authors diverge from the literature is by including competition within an industry into their model to determine how lower interest rates would affect the nature of competition:

A reduction in long-term interest rates tends to make market structure less competitive within an industry. The reason is that while both the leader and follower within an industry increase their investment in response to a reduction in interest rates, the increase in investment is always stronger for the leader. As a result, the gap between the leader and follower increases as interest rates decline, making an industry less competitive and more concentrated.

When interest rates are already low, this negative effect of lower interest rates on industry competition tends to lower growth and overwhelms the traditional positive effect of lower interest rates on growth.

This produces a hump-shaped inverted-U production-side relationship between growth and interest rates.

While the study points out that low long-term interest rates are only a contributing factor, and not the only factor, in the slowdown, it suggests that low long-term interest rates may be “the common global ‘factor’” as they increase market concentration and market power, and also make “industry leadership and monopoly power more persistent,” which in turn weigh heavily on productivity growth and economic growth.

It is interesting that the NBER would offer this delectable food for thought in an era when interest rate repression by central banks — zero-interest-rate policies, negative-interest-rate policies, and QE to repress long-term interest rates — have become all the rage in combating economic slowdowns.

Yet, confusingly, the biggest market with negative interest rates, the Eurozone, is currently sinking deeper into a broad-based economic slowdown, if not a recession. Japan, which has had a zero-interest-rate policy in effect for 20 years, has been mired in a slow-growth economy with several recessions over those 20 years. And US economic growth following the Financial Crisis and the Fed’s interest rate repression has been woefully lethargic.

Clearly, the NBER is onto something, and perhaps its study was designed for the eyes of the central bankers in charge of the current interest rate repression.

China, Japan, other foreign entities dumped US Treasuries. But someone had to buy. Here’s who. So far, so good. Read…  Who Bought the Gigantic $1.5 Trillion of New US Government Debt Issued over the Past 12 Months?

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  83 comments for “Oops: Low Interest Rates a “Factor” in Slowdown of Economic & Productivity Growth: NBER

  1. HMG says:

    Makes perfect sense to me.

    Small asset rich Company with no borrowings goes to UK bank (80%) owned by UK Government with whom it has been banking for 50 years, and asks for a loan of a few hundred thousand pounds. Choice of un-mortgaged properties to offer as collateral. Answer : No loan possible.

    Large PLC Company (plenty to choose from in the recent years) already borrowed up to the eyeballs goes to same bank and asks for loans to be increased by millions. Answer : Yes.

    Overall Result : Often no loans to small expanding Companies.
    But lots of money unnecessary lost by Big Bank trying to rebuild it’s reputation when the PLC employing lots of people goes bust anyway despite the extra loans.

    Solution : There isn’t one.

    • Bill from Australia says:

      HMG you nail it.

      • HMG says:

        Thanks Bill.

        Perhaps I should add that the PLC probably received the increased multi million pound loan at an even lower interest rate that the Financially secure small SME would have been offered had the Bank agreed to lend to them.

        At 1% or 2% interest who wouldn’t want to borrow a few million ??

        • Off The Street says:

          If you lend it, they will come.
          (Apologies to Field of Dreams fans)

          Corporates, Countries (recall 1980s petro-dollar recycling to Latin America) Developers, potential home owners, anybody needing money, all become fair game for a lender with money to lend, read Have To Lend.

          Those bursts of profligacy are always followed by just enough remorse and campaign or lobbying effort by lenders, as in 2008, to stave off further regulation. Residual effects include but are by no means limited to obligatory punishment of small borrowers and 401k equity holders

      • Trinacria says:

        So how much more road is left on which to keep kicking this proverbial can??? David Copperfield (magician) has nothing on these folks.

    • Caradoc says:

      Here here. Recognise that scenario not to mention acquisition frenzy at inflated prices stifling competition and innovation.

      • Bobber says:

        Yes. The big tech companies, for example, simply use their cash flow to buy competitors and stifle competition. Each of the big tech companies buys 20-50 companies with emerging technologies per year. They avoid anti-trust concerns by buying them when they are small and have little revenue. But the overall effect is the same – no competition.

        The buyouts are priced so high, there is not even any competition for the buyouts. How many companies can pay 10x, 20x, or 30x revenues for another company, in cash? Only the extremely rich tech companies that already have a near monopoly can do this.

        Anti-trust regulators need to develop a response to this tactic.

        • subunit says:

          We still have anti-trust regulators..? Could have fooled me.

        • Anonymous says:

          This is spot on – Yet congress is so sidelined and gridlocked on stupid stuff like the wall and immigration policy, that they have no focus or cares to take on this. Or they are just lobbied so hard by Amazon and others that they won’t touch it.

          I have zero confidence in the ability of regulators to address such an issue.

          The only way this changes is if the markets somehow have a massive correction and these large conglomerates are forced to breakup themselves and sell off entities. I’m not confident that will happen though either.

        • Julian says:

          Have to disagree.

          There is no certainty on Tech.

          Companies in tech come and go and it won’t be long until Google, Facebook, Amazon and the like are destroyed by smaller & nimbler companies with the next great idea.

          They are lumbering Giants headed for a fall.

          Don’t over regulate the market and you’ll see these companies crash and burn sooner them you think.

          Thinking you need any kind of “anti-trust” for tech companies is insane.

    • Debt bubble says:

      Sounds like a job for the introduction, and the consistent application of, Minsky Lending Rules.

      The problem with low interest rates is that they will encourage further debt, speculation and asset inflation. That debt then drags on the real productive economy until things fall off the cliff. And once in that downward spiral, low rates matter little.

    • Nick says:

      One more reason for FED dissolving

  2. fjcruiserdxb says:

    Interesting article. Is it the same as saying low interest rates encourage doomed-to-fail businesses to take longer to fail. When we talk about leading businesses do we talk about quality businesses or just big hypes because some fools are happy to back them.

    • HMG says:

      ABSOLUTELY YES. It just means it takes them longer to fail.

      • Briny says:

        Carillon and Interserv come to mind. Something similar in Spain and Italy I believe with construction.

        • HMG says:

          Yes they are obviously the Companies I had in mind in my first post to this article.

          I just thought it diplomatic not to mention any names.

          I didn’t want Wolf or me to get sued .

        • Briny says:

          I didn’t think of that. I could say “been there, done that” but that’s not fair to Wolf. Noted for the future.

    • economicminor says:

      The doomed overly indebted extremely large Zombie businesses are also hollowing out the middle class which is / was the basis of America exceptionalism. We are watching in real time, the demise of the America we grew up to know and admire. Promoted and funded by the FED. And allowed by the laws of the land.. in other words, allowed by our Congress.

  3. John Taylor says:

    Easy money policies push up asset prices, including stocks. Large publicly traded companies have tremendous equity gains making it very easy to buy off their competitors.

    Private businesses, which tend to be smaller, don’t get the ballooned equity value, making them easier to purchase.

    Startups still have a high cost of capital, making it extremely difficult to compete.

    Another point to consider is that a much lower return on investment is required when investment money is cheap, so you can have hyped companies like Amazon which can price very aggressively and lose money for years to gain market share. Smaller companies that require positive cash flow from operations simply can’t compete.

    • Iamafan says:

      There’s too much money around for stock buybacks and company takeovers by private equity who gut out the employees and their pension funds. Debt fuels both. Low interest makes pension plans not hit their average 7% yearly goals. The ZIRP regime was dreadful.

    • nearlynapping says:

      @John Taylor: Your mention of Amazon is fascinating to me. Great for visualizing the relationship between cheap credit, asset prices and competition. Wish there was reliable data comparing Amazon’s growth in value relative to the value of the businesses/jobs it has destroyed by perpetually selling at a loss. The net wealth destruction will be complete if Amazon’s paper stock price at some point gets halved, or worse.

      • Prairies says:

        If you want reliable data just look at the brick and mortar melt down and count the bankruptcies in comparison to the growth of Amazon share prices. More free money flowed into Amazon than the competition could match. The same story can be told of Uber vs Yellow cabs.

      • Amazon succeeded by building a retail presence without brick and mortar, which takes time and money. While they were losing money they were gaining market share. The market (wisely) saw past the reward of instant profits, to the end game. The real question regarding their monopoly, do we need ten Amazons? Was the capital allocation access biased to a detrimental degree? Amazon will probably break itself into pieces, when you realize they are the middle man and the middle man always gets squeezed.

        • HMG says:

          What exactly is “the end game” . Please tell me, I want to know.

        • A dominant cyber retail platform, profitability, what else can I tell you already know?

        • safe as milk says:

          @HMG “What exactly is “the end game” . Please tell me, I want to know.”

          the end game is amazon’s cloud infrastructure otherwise known as aws. that’s where they earn most of their profit. amazon is renting aws services to everyone from the big box stores to mom & pops plus our government. even when you buy from someone else, amazon gets a piece of the action.

        • Anon says:

          Profits tend to zero in competitive capitalism. The end game is securing economic rent. The only way exorbitant valuations and economic rents can be supported is by monopoly, cartel, etc. End game: creation of monopolies, cartels, etc. Anything less is doomed by competition.

      • Juanfo says:

        I thought it was illegal to run a business at a loss to make competitors go out of business.

  4. Cynic says:

    The amusing thing is that a few moments reflection on how the world really works would have arrived at this quite logical conclusion – many observers have got there long before this distinguished body……

  5. C says:

    “In the US, the situation is even worse, according to data from BIS published this month. More than 16% of all American companies are zombies. Twenty years ago, in the late 1980s, the zombie problem was negligible, according to BIS senior economist Ryan Banerjee. Only 2% of firms were zombies. …

    The data is disturbing in light of the threat that “leveraged loans” pose to the global economy: $1.6 trillion in risky, low-quality corporate debt that will be potentially downgraded, triggering a possible mass sell-off, if interest rates rise. ….


  6. Rinaldo says:

    The other CBer fallacy imo is the notion zero interest rates create inflation. Cost of credit must be calculated in almost every product we purchase.
    How can lowering the production/distribution cost of real goods lead to higher prices?

  7. timbers says:

    So in other words, ZIRP advances the neoliberal agenda perfectly.

    No wonder ZIRP combined with austerity for you and me (but the War & Aggression Complex, corporations, an the ultra rich) has been the dominate bipartisan policy of most governments through out the world for decades now.

  8. Iamafan says:

    It makes sense. So when does the hanging begin?

  9. Kent says:

    I don’t know how much of this I buy. There will always be a relative difference in interest rates between companies. Reducing them just makes them lower for both.

    I see lower growth as strictly a function of investment in low wage 3rd world countries instead of home countries. Growth in the US may be relatively low, but growth in the US + China is relatively robust, because that’s where American corporate investment is going.

    • Bankers says:

      Artificially lower rates fuel consumption via monetary expansion instead of true earnings, this sets up a competitive scenario between businesses to supply to that new body of demand, which is expansive. However that expansive supply framework does not favour traditional run of the mill businesses, it favours a cost cutting enterprise supported by cheaper finance. You can say this is fair to all, but in reality you have just changed the rules, and rule change is never equal in its effect on everyone. Therefore you cannot say it is fair, so the question is has it made reality fairer for the majority maybe ? Economics is not about imposing equality remember, as far as government management is concerned it should be about minimally establishing a reliably consistent playing field within which people are able to compete fairly. Messing with the money supply is like changing a rugby ball for a football every now and then.

      The move of production to third world is financed by an agreed pegged reinvestment scheme of foreign dollar earnings. It is eq. to a high level integration where return flows finance further US debt and government spending, a.k.a as “good times” in undifferentiated analysis.

      Government spending and social support, and expectation of that, has similarly increased on par with the headline gdp, not in line with actual productivity.

      You see where this is going, many people intuit this and there are several ways of communicating the view, but an empirical analysis is much more dificult to prepare, and to come by. So usually the topic gets burried under mundane subjective argument and never reaches obvious consensus. So the show continues, and the nature of the forces that govern us take the direction that they do.

      • The part everyone seems to miss is unless interest rates continue to fall eventually every corporation and every consumer hit the debt wall.

      • WES says:

        Banker: An existing business financed at 6% can not compete with a business financed at 4% which in turn can not compete with a business financed at 2%!

  10. Iamafan says:

    I had a difficult time getting a free link to the article but I finally found a link to it. Kinda wonky read.


    • Wolf Richter says:

      Thanks. The article you linked is an abbreviated version (29 pages) of the original (84 pages). If anyone wants the original PDF, contact me via the “Contact US” tab in the menu bar, and I’ll be happy to email you the original. I just don’t think that I’m allowed to post it on my server where everyone can get to it since it is a proprietary report.

      • Ididsa says:


        I would like the full article but can’t find the Contact Us in the menu at the top. Perhaps because I’m on an iPad

        This is a topic that I’ve researched quite a bit on, and the article aligns well with the economic growth and productivity data from an empirical perspective.

      • taxpayer says:

        There seems to be an 82-page version posted at https://papers.nber.org/sched/EFGf18

        • Wolf Richter says:

          OK, that’s the “October” version, not the “January 2019” version, but probably close enough :-]

          These are “working papers” so they might change here and there.

        • Ididsa says:

          Thanks for the link. I found the Jan 2019 version at the University of Chicago website. You can google it.

      • Ididsa says:

        Great paper Wolf. Thanks for posting this article to bring it to our attention. I wish the Fed could read this. It is all about moderation and finding the sweet spot in interest rates. Now days everything is so extreme. More (or less, in the case of long term interest rates) is not necessarily better. We should be trying to foster healthy long term interest rates rather than continue to destroy all of the yield curve dynamics (and convexity) that would be found in a free market.

        I found these quotes to be very interesting, particularly the one on the equity portfolio side of things :)

        “This induces an inverted-U shaped production-side relationship between economic growth and the interest rate. Starting from a high level of the interest rate, growth increases as the interest rate declines because the traditional effect dominates the strategic effect. However, as the interest rate declines further, the endogenous investment response of the leader and follower causes the strategic effect to dominate, and economic growth begins to fall. The key theoretical result shows that this positive relationship between the interest rate and economic growth must happen before the interest rate hits zero.”

        And this using historical data from 1962 onwards:

        “The empirical analysis tests this hypothesis using CRSP-Compustat merged data from 1962 onward. A “leader portfolio” is constructed that goes long industry leaders and shorts industry followers, and the analysis examines the portfolio’s performance in response to changes in the ten year Treasury rate. The model’s prediction is confirmed in the data. The leader portfolio exhibits higher returns in response to a decline in interest rates, and this response becomes stronger at a lower initial level of interest rates. The estimated effect is large in magnitude and robust to a number of tests.”

        Thanks again for bringing this to our attention…..

  11. t.s. Eliot says:

    The consensus here is ‘rock solid’ the only thing missing is that the left&right, both have the same goals, e.g. to enslave the moron class that is stupid enough to work.
    The funny thing is that the left&right parrots will keep voting, even while they’re children are sold into ‘slavery’
    Nobody wants the charade to end, because deep down everybody believes that they’re an ‘insider’.

    “It’s a big club, and you Ain’t a member” – Truer words were never spoken

  12. KPL says:

    Bingo! What has been obvious to any sane and thinking person (rules out Bernanke and the like at the Fed ) for a long, long time is now becoming clear to someone at NBER too.

    Pricing is among the most of important function for any resource and that is what has been missing in the cost of money the last decade. And when Powell seemed to regain sense, the Fed has done it again by losing it.

    Add in the fact that when any resource (water, power and yeah money too!) costs next to nothing it is frittered away (all will queue up for flying if it is free) and thus you have mal-investments. Imagine what could have been done to help those in need with this. Further imagine the lost opportunities and lost generation. Who will pay for it? If it is crime to kill a person what should be the punishment for the cabal of politicians, bankers, politicians and rating agencies for the crimes committed in the guise of saving us from something far worse.

  13. Iamafan says:

    Talk about lousy investments due to cheap money.

    In my hometown, we have 2 of largest malinvestments by European banks. One of them had the largest off-Wall Street trading floor (it’s empty now.)
    Nearby is a mall that resembles many stories you see here. The remaining draw of the mall is its parking lot. Hospital staff can park there and are shuttled back and forth to the hospital. Car companies rent parking for their inventory and provide a nicer showplace for their customers. I actually bought a car from the mall’s parking lot. Now, used car dealers use it too. Who would have thought of the parking lot as the last important feature of malls?

    As a proud American, I did my share of helping the economy last weekend. I bought a new car from our local dealer. But, I bought the car “right of the boat” (from Japan) sight unseen. It’s great.

    This site gave me the inspiration to read about the Fed and the economy.
    I’m currently reading “Floored” by George Segal (he hates IOER).
    I have also read most of Zoltan Posar’s Global Money Notes (from Credit Suisse). These plus other reads are helping me understand the Fed.
    Thank you Wolf for opening my eyes more. You are doing a wonderful job.
    We are going through some strange transformations. Enjoy the ride.

  14. This is not rocket science, but still a welcome admission from the NBER. If you inject $trillions into a corrupt financial system, suppressing interest rates in the process, those with first access to the credit will utilize it to their own advantage…at the expense of the larger population. The U.S. housing market is Exhibit A.

  15. raxadian says:

    *Did ya see this NBER study?*

    No I “never” saw it!

    Jokes aside, this has been evident for a while.

    Very low interest rates also give birth to junk bond stars like Tesla and Netflix because the debt is so cheap they can keep going and going and going like certain batteries Ads bunny. Completely ignoring the fact that even tbe best “batteries” eventually stop working.

    And the cheap debt lets big companies that are not hugely dependent on debt to become even bigger.

    But of course interest rates cannot stay low forever, can they?

    And as soon as interest rates rise just an itty bitsy bit, junk bond stars start to get in trouble and big companies that borrowed money get less earnings because they have to pay more for their debt.

    • HMG says:

      The real question is:

      Does Capitalism, as we have known it for 200 years, work at negative, zero or very low interest rates ?

      We may soon find out. I think I am going to have to throw away all my 50 year old Oxford University Economics Books.

  16. Marcus says:

    I wonder how many small companies have been forced into unwanted debt over the past 10-15 years. If your competitors are taking out debt to pilfer your market share, improve technology, acquire talent, etc., then you may have no choice but to do the same or fade away, evem if your product/sevice is superior. But when any industry growth outpaces demand, there will be a reckoning. Good companies with good products/services will fail or be acquired because they got swept up in the rat race. From this perspective, debt is incentivised for the biggest players because they can pressure smaller competitors into compromising debt situations.

  17. Lower interest rates helps companies with the most debt. QE disproportionately benefited the lowest decile price-revenue stocks. In industries like Autos, the obstacles to entry, (Tesla) are almost insurmountable. If you have a Moat the analysts love you. If you’re Netflix, it’s another story, it really comes down to the divide between old industry and new, hardware and software.

  18. akiddy111 says:

    Quite frankly i was surprised that Powell hiked as much as he did. Inflation concerns ? Strong economy concerns ? Non IG debt concerns ? So what ?

    There were those who said that the FED will not miss a beat with it’s rate hike cycle and it’s snail’s pace balance sheet draining operations. Although i am not the smartest person in the room, I was sceptical

    We know now that we did not need to count the number of times the word “strong” appeared in the FOMC statement.

    The Fed handles monetary policy in a responsible way when measured against the ECB, Bank Of Japan and expecially the PBOC.

    Expect a return to QE as economic data weakens.

    We have a global debt problem and rates are comparatively too high in the USA. The short experiment is over. Rates need to come back down until we can figure out plan B.

    The large non IG Corporate debt mountain is not their biggest worry. But their reputation, and to a lesser extent their career risk, definitely is.

    • JZ says:

      “We”, what do you mean “we”? Rates need to come back down? Why should it be anybody’s power to determine what the correct rate is? If I do my job wrong, I got fired. If “they” do their job “wrong”, nothing happens and they retire any way giving speeches at 250K a session while “we” lose our homes and do mass school shootings or discussing building walls. What do you mean “WE”?

    • I would call that boilerplate with a twist of lemon. The amount of corporate debt may not be their problem, expanding corporate debt complicates new treasury issuance. When Powell praises Yellen, and adopts her wait and see policy, he is breaking with the Prez in matters of fealty, but they end up on the same page where rates are concerned. He is independent in a backhanded sort of way. As you point out his policy is less feckless than the other CBs, and I would expect that in contraction the US would not use QE to the degree that other CBs might.

    • Paulo says:

      There can be no obvious Plan B in a democracy as the goal is always re-election. (Until there is a crisis, I guess.) TARP, QE, etc were Plan Bs when the casino blew up.

      There is just too much debt, everywhere. I have never done debt as I hate it. We looked like a foolish family for the last 10 years (maybe) but the hell with it…. we just don’t borrow money. My wife and I have a sense of safety and well-being with limiting debt. My children are following along the same path to the best of their ability. Those are the values we were raised with as my parents were the product of the Great Depression and my in-laws came out of WW2 with nothing but a suitcase and a chance to start over in BC.

      If this all blows up we will be able to stay in our home and help others as needed. That’s our Plan B. Those indebted companies? No one will even remember their names. In Canada think Eatons. Or Woodwords. Long gone bastions, never to return. Recently KMart, Zellers, and Sears. Gone.

      • JZ says:

        Paulo, debt is NOT a problem. Try youtube Stephanie Kelton, Stony Brook professor explaining “Modern Monetary Theory”, see if she can blow your mind…….

        ( I only trust guns, free speech and sound money. But if you into logic reasoning against these elites and their mouth piece, you will be surprised how they can convince anybody who believes logic than sound principle on all human affairs. Set aside science)

  19. Peter Stubben says:

    Excellent Wolf — this is a fascinating and counter-intuitive explanation – at least for me – of this ‘conundrum’, as the guru Greenspan used to say, of minimal productivity gains. Thank You.. PJS

  20. J.M.Keynes says:

    – Nope. This assumes that central banks are able to determine the level of interest rates. But it’s Mr. Market that determines those rates both short and long term rates.
    – It’s increased productivity itself that reduces demand. I’ll explain why.
    – Let’s take a producer that produces 100,000 units (pens, pencils, bricks, etc.) per month and it’s done with 100 workers each earning $ 1000 per month. Then total income for those workers is $ 100,000. These workers then can spend (=demand) $ 100,000 per month. This assumes that these workers don’t take on (more) debt.
    – Now the producer increases productivity by producing the same amount of units but now with 90 workers each still earning $ 1000 per month. As a result of this these 100 (not 90) workers now have a total income of $ 90,000. But then these 100 workers only can spend $ 90,000 per month.
    – Demand now has dropped from $ 100,000 down to $ 90,000.
    – The only way to increase demand is to increase the amount of debt. The total amount of debt, that has increased year after year, papered over the impact of ever increasing productivity in the last 3, 4, 5 decades.

    • J.M.Keynes says:

      – And this reduced demand spills over back into slow/slower productivity growth.
      – Look at the formula of productivity:

      GDP/(workers x hours worked)

      – When there is reduced demand then it’s harder for a producer to increase prices. Then the producer has raise its prices at a (much) lower pace or there will be no price raises at all. When prices rise at a lower pace then GDP will also rise (much) slower. Because it means that the value of all stuff/goods produced (=GDP) also will rise at (much) lower pace as well. See the formula above.
      – There are actually 2 reasons why productivity is overstated:
      1) there are serious doubts that the total amount of “Hours worked” is accurate. Some say that this metric is too low.
      2) There are serious doubts that the GDP is calculated accurately. There are some good arguments to make why GDP is overstated.
      And these 2 things combined have serious (negative) implications for the accuracy of the calculation of productivity.

    • taxpayer says:

      Those ten laid-off workers can’t find other jobs? Can’t employ themselves? Even tho the customers now have $10,000 more per month to spend on things other than bricks/pencils/pens?

      • J.M.Keynes says:

        – It’s a (very) provocative thought, right ?
        – No, they don’t have $ 10,000 per month more to spend. Because total income (=total demand) didn’t increase, it decreased by $ 10,000.
        – Of course, they can employ themselves or find other jobs. But that doesn’t change the equation of (total/aggregate) demand dropping by $ 10,000 in the entire economy (in this one particular example).

        • taxpayer says:

          These 100 workers are the entire economy? OK, I stand corrected. But in the real world — unless constrained by monopoly power or somehow unable to do any other kind of work — we would find some other way to make a living. And if there’s no increase in the money supply, we’ll use some kind of credit, or tins of fish, or barter or something else to trade.

    • Bobber says:

      Your example assumes the10 laid off workers don’t replace their income, which may not be far from the truth if they take low paying service jobs.

      • Marko says:

        It also overlooks the remaining 90 workers who will want to be rewarded with higher wages for their increased productivity.

        • J.M.Keynes says:

          – That’s a fallacy as well because demand has dropped. In order to keep production from dropping the producer is forced to reduce prices. But reducing prices means that profits fall and then there is no room anymore for increasing wages.

        • J.M.Keynes says:

          – @Marko: This overlooks one nasty little thing: The law of Demand and Supply. In the example above the producer can do the production with 90 instead of 100 workers/employees. So, Demand for workers has dropped from 100 to 90. The law of Demand & Supply says that when Demand drops prices on the Supply side will go down. In this case that means that wages will (have to) adjust lower.
          – And this is going to hit the producer in the form of lower demand for its products. It forces the producer to lower his/her prices as well, in an attempt to let total sales volume stay flat. Because there is lower demand from the consumer.

      • J.M.Keynes says:

        – Those 10 workers won’t replace their income because demand has dropped by $ 10,000.

    • James R. Chaillet, Jr., MD says:

      Your example is interesting but incomplete. The producer can produce the same output with 90 workers. Assuming the producer does not increase the wages of those 90 remaining workers, the producer has $10,000 more to either spend(increase demand in your parlance) or save and/or reinvest. This reasoning assumes also the the 10 excess workers are terminated from employment.

      Also, what happens to the 10 workers displaced? In a dynamic economy they would find other work for what they would be paid and add to demand.

      So, in a dynamic, free economy real increased productivity should lead to increased demand or, overall, an increase in income. It should not be a negative.

  21. J.M.Keynes says:

    – Falling interest rates is a function of rising income in-equality. And rising income inequality is (partially) the result of increased productivity.
    – Looking through that lens one can see that income inequality rose in the 1920s and between 1980 and today (look at e.g. the US 10 year yield)
    – Income inequality fell between say 1950 and 1981 (think: rising US 10 year yield).

    • HMG says:

      John M Keynes

      Your books are the first ones to go on the bonfire, albeit you went to Cambridge not Oxford.

      • J.M.Keynes says:

        – It seems you don’t like the (economic) impact of increased productivity, right ?
        – By financing the purchase of cars does help to increase demand.

        • HMG says:

          To what end ?

          If hypothetically everyone is artificially ‘rich’ enough because of Manufacturer low interest , long term finance schemes to buy say two or three cars each, how in the long term can that be good for humanity and/or good for the planet ?

          If everyone has a big 6.0 litre gas guzzler, because ‘clever’ finance deals enabled them to ‘live their dream’ what is the end game ?

          More jobs in China ?

        • Anon says:

          The economic impact of increased productivity includes the latent ability to create new jobs/sectors that could not possibly exist otherwise. EG: the massive productivity growth in agriculture from ~1800 to the early part of the 20th century liberated ~70% of the labor force from the most difficult kinds of ag labor.

          Unfortunately, big gov is one of the results.

        • HMG says:

          As I said. For 200 years ‘Capitalism’ has ‘worked’ well.

          But the current ZIRP has upset the applecart.

          ZIRP , NIRP and. LIRP (low interest rate policy) have removed a vital part of most Macro Economic Theories which have explained well our capitalist financial systems for the last two hundred years.

          Hence the hitherto successful fiscal tweaks, made by governments with generally beneficial results, will no longer work as well as they have in the past.

          Please inform Powell, Draghi, Kuroda, Carney et al accordingly.

  22. Steve M says:

    I don’t see how the NBER analysis is a breakthrough study since a century and a half ago the economist Karl Marx wrote that large companies consolidate their dominance by becoming monopolies in specific industries, thereby reducing productivity growth while the financial sector canabalizes productive entities for profit in what he termed late stage capitalism.

    Oh, Marx. Yes, this is a breakthrough study.

    • Ididsa says:

      Hi @Steve M

      I don’t know much about Marx’s economic theories but did he correlate long term interest rates to the corporate monopolistic consolidation?.

      The NBER analysis extends and correlates this corporate consolidation effect to long term interest rates (the 10 year treasury yields) via an inverted U type curve dynamic of economic growth plotted against long term interest rates.

      It also explores the effects of low long term interest rates on the *growth* rate of productivity which is missing in much of the economic literature.

    • HMG says:

      I don’t intend to burn Karl Marx’s books.

      They should not be underestimated.

  23. Tim says:

    Where have those guys been?

    Years ago I read an economics book that contained a discussion of the relationship of economic expansion, innovation and development to the discount rate!

    A higher discount rate is associated with stronger development, and innovation. In that discussion were points about the incentive to innovate.

    Low interest rates, low incentive to innovate.

    The discussion was different than the discussion of Marx.

  24. Lenz says:

    Italy’s PM Giuseppe Conte in Davos.

    Maybe people are skeptic of this QE strategy.


  25. Wes says:

    If inflation is minimal and it is difficult to pass on an increase in price (stagnant wages with credit saturation) another alternative is to increase market share and gain an economy of scale. This would lower the break even unit cost and increase the gross margin without increasing price. Has the US been going through a ten year phase of consolidation with the assistance of the central bank?

  26. WSKJ says:

    I’m glad to see that you are keeping us up with the wonky studies on ZIRPs and VLIRPs, Wolf. Once the higher math has been put into the studies, I suppose that the CBs will have to take it seriously (“it” being the idea that ZIRPs are not just a great new tool in the toolbox, but have serious, and apparently destructive, long-range consequences).

    Here’s an observation that has been puzzling me: as I watched Santelli (CNBC) talk interest rates earlier this week, it really hit home for me that, yes, the 10-year US Treasury was about 2.7 %, and the Bund (German) 10-year bond, was about 0.17 %…… or was it 0.27, anyway, about 10 to 1.

    In a “global economy”, how can this even occur ? One supposes that the US CB assumed that the rest of the developed nations would come along ? but so far they haven’t ? Is there some kind of arbitrage taking place ? What is going on with that ?

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