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JPMorgan Asks If Tech Progress Ending for U.S.: Cutting Research

JPMorgan Asks If Tech Progress Ending for U.S.
An attendee takes a photograph of laptop computers arranged in a display at the 2013 Consumer Electronics Show in Las Vegas, Nevada. Photographer: David Paul Morris/Bloomberg

The pace of technological advance may be slowing in the U.S., threatening the economy’s ability to grow without sparking inflation.

That’s according to JPMorgan Chase & Co. chief U.S. economist Michael Feroli. He noted in a Jan. 11 report that the price of information-processing and software equipment is declining at the slowest pace in a generation.

That suggests to Feroli a weakening in the degree of technological breakthrough, a concern for the U.S. economy given that gains in information technology are often credited with boosting productivity from 1995 to 2005. Federal Reserve researchers have reported that declines in I.T. prices in the 1990s were central to the economic boom that decade.

“If that technological growth is slowing -- as indicated by the earlier observation on tech prices -- then this could have quite significant implications for the U.S. economy’s potential growth rate,” said New York-based Feroli, a former Fed economist.

At the same time, it’s not all bad news if softer growth of the supply side aids the re-hiring of underutilized workers and weaker momentum in technology helps reverse the rise in income inequality, Feroli wrote:

“A slower pace of tech advances may allow the skill and education level of the workforce to catch up with the level of technology.”

* * *

Federal Reserve Bank of San Francisco President John Williams is taking note of new academic research that highlights the perils of too much humility.

“The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter” was the title of a paper presented to the American Economic Association annual meeting this month by University of California, Berkeley, economists Christina D. Romer and David H. Romer.

In it, the husband-and-wife team argue that the Fed’s 100-year history shows humility can “cause large harms” to the economy. In the 1930s, for example, excessive pessimism about the power of expansionary monetary moves led policy makers to hold back fighting the Great Depression, they said. In the 1970s, doubts about whether contractionary policy would reduce inflation allowed a price spiral.

With high unemployment and weak inflation, central bankers more recently may have questioned the benefits of expansionary monetary policy too much and “may be judged to be too pessimistic” later on, Romer and Romer said. Christina Romer was chairman of President Barack Obama’s Council of Economic Advisers in 2009 and 2010.

Speaking to reporters Jan. 14, Williams said the point of the paper is that there is always uncertainty. The biggest mistake is that “you get to that point where you don’t believe you can affect the economy and then you give up,” he said.

For him, with doubts circulating about the potency of the Fed’s third round of quantitative easing, the lesson is that “we need to have the very best research and analysis on what the effects of our policy instruments are.” That research has “consistently” shown that the unprecedented measures have worked, he said.

* * *

The so-called New Silk Road has more traffic.

A World Bank report this week showed developing nations are becoming more important trading partners for each other than are rich countries, supporting what economists call south-south trade. The Silk Road originally referred to the trade routes carrying Chinese silk to the Mediterranean starting in 200 AD.

South-south commerce is estimated to account for 50 percent of total developing country exports in 2010, up from 39.2 percent in 2002. That should help increase the countries’ share of international trade to 35 percent by 2015, it said.

The rising power of emerging markets was underscored by a Jan. 16 report from PricewaterhouseCoopers LLP. It estimates such nations will grow 4 percent per year from 2011 through 2050, double the pace of richer nations.

China will overtake the U.S. as the world’s largest economy by 2027 based on market exchange rates, it said. Russia could pass Germany by 2035 to become Europe’s biggest on the same basis.

* * *

Cash-strapped European economies may be staging a repeat of the 1970s.

A lasting period of stagnation and chronic inflation like that of the late 1970s is a threat for the likes of Spain and Greece, according to a Goldman Sachs Group Inc. analysis of the “labor share” -- the fraction of national income that workers take via wages and compensation.

In the 1970s, the tug of war between employees and employers initially favored workers before it resulted in unemployment and stagflation, Goldman Sachs economist Andrew Benito said in a Jan. 10 report. As personnel resisted wage reductions, labor share continued to climb until the early 1980s. That was when companies found ways to economize on workers and the labor share dropped in relation to capital, he said.

Similar fallout from excess labor share is now occurring in Europe’s so-called peripheral economies, from Spain to Greece. The difference is that while wages drove the cycle in the 1970S, low interest rates created the current one, by triggering surging investment following the start of the euro in 1999.

The needed reduction in labor share may mean economic pain for Portugal, Greece and Spain, said London-based Benito, a former Bank of England economist.

By contrast, labor share in Germany has room to climb after worker compensation didn’t fully profit from the effects of the lower interest rates, he said.

With labor’s share in the periphery already 13 percentage points below the level of the 1970s, there may be a limit on how much further it can fall, said Benito.

The benchmark for the adjustment now required is the U.K. of the early 1980s, when Prime Minister Margaret Thatcher acted to make labor markets more efficient, according to Goldman Sachs. While that period shows a shift to greater labor market flexibility is possible, it also demonstrates “that the transition is likely to be painful and politically fraught,” Benito said.

* * *

Governments could save $1 trillion a year by making infrastructure spending more efficient, says a new report from McKinsey & Co.’s research division.

The study published yesterday found ways of boosting the productivity of roads, water supplies and other infrastructure by enough to save 40 percent of the delivery cost. Suggestions include speeding up the approval process for building and upgrading current airports or ports.

The potential for savings is so large because the infrastructure industry has such weak productivity. Low-income nations in central Africa could add 2.2 percentage points to annual growth if they matched the infrastructure building of India, the report suggests. An increase in such spending by one percent of GDP could translate into 1.5 million U.S. jobs.

“Infrastructure investment is a rare ’win-win’ that boosts overall economic productivity in the long run and creates jobs in the short run,” said Richard Dobbs, a director of the McKinsey Global Institute.

* * *

An increase in the value of a home also increases the owner’s health.

A study of the U.K. housing market from 1991 to 2009 published by the University of Nottingham found home equity gains cause a reduction in the likelihood of a wide range of medical conditions such as arthritic conditions, chest pain and high blood pressure among owners.

The effects are stronger for younger people and women, said economists John Gathergood and Eleonora Fichera in the study.

Among the reasons suggested are that homeowners are more likely to buy health insurance and enjoy more leisure time and exercise. Unlike income increases, a rise in home equity doesn’t spur risky healthy behavior such as smoking, the study said.

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