The Long View: Is Tech Helping or Hurting?

by Douglas J. Peebles, Head, Fixed Income, and Eric Winograd, Economics, AllianceBernstein

This is the third in a four-part series called The Long View. Click here for part one, and here for part two. And read this post for insight into how technological advances are impacting fixed-income investing.

ERIC WINOGRAD

How do you measure the productivity of a service? How do you measure the productivity of a cell-phone app? We’re in an information economy; how do we measure the productivity enhancement of information?

The history of technological innovation is that it takes about a generation for an economy really, truly, to capture the productivity gains of it. I think of it in the context of my own children, right? I have a phone that contains all the knowledge of the world in my pocket, but I still fumble around with it and—and don’t feel like I’m really maximizing it. And then I watch my children use it and it’s like an extension of their body.

So I do think there’s reason to hope that the productivity gains we’re not seeing from technology today will be seen in the future. And that would be a wonderful thing for the global economy: that would boost productivity, that would boost growth, that would allow us to run growth at a faster rate without generating inflation, and it would increase the standard of living for everybody.

DOUG PEEBLES

Let me just talk to you a little bit about the measurement techniques in productivity. What really drives economic growth is working-age population plus productivity. And yet when we look at, even in the financial crisis— We’ll take the United States, for example. Even though the postcrisis time period didn’t have very, very high actual GDP growth, the profit numbers of companies were absolutely off the charts. And they were still hiring people, so it’s not like they just did this completely through cost-cutting.

And so the profit numbers would indicate that productivity levels were actually quite high; whereas, when we talk about the actual economic, statistically measured productivity, it has been very disappointing.

ERIC WINOGRAD

There are a lot of potential explanations, but one I think we should be open to is that we’re not measuring it properly. We know that there was this much input and we believe that there was that much output. And the difference between those two things must be how productive the inputs were in creating the outputs. And that was very simple to do when it was a goods-producing, manufacturing-heavy economy. You had a certain number of people who spent a certain number of hours and used a certain amount of raw material to produce things. And it rolled off the assembly line at the other end and you could count them. Right? So then it was just a math problem.

DOUG PEEBLES

Right.

ERIC WINOGRAD

It’s very possible that at some point in the future we’ll look and say we were mismeasuring productivity and it was higher. It may also be the case that we’ll look back and say, well, people weren’t being more productive; they were playing Candy Crush, they were doing other things on their phone that may have boosted their standard of living, may have made them happier, but weren’t economically productive.

DOUG PEEBLES

And if we’re underestimating the productivity level, then the potential growth rate of the economy is actually quite a bit higher than what I think general economic consensus would be. Could monetary policy actually be too tight given the mismeasurement of productivity and that overall debt level outstanding?

ERIC WINOGRAD

I think it’s probably a stretch to say that monetary policy is too tight, but I think it’s reasonable to think that it might not be as tight as people—

DOUG PEEBLES

Again.

ERIC WINOGRAD

—think that it is.

DOUG PEEBLES

Again.

ERIC WINOGRAD

If potential growth is higher than we think it is, then monetary policy does not need to move as quickly, perhaps, because there is still spare capacity in the economy. I would feel better about making that argument in the US if inflation had not been going up over the course of the past year. So I’m not entirely convinced that monetary policy is too tight. But I’m very encouraged by the fact that central banks around the world are proceeding extremely slowly with raising interest rates.

DOUG PEEBLES

Do you think that there’s a possibility that because of the first item that we talked about, the debt overhang, that monetary policy has lost its effectiveness at all, in terms of influencing the economy?

ERIC WINOGRAD

I would argue the opposite. I would argue that with a debt overhang as large as it is, the level of interest rates may mean even more than it ever has, right? The ability of companies to roll over debt, the ability of countries to roll over debt, given the size of the debt burden—they may feel the pain from rising interest rates even sooner now than they would have in the past.

DOUG PEEBLES

So that means that if the monetary-policy makers are intent on slowing down the economy, it should be pretty easy for them to—

ERIC WINOGRAD

That’s right.

DOUG PEEBLES

—do that through monetary policy. Let’s look at it on the flip side. If the monetary-policy makers are trying to boost the economy with this debt overhang, have they lost some of their effectiveness?

ERIC WINOGRAD

I think when you look at it from that direction, then absolutely. The ability of monetary-policy makers to stimulate the economy by lowering interest rates into an already indebted society: look, it depends on the willingness of borrowers to borrow even more. The desire of companies to borrow, the desire of individuals to borrow, may be limited. And this gets you back again to the idea that fiscal policy may matter—

DOUG PEEBLES

Right.

ERIC WINOGRAD

—a whole lot more because the sovereign…may make that decision to borrow anyway, because that’s who has to borrow to boost growth, if no one else is willing. When you find monetary policy to be exhausted, fiscal policy becomes much, much more important.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

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