It’s time to rethink the way that advanced technologies are impacting markets, as they move from affecting structures and pricing behaviour to include meaningful and lasting macroeconomic consequences, according to a recent research report from Barclays.
The report tries to address the reasons why traditional macro models struggle to explain the ‘puzzles’ behind weak output growth, low productivity, muted wage increases and subdued inflation.
“This may require adjusting the theories that guide our economic analysis, including on monetary policy, public finance and development strategies,” Barclays’ analysts wrote.
Macroeconomics of the machines
The manufacturing-focused concept of GDP does not include digital products’ consumer rent and also struggles to capture properly the effects of sharing and disintermediation, quality improvements and intangible capital, for examples.
That means annual growth rates are estimated to be up to almost 3/4 percentage points higher if adjusting for the digital economy.
Also, inflation is likely lower than official estimates, and technology is affecting its underlying dynamics, in particular through wages developments. Challenges in quality adjustments suggest that official inflation rates may at times be over-recorded by as much as 1%, the research showed.
Technology is also affecting underlying inflation dynamics through the labour market due to automation.
“New technologies could turn globalisation on its head,” the report said.
Moreover, the leap in technological innovation, spurred by advances in machine learning and robotics, is generating fears of a jobless future.
Yet, every major economy appears to be producing millions of jobs, pushing unemployment rates down to historical lows.
And wage growth and overall inflation have remained puzzlingly low, despite rock-bottom jobless rates.
Robots at the gates
It’s not a matter of technology eliminating the global workforce, rather reshaping it.
“While technology does not portend a jobless future, it can often be a force for wage disinflation,” said Barclays analysts.
“We believe that soft automation is to blame: the reason why technology exerts a downward gravitational pull on wages is because for the first several years or even decades, even the most path-breaking technologies end up automating specific tasks within a job, not the job itself.”
In doing so, technology frequently ends up lowering the skill-set needed to do a job, in turn expanding the pool of potential workers, which then acts as a drag on wage growth, they explained.
In addition, the report pointed out that advances in technology have failed to lead to a spurt in per capita productivity growth.
From 2005 to 2015, the OECD estimates that aggregate productivity in 30 major economies was just over 1%, compared with 2.5% in the previous decade – a marked decline in productivity and global growth.
“We believe that time lags are to blame: even the most productivity-enhancing inventions take several years and sometimes decades to truly become part of an economy, and only then does the impact show up in the productivity statistics,” analysts said.
Public policy implications
The report noted that policymakers will have to consider the implications, with policy analysis needing to expand beyond GDP when assessing societies’ progress and well-being.
“The focus of economic policies may shift from efficiency towards distribution, as machines
may bring abundance but not necessarily equity,” analysts wrote.
For public finance this may imply temporary and possibly permanent income support measures, sometimes referred to as a living wage, but securing a tax base may be challenging.
Central banks, meanwhile, may need to adjust to a world where inflation can be less easily controlled within inflation targeting regimes.