Thread by @Noahpinion

In today's @bopinion post I lay out a very scary idea: a case for why low interest rates might be holding down productivity growth.

bloomberg.com/opinion/articl…

OK so we think that productivity growth in rich countries has slowed a lot since the recession.

That might seem minor, but over time it's really bad. Eventually it means back to a low-growth, zero-sum world. And that's probably not a good world.

What else has happened in rich countries since the Great Recession?

Interest rates have been very close to the zero lower bound.

Could these two be connected?

In a post last December, I laid out the case for how easy monetary policy could RAISE productivity growth - by raising aggregate demand and prompting companies to invest more in the latest technology.

Today's post lays out the opposite case.

bloomberg.com/opinion/articl…

So how could low rates be hurting productivity growth?

In a new paper, @AtifRMian et al. hypothesize that low rates could help dominant companies take over their markets. That could choke off economic activity and lower observed productivity growth.

papers.ssrn.com/sol3/papers.cf…

An alternative possibility is that low interest rates could help low-productivity companies stay in the market, inefficiently crowding the more productive ones!

Unproductive companies kept alive by cheap credit are known as "zombies".

In the 1990s, after Japan's asset bubbles burst and their economy slowed, big Japanese banks kept lots of zombie companies alive with lines of cheap revolving credit.

economics.mit.edu/files/3770

Now, Japanese banks had all kinds of reasons to do this besides low rates (for example, cross-shareholdings).

But Japan's low interest rates might have made the zombie strategy possible for these banks.

Now we have very low rates in Europe. And some economists claim that the zombies have invaded Europe as well.

ecb.europa.eu/pub/pdf/scpwps…

And a recent paper from the BIS goes farther. It claims that zombies are infecting both Europe and America, and that low rates are the cause.

bis.org/publ/qtrpdf/r_…

And here's some possible micro evidence from France. Aghion et al. claim to show that there's a U-shaped relationship between credit access and productivity growth. If crappy companies get easy credit, they don't exit the market.

scholar.harvard.edu/files/aghion/f…

So if low interest rates DO lower productivity growth, what does that mean?

Well, for one thing, it means that the MMT people who call for permanently zero interest rates could be playing with fire.

bilbo.economicoutlook.net/blog/?p=4656

It could also mean that China is headed for a prolonged productivity slowdown, even though they tend to use credit policies as stabilizers rather than interest rates per se:

bloomberg.com/opinion/articl…

And it could mean that the apparent one-way downward ratchet of U.S. interest rates could come with long-term costs to growth.

The case that low rates cause low productivity growth is not yet a slam dunk by any means. It's just a hypothesis with a bit of circumstantial evidence.

But if it's true, it should change the entire way we think about macroeconomic policy.

(end)

bloomberg.com/opinion/articl…