By 2014, what do we find? Due to the magic of compound interest, China is now almost eight times the size of Italy. Indeed, China creates a new economy the size of Italy every 18 months; an economy the size of Portugal every quarter; an economy the size of Greece every month; and an economy the size of Cyprus every week. Those things that can be counted sometimes really do count. Today’s policy debates bear testimony to that. Since the financial crisis, global growth has under-performed. In the decade prior to it, advanced economy growth averaged 3% per year. In the period since, it has averaged just 1%. The world has grown fast, then slow. That has led some to fear “secular stagnation” – a lengthy period of sub-par growth. 3 The self-same concerns were voiced at the time of the Great Depression in the 1930s. 4 The economic jury is still out on whether recent rates of growth are a temporary post-crisis dip or a longer-lasting valley in our economic fortunes. Pessimists point to high levels of debt and inequality, worsening demographics and stagnating levels of educational attainment. 5 Optimists appeal to a new industrial revolution in digital technology. 6 Given its importance to living standards, this debate is one of the key issues of our time. Some insight into that debate can be provided by looking at patterns of growth through a long lens. Over long runs of history, it is possible to detect distinct phase shifts in growth.
Behind the physiological shift from the ridge brows of Neanderthal man to the flat foreheads of modern man may have been a more important neurological one. Flat foreheads allowed growth in the pre-frontal cortex region of the brain. Modern-day MRI scans tell us this region is responsible, among other things, for patience. What we may have seen, tens of thousands of years ago, was Darwinian natural selection of patient homo sapiens over impatient Neanderthals. 42 And with that came rising living standards. The secular struggle – innovation or stagnation? From the distant past, then, to the present and future. Today’s great debate is where next for growth. The sunny uplands of innovation-led growth, as after the Industrial Revolution? Or the foggy lowlands of stagnant growth, as before it? Which of the secular forces – innovation versus stagnation – will dominate? And if growth is going back to the future, on which side of the Industrial Revolution will it land? The balance of these arguments matters greatly for future well-being and public policy. Indeed, it is hard to think of anything that matters much more. More parochially, for central banks setting monetary policy one of the key judgements is the appropriate “neutral” level of interest rates. You can think of this as the interest rate that would align desired saving and investment over the medium term. But what is the “neutral” level of interest rates today? Secular innovation might imply a level at or above its historical average of 2–3%, in line with historical growth rates.