While I am just about as far from an economist as one can get, I have the honor of serving on the Board of the Council for Economic Education (CEE). Last week, the CEE hosted its lecture series, “Economists on the Economy,” with The Honorable Larry Summers, the 71st Secretary of Treasury, being interviewed by Professor Benjamin Friedman, the William Joseph Maier Professor of Political Economy and former Chairman of the Department of Economics at Harvard University.
The questioning explored whether or not the real interest rate is lower than we have historically known in the U.S. (For us non-economists, the real interest rate is defined as a rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender, according to Investopedia).
A heady question debated easily by the world’s finest economists uncovers an interesting proposition for the rest of us to consider; are we focusing on the right economic indicators when looking for economic stability?
The Secretary reminded us that “progress that is transformative of the lived experience is not what it once was in the smokestack economy.” We live in a world with a desire for the substantial. Yet in our economic environment, numerous sets of structural factors have reduced the propensity to save vs. the propensity to invest. Capital flight is leading to the export of savings, which leads to the taste for borrowing and reduces the appetite for investment. Uncertainty about retirement is at a new height. Previewing a data point from Edelman’s upcoming U.S. research on “Millennials and Money,” less than 50 percent of millennials believe that they will retire.
In some broad way, real interest rates are determined by supply of savings and demand of investment. Yet the nature of product and output have changed. One can obtain more with less as technology has changed the nature of work and the associated capital investments required. Law firms use two-thirds as much space per lawyer as they did 10 years ago. Fewer people shop in malls due to e-commerce. Less warehouse space is required for companies due to smarter supply chain management. Apple and Google, who have among the largest market caps in the world, face pressure from activists because they cannot put to use all that they produce.
So it is in this tech-enabled environment that, as the Secretary puts it, “pervasive free stuff is really good, but isn’t Gross Domestic Product (GDP).” Now that we have a lot of pervasive free stuff, what are we trying to measure with GDP? If the quality of marriage improved or weather got better, lives and economies would improve. But this is not reflected in GDP. Progress is good, but the conceptual measure may not show up in GDP statistics. Here, we find a set of conceptual issues associated with the very imperfect relationship between consumer surplus and GDP.
And why is this so important? Secretary Summers reminds us that, “Downturns cast a shadow forward to determine the economy’s potential.” Investors must take a broader view as markets roil over energy prices and uncertainty in parts of the world. The Secretary also urged students of the economy to apply the most basic principles to public policy making, keeping in mind that the real test of success is whether a typical middle-class family can achieve its economic goals.
Secretary Summers got to the point early in the discussion when he said, “Better economic education ensures better policy, which leads to better lives for millions of people.” This is the responsibility of us all.
Deidre H. Campbell, global chair, Financial Services sector.