Women, negative real interest rates and financial repression?

What do all of these have in common? I mean, what kind of messed-up mind mixes those together? Well, it starts with this article from Carmen Reinhart and Jacob Kirkegaard. According to them, interest rates adjusting for inflation were negative from 1945 to 1980 as a result of financial repression. This means that governments were mixing a set of policies to reduce the cost of debt (and the benefits of savings by extension, leading to a lower savings rate) by controlling capital mobility accompanied by a (un)healthy dose of inflation. As a result, governments in advanced economies were able to reduce their debts in the year following World War II.

I am not sure how much of that story I buy, but there is a part that I don’t get : why was economic growth fast in the period described by Reinhart and Kirkegaard? Well, this where I am heading towards the issue of women by asking the question of if we have not overestimated the real growth rate of western economies in the period from 1945 to 1980? Why women? Well, I’ll quote an old article from Economist’s View that is much more eloquent that I could be:

 A lot of what used to be done outside of the formal marketplace, things  such as meal preparation, child care, yard care, house cleaning, all sorts of  services such as these, are now often performed in the formal marketplace by  service firms. Thus, what used to get missed in GDP calculations now gets  counted because it involves a market based transaction (if you vacuum your house  yourself, there is no value-added to GDP calculations, but if you hire someone  to do it for you, it counts as part of GDP).

I’ve wondered how much of GDP growth in recent  decades, or growth worldwide, is truly new economic activity and how much of it  is simply the internalization of tasks that we didn’t used to count because they  were performed outside the formal marketplace.

This is not a trivial point. Since GDP accounting considers formal activities, everything that has value but not counted is abstracted so the economy is always a little larger than what we see in the official statistics. After all, is there someone at BLS or StatCan or Eurostat that attributes a price to the value of stay-at-home moms? However, once that mom decides that she has had enough with staying at home, finds a job and sends her kid into kindergarten, it becomes a new value. It may generate more value, but we can’t discount the value of stay-at-home moms from kindergarten services.

So where am I going with this? Well, I have a hard time reconciliating the real negative interest rates found by Reinhart and Kirkegaard with the high pace of western economic growth from the end of the Second World War to 1980. After all, real negative interest rates would mean that one consumes capital rather than accumulate it, hence reducing potential economic growth. Yet, in those years, the stock market was performing very poorly(very very very) relative to the period from 1980 to 2008. This is consistent with the Reinhart and Kirkegaard story as well. So how to explain the fast pace of economic growth?

I think that the increased participation of women in the labor market and the shifting of non-accounted home production towards open market production has over-evaluated economic growth in the period. This would not fit in with the story of repaying government debts that Reinhart and Kirkegaard try to tell, but it does reconcile their findings with the fast (and maybe overestimated) economic growth rate from 1945 to 1980.

But heh…I am just thinking on a blog about national accounting…


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