AND EVERYTHING THAT'S COMING WILL DRIVE INFLATION AND INTEREST RATES LOWER:

[T]he secular stagnation theory offers the most comprehensive account of the situation and the best basis for policy prescriptions. The good news is that although developments in China [8] and elsewhere raise the risks that global economic conditions will deteriorate, an expansionary fiscal policy by the U.S. government can help overcome the secular stagnation problem and get growth back on track.

Just as the price of wheat adjusts to balance the supply of and demand for wheat, it is natural to suppose that interest rates--the price of money--adjust to balance the supply of savings and the demand for investment in an economy. Excess savings tend to drive interest rates down, and excess investment demand tends to drive them up. Following the Swedish economist Knut Wicksell, it is common to refer to the real interest rate that balances saving and investment at full employment as the "natural," or "neutral," real interest rate. Secular stagnation occurs when neutral real interest rates are sufficiently low that they cannot be achieved through conventional central-bank policies. At that point, desired levels of saving exceed desired levels of investment, leading to shortfalls in demand and stunted growth.

This picture fits with much of what we have seen in recent years. Real interest rates are very low, demand has been sluggish, and inflation is low, just as one would expect in the presence of excess saving. Absent many good new investment opportunities, savings have tended to flow into existing assets, causing asset price inflation.

For secular stagnation to be a plausible hypothesis, there have to be good reasons to suppose that neutral real interest rates have been declining and are now abnormally low. And in fact, a number of recent studies have tried to look at this question and have generally found declines of several percentage points. Even more convincing is the increasing body of evidence suggesting that over the last generation, various factors have increased the propensity of populations in developed countries to save and reduced their propensity to invest. Greater saving has been driven by increases in inequality and in the share of income going to the wealthy, increases in uncertainty about the length of retirement and the availability of benefits, reductions in the ability to borrow (especially against housing), and a greater accumulation of assets by foreign central banks and sovereign wealth funds. Reduced investment has been driven by slower growth in the labor force, the availability of cheaper capital goods, and tighter credit (with lending more highly regulated than before).

Perhaps most important, the new economy [9] tends to conserve capital. Apple and Google, for example, are the two largest U.S. companies and are eager to push the frontiers of technology [10] forward, yet both are awash in cash and are under pressure to distribute more of it to their shareholders. Think about Airbnb's impact on hotel construction, Uber's impact on automobile demand, Amazon's impact on the construction of malls, or the more general impact of information technology on the demand for copiers, printers, and office space. And in a period of rapid technological change, it can make sense to defer investment lest new technology soon make the old obsolete.

Various studies have explored the impact of these factors and attempted to estimate the extent to which they have reduced neutral real interest rates. The most recent and thorough of these, by Lukasz Rachel and Thomas Smith at the Bank of England, concluded that for the industrial world, neutral real interest rates have declined by about 4.5 percentage points over the last 30 years and are likely to stay low in the future. 

We shouldn't underestimate the scale of the current technological transformation, and its impact on work. Full automation is certainly just at the beginning. The internet in its newest forms, for example, 'the internet of things', aims to become pervasive across all productive sectors - from communication, to energy and logistics - and to seamlessly permeate every level of society. In a way, the robot economy is already here. Foxconn, the world's largest manufacturer, is now introducing 30,000 robots per year, and Amazon has 15,000 robots already working in delivery centres. According to Brian Arthur, this "second economy", where machines transact only with other machines, could replace the work of approximately 100 million workers globally.

Most of the current digital platforms are multi-side marketplaces that can match potential customers with everyone and everything. The strategy of these powerful 'algorithmic institutions' is to enter a variety of economic sectors rapidly and disrupt current industries. By controlling their digital ecosystems, they can turn everything into a productive asset and every transaction into an auction where they set their bidding and pricing rules.In addition to the changes being brought by automation, the job market is being transformed by digital data-intensive platforms like Uber. We are seeing a shift of power from service intermediaries to information intermediaries, a kind of 'Uberisation' of services.

The surgeon, who has spent 15 minutes gently tearing through tissue, suddenly pauses to gesture ever-so-slightly with his tiny scissors. "Do you see what's on this side? That's nerves." He moves the instrument a few millimeters to the right. "And on this one? That's cancer."

Ashutosh Tewari is the head of the urology department at Mount Sinai Hospital in New York City. He is in the process of removing a patient's cancerous prostate, the walnut-sized gland in the delicate area between the bladder and the penis. This surgery--one of three that Tewari performs on an average day--takes place entirely within an area the size of a cereal bowl. Tewari's movements are deliberate and exact. Just a few wrong cuts could make the patient incontinent or unable to perform sexually for the rest of his life.

But Tewari is making those cuts from 10 feet away. With a robot.

From where I'm standing in the operating room, the patient is partially obscured by the large multi-armed robot that looms over him, as well as the team of surgical assistants and anesthesiologists that surround him. Tewari, meanwhile, sits at a large console. He stares into the 3D display while manipulating levers with his hands and fingers, which give him some haptic feedback. While the system resembles an old-school arcade video game, Tewari insists that there's nothing game-like about it. Surgery is serious business.

Even from across the room, robots can make surgery better. For the surgeons, sitting at a console is less physically taxing than hunching over the body during an open procedure. The software is so sophisticated that it corrects a surgeon's shaking hand. The zoomed-in camera view takes some getting used to, but for working in a small area, it's great.

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