Selgin's 'Less Than Zero': Required Reading for Central Bankers

By chance I came across two articles today that are wildly optimistic about global economic growth in the future. First, via Karl Smith, I see that Robin Hanson is talking up the possibility of a robot-induced "singularity" in the future that will radically increase global economic growth rates. Second, Ambrose Evans-Pritchard is highlighting an HSBC report that foresees a pronounced increased in the trend global economic growth by 2050.

These two pieces are both interesting, but ignore an important question: what type of monetary policy arrangement would be most conducive to maintaining economic stability during such rapid economic growth? Such an environment could easily lead to overoptimism, that in turn could fuel an unsustainable asset and credit boom. It is easy to see how monetary policy could play into such an unsustainable boom.

The rapid productivity gains implied by these two pieces would create strong deflationary pressures. Central banks targeting some form of price stability would react by adding monetary stimulus to prevent deflation from emerging. But adding monetary stimulus in the midst of such a boom would only intensify it. Another way of seeing this is to realize that a productivity boom typically puts upward pressure on the neutral real interest rate. Trying to maintain price stability in face of productivity boom, however, requires central banks to lower the real interest rate.

So is there a monetary policy that could handle such rapid economic growth without destabilizing it? Fortunately, George Selgin has thought extensively about this very situation and has come up with what he calls the Productivity Norm Rule for monetary policy. This monetary policy rule would have have nominal GDP grow at the same rate as that of factor inputs. Doing so would allow productivity gains to be reflected in the price level while maintaining factor price stability. Thus, the Productivity Norm in an environment of rapid productivity growth would tend to stabilize nominal wages, allow the price level to decline, and yet keep aggregate spending growth stable. Selgin has nicely articulated the details and implications of the Productivity Norm Rule in his monograph titled "Less Than Zero." If, in fact, Robin Hanson and HSBC are correct in their assessment of future economic growth, then Selgin's monograph should become required reading for every central banker.