DP12519 Secular Trends and Technological Progress
Can technological progress explain secular stagnation? We show how an excess of savings over investment arises when innovative production requires creative human capital
rather than physical investment. Innovating firms cannot own human capital so they need less investment financing, but need to ensure the commitment of human capital
by rewarding it gradually over time. Over time, as innovators are granted a rising income share, the supply of investable assets falls. The general equilibrium effect is declining
corporate leverage, a gradual fall in interest rates and rising asset valuations. The concomitant
rise in house prices and wage inequality leads to higher household leverage and
mortgage default risk. We show that only a redistributive productivity shift can account
for a fall in physical investment in the context of falling interest rates, consistent with
major economic and financial trends since 1980.
