Williams explains the perverse result comes from wealth effects and higher rates leading households to consume more and work less.
“This “perverse” result, in the words of John Campbell (1994), 5 stems from the combination of a strong wealth effect and higher expected real interest rates, which contribute to a transition period during which households enjoy greater consumption and leisure.”
Williams says standard theory paradoxically predicts productivity increases cause downturns with declining investment and hours worked.
“Assuming immediate recognition, standard macroeconomic theories predict a paradoxical result: an increase in trend productivity growth drives up real interest rates and causes an economic downturn, with hours worked, investment, and output declining.”