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Dreams of a boom fade & attention turns to secular stagnation.

Larry Kummer, Editor

Summary: Today we discuss secular stagnation (what Tyler Cowen calls The Great Stagnation). It has emerged as a major public policy concern as forecasts for a boom proved false (again) in 2014 — and the economy slowed in the early days of 2015. We face a dark future if we can’t restart the economy, especially if the 1% continue to skim off most of what little growth we get.  First in a series about this, perhaps among our most serious problems. {1st of 2 posts today}

“…a full-fledged recovery … requires a large outlay on new investment, and this awaits the development of great new industries and new techniques. But such new developments are not currently available in adequate volume.”

— Speech by Alvin Hansen (Prof Political Economy, Harvard), 28 December 1938. He was right. WWII provided the missing spark to start a US recovery.

We imagine that we’re fast.

Introduction to stagnation.

Since 2010 mainstream economists have assured us that the economy was returning to normal (i.e., 3-4% real gdp growth). Many forecast a that boom was coming (4-5%). Almost all agreed that rising rates and inflation lie ahead. Skeptics, like me, predicted that growth would remain stagnant and that deflation was loose in the world. Now that debate has ended, and the debate begins about the causes and cures of secular stagnation — and rising concern about deflation.

The first warnings, disregarded.

In 2011 Tyler Cowen (Prof Economics, George Mason U) published The Great Stagnation, explaining that the US economy had reached a technological plateau, and so began a period of slow growth. Few believed him.

In the November 2011 Monk Debates the proposition was “Be it resolved North America faces a Japan-style era of economic stagnation”. Paul Krugman and David Rosenberg spoke for for the resolution; Larry Summers and Ian Bremmer spoke against it.

Krugman said “It’s now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery.” Rosenberg said “When all the stimulus is gone and the Emperor is disrobed, it is not going to be a pretty picture.”  The vote was 55% – 45% against. Likewise in the wider world our slow growth was considered a cyclical problem and its deeper causes ignored.

In the following years David Rosenberg converted to the optimists’ side, becoming a roaring bull about the economy and stock market. In 2013 Larry Summers moved in the opposite direction, warning about stagnant growth. He gave his first alarm quietly and uncertainly in a speech to the IMF on 8 November 2013 — Excerpt:

I wonder if a set of older and much more radical ideas — that I have to say were pretty firmly rejected, a set of older ideas that went under the phrase secular stagnation — are not profoundly important in understanding Japan’s experience in the 1990s, and may not be without relevance to America’s experience today.

… Now, this may all be madness, and I may not have this right at all.  But it does seem to me that four years after the successful combating of crisis, since there’s really no evidence of growth that is restoring equilibrium, one has to be concerned about a policy agenda that is doing less with monetary policy than has been done before, doing less with fiscal policy than has been done before, and taking steps whose basic purpose is to cause there to be less lending, borrowing, and inflated asset prices than there were before.

My lesson from this crisis, and my overarching lesson, which I have to say I think the world has under-internalized, is that it is not over until it is over, and that time is surely not right now, and cannot be judged relative to the extent of financial panic. And that we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity holding our economies back below their potential.

He needs a little push.

Reality casts the final vote.

Now, 3 years after the debate, most economists agree that we have some kind of global secular stagnation. But what is it, exactly? The Economist notes that “Despite the sterling efforts of the authors to pin down the term, secular stagnation remains a baggy concept, arguably too capacious for its own good.” Krugman explains there are two different definitions:

{S}ecular stagnation is the claim that underlying changes in the economy, such as slowing growth in the working-age population, have made episodes like the past five years in Europe and the US, and the last 20 years in Japan, likely to happen often. That is, we will often find ourselves facing persistent shortfalls of demand, which can’t be overcome even with near-zero interest rates.

{the other view} associated in particular with Bob Gordon {is} that the growth of economic potential is slowing, although slowing potential might contribute to secular stagnation by reducing investment demand. It’s a demand-side, not a supply-side concept. And it has some seriously unconventional implications for policy.

Krugman explains the implications:

This is a really important distinction, because secular stagnation and a supply-side growth slowdown have completely different policy implications. In fact, in some ways the morals are almost opposite.

If labor force growth and productivity growth are falling, the indicated response is (a) see if there are ways to increase efficiency and (b) if there aren’t, live within your reduced means. A growth slowdown from the supply side is, roughly speaking, a reason to look favorably on structural reform and austerity.

But if we have a persistent shortfall in demand, what we need is measures to boost spending — higher inflation, maybe sustained spending on public works (and less concern about debt because interest rates will be low for a long time).

Slow growth is not a problem for everyone.

Conclusions

Tomorrow we’ll delve into the details, but here’s the bottom line. Reliable treatment requires accurate diagnosis, in economics just as in medicine. Unfortunately, here we see the same confusion in economics as we do with climate scientists studying the pause: a problem unexpectedly appears in a serious area and experts offer many explanations — some overlapping and some contradictory, most given with great confidence.

That’s appropriate in science, where conviction give scientists drive and focus. It’s not helpful in public policy debates as non-experts have no rational basis to choose among the various theories — so they choose using their political and ideological biases.

A selection of readings from all sides of the debate.

Some believe that supply-side problems have slowed growth (e.g., Robert Gordon, Tyler Cowen). For details on their theories (and those of blue sky optimists) see Has America grown old, and can no longer grow? Or are wonders like the singularity in our future?

Here are some articles about the many other theories about our slow growth:

For More Information

(a)  See all posts about economics and about deflation.

(b)  Recent posts about this economic cycle:

  1. Are we following Japan into an era of slow growth, even stagnation?, 18 November 2013.
  2. See the true trend of the US economy, hidden in the daily news, 1 August 2014.
  3. It’s not too soon to worry about the US economy. There are things worse than slow growth., 18 September 2014.
  4. Listen to the slowing US economy, hear echoes of Japan, 24 September 2014.
  5. 3 graphs tell the story about the US economy, hidden amidst the noise of the jobs report, 6 October 2014.
  6. Look at the economy. Fight the illusion of normality. Feel the weirdness., 8 October 2014.
  7. Here’s help to see the truth through the narratives in the news: looking at the jobs numbers, 9 December 2014.
  8. What does the data tell us about the US economy in 2015?, 6 January 2015.
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