Secular Stagnation

By | Updated June 23, 2016 7:09 PM UTC

A specter is haunting dismal scientists, an economic nightmare with an ugly name. It’s secular stagnation, the proposition that the slow growth plaguing developed economies may be permanent. If true, it means busts won’t turn to booms, tried and true growth policies won’t work, lost jobs won’t be regained. And here’s the really scary part: Future economic expansion may be inseparable from the reckless financial practices that caused the problem in the first place.

The Situation

Since the U.S. recovery began in 2009, gross domestic product has grown by just 15 percent. Compared with past recoveries, that’s feeble. In the first seven years of the 1960s expansion, the U.S. economy advanced by 45 percent. Growth was 28 percent in just the first five years of the “Reagan recovery” of the 1980s. Europe’s situation is worse. Growth in the euro area has stalled. Deflation remains a threat. Economists say that expansion is sluggish because businesses and consumers are spending too little; the new fear is that there’s nothing to make them spend more. Aging populations and efforts of some governments to build foreign exchange reserves have caused a global excess of desired saving over desired investment. Rising inequality adds to this surplus, because the rich save more of their income. Usually, lower interest rates would stimulate enough borrowing to restore the balance. But with inflation low and nominal interest rates at zero, real interest rates can’t fall enough. Sluggish productivity growth is another concern. Recovery in many countries also seems to be impeded by shrinking labor forces, smaller improvements in education and job skills, and a tepid pace of innovation.

The Background

The term “secular stagnation” — meaning long-term stagnation — isn’t new. It was coined by a Harvard University economist, Alvin Hansen, in 1938. In a speech to the American Economic Association, he warned of the danger of “sick recoveries which die in their infancy and depressions which feed on themselves.” Former U.S. Treasury Secretary Lawrence Summers gave the idea new currency in a talk at the International Monetary Fund in 2013. Since the crash, the problem of the “zero lower bound” on interest rates had become familiar, but this was generally thought to be temporary: Summers said no, the floor on interest rates might be “a chronic and systemic inhibitor” of growth. Perhaps, he suggested, the only way to maintain adequate demand in the future would be to tolerate financial recklessness and the bubbles, booms and busts that go with it. If that’s true, it would mean there could be economic expansion or financial stability, but not both.

The Argument

According to one school of thought, a new era of slow growth may have begun. That’s the view of Summers and other prominent economists such as Paul Krugman, Robert Gordon, Tyler Cowen and Gauti Eggertsson. Their reasoning differs — some stress the investment shortage and the lack of policy tools to attack it, others the diminishing power of innovation. Against the pessimists are technology optimists such as Joel Mokyr and Erik Brynjolfsson. Stanford’s John Taylor sees secular stagnation as a cover for what’s really holding back the U.S. recovery: bad policies. Don’t blame deep structural forces; blame uncertainty over the Obamacare health reforms and other initiatives, and costly regulation such as the Dodd-Frank law. Many other economists, including former U.S. Federal Reserve chairman Ben S. Bernanke, think the gloom is overdone, or emphasize the uncertainties. Still, some concerns are hard to dismiss. The shadow of the recession eventually will recede, but demographics alone make it conceivable that the U.S. and other economies will perform poorly by past standards.

The Reference Shelf

  • An e-book compiled by VoxEU gathers short, accessible papers by leading economists. Read the introduction by editors Richard Baldwin and Coen Tuelings. A series of articles for Bloomberg View reviews the main arguments.
  • Robert Gordon gave a talk at TED on the death of innovation.
  • Tyler Cowen argues in “The Great Stagnation” that the U.S. has reached a technological plateau. Erik Brynjolfsson and Andrew McAfee argue in “The Second Machine Age” that it hasn’t.
  • Kenneth Rogoff makes the case that the slow pace of recovery is attributable to long debt cycles, not chronic low demand.
  • James Hamilton and co-authors look at the timing of bubbles since 1980 and find that the theory of secular stagnation doesn’t fit.
  • John Williams of the San Francisco Fed says the productivity slump may last.
  • Ben Bernanke and Larry Summers debated secular stagnation on their respective websites.
  • For the technically inclined, an effort to develop a formal model of secular stagnation.

First published Oct. 22, 2014

To contact the writer of this QuickTake:
Clive Crook in Washington at ccrook5@bloomberg.net

To contact the editors responsible for this QuickTake:
Jonathan Landman at jlandman4@bloomberg.net
Anne Cronin at acronin14@bloomberg.net