Secular Stagnation

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.

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.