Economic stagnation

Economic stagnation or economic immobilism, often called simply stagnation or immobilism, is a prolonged period of slow economic growth (traditionally measured in terms of the GDP growth), usually accompanied by high unemployment. Under some definitions, "slow" means significantly slower than potential growth as estimated by macroeconomists. Under other definitions, growth less than 2–3% per year is a sign of stagnation.

The term bears negative connotations, but slow economic growth is not necessarily the fault of economic policymakers. For example, potential growth may be slowed down by catastrophic or demographic reasons.

Economic stagnation theories originated during the Great Depression and came to be associated with early Keynesian economics and Harvard University economics professor Alvin Hansen.

Secular stagnation theory

Secular stagnation refers to "a condition of negligible or no economic growth in a market-based economy".^[1] In this context, the term secular is used in contrast to cyclical or short-term, and suggests a change of fundamental dynamics which would play out only in its own time.

The term was originally coined by Alvin Hansen in 1938 to "describe what he feared was the fate of the American economy following the Great Depression of the early 1930s: a check to economic progress as investment opportunities were stunted by the closing of the frontier and the collapse of immigration".^[2] Secular stagnation was dusted off by Hans-Werner Sinn in a 2009 article ^[3] dismissing the threat of inflation, and became popular again when Larry Summers invoked the term and concept during a 2013 speech at the IMF.^[4]

However, The Economist criticizes secular stagnation as "a baggy concept, arguably too capacious for its own good".^[2]

Paul Krugman, writing in 2014, clarified that it refers to "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 United States, 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."^[5] At its root is "the problem of building consumer demand at a time when people are less motivated to spend".^[6]

Causes of secular stagnation

One theory is that the boost in growth by the internet and technological advancement in computers of the New economy does not measure up to the boost caused by the Great inventions of the past. An example of such a great invention is the assembly line production method of Fordism. The general form of the argument has been the subject of papers by Robert J. Gordon.^[7] It has also been written about by Owen. C. Paepke and Tyler Cowen.^[8]

Secular stagnation has also been linked to the rise of the digital economy. Carl Benedikt Frey, for example, has suggested that digital technologies are much less capital-absorbing, creating only little new investment demand relative to other revolutionary technologies.^[9]

Another is that the damage done by the Great Recession was so long-lasting and permanent, so many workers will never get jobs again, that we really can't recover.^[10]

A third is that there is a "persistent and disturbing reluctance of businesses to invest and consumers to spend", perhaps in part because so much of the recent gains have gone to the people at the top, and they tend to save more of their money than people—ordinary working people who can't afford to do that.^[11]

And a fourth is that advanced economies are just simply paying the price for years of inadequate investment in infrastructure and education, the basic ingredients of growth.^[12]

During the Great Depression, private capital investment fell because of excess capacity and the lack of good investment opportunities. Secular stagnation theory blamed inadequate capital investment for hindering full deployment of labor and other economic resources. Secular stagnation theory differs from the theory of the tendency of the rate of profit to fall in that businesses will curtail investment in industries with falling rates of return.

Chapter IV in Postwar Economic Problems is titled Secular Stagnation Theory.^[13]

“The basic changes going on since the beginning of the century are not only important in explaining the unprecedented severity and persistence of the depression of the thirties but also in appraising the outlook for the future. The reduced rate of growth, with respect to both population and territory, is likely to be permanent. Technological change is still going on, at a rapid rate, and, so far as anyone can see, is likely to continue for a long, long time to come. In the thirties the changes were predominantly of the sort that requires relatively small investment of new capital. This, of course, may change. There may be innovations in the future comparable in their effect on investment to the railroad, the automobile, or electricity. It is highly unlikely, however, that further technical change will be so much ‘’more’’ capital using as to make up for the reduced rate of territorial expansion and population growth. This is the basis on which the stagnation school predicts a long-run deficiency of investing opportunity.” Harris (1943): Chap.IV by Alan Sweezy

According to Harris (1943) "the idea of secular stagnation runs through much of Keynes General Theory".

Nineteenth century U.S. labor and capital conditions

The great innovations, such as canals, railroads, highways, manufacturing and electrification required large capital investments. The decade of the 1880s saw great growth in railroads and the steel and machinery industries. Purchase of structures and equipment increased 500% from the previous decade. Labor productivity rose 26.5% and GDP nearly doubled.^[14]

Capital was so scarce before the Civil War that private investors supplied only a fraction of the money to build railroads, despite the large economic advantage railroads offered. Before the Civil War, few railroad stocks were listed on the New York Stock Exchange. Local and state governments provided money, land and supplies. The U.S. government provided a small amount of money but granted millions of acres of land to railroads. The U.S. government also financed the first telegraph line in the country, after Samuel Morse was unable to secure private funding. Capital availability was greatly improved toward the end of the century, with early electrification projects having plenty.^[15]

The scarcity and high price labor in the United States during the 19th century was well documented by contemporary accounts, as in the following:

"The laboring classes are comparatively few in number, but this is counterbalanced by, and indeed, may be one of the causes of the eagerness by which they call in the use of machinery in almost every department of industry. Wherever it can be applied as a substitute for manual labor, it is universally and willingly resorted to ….It is this condition of the labor market, and this eager resort to machinery wherever it can be applied, to which, under the guidance of superior education and intelligence, the remarkable prosperity of the United States is due."^[16] Joseph Whitworth, 1854

Scarcity of labor was a factor in the economics of slavery.^[17] Labor was particularly scarce at the time of plowing, planting and harvesting.^[18]

As new territories were opened and federal land sales conducted, land had to be cleared and new homesteads established. Hundreds of thousands of immigrants came to the United States every year and found jobs digging canals and building railroads. Because there was little mechanization, almost all work was done by hand or with horses, mules and oxen until last two decades of the 19th century. Although steam power was increasingly used in factories, mines and mills from the 1840s on, hundreds of thousands of small shops relied on hand and animal-powered equipment until the century's end, and in some cases muscle power was not displaced by electricity or internal combustion until the 1930s.^[15]

The workweek during most of the 19th century was over 60 hours, being higher in the first half of the century, with twelve-hour work days common. There were numerous strikes and other labor movements for a ten-hour day. Unemployment at times was between one and two percent.

The tight labor market was a factor in productivity gains allowing workers to maintain or increase their nominal wages during the secular deflation that caused real wages to rise in the late 19th century. Labor did suffer temporary setbacks, such as when railroads cut wages during the Long Depression of the mid-1870s; however, this resulted in strikes throughout the nation.

There were labor shortages during World War I. Jobs were easy to find, which was one of the reasons Ford Motor Company doubled wages to reduce turnover.

Secular stagnation and the Great Recession of 2008–2009

Economists have asked whether the low economic growth rate in the developed world leading up to and following the subprime mortgage crisis of 2007-2008 was due to secular stagnation.

Paul Krugman wrote in September 2013: "[T]here is a case for believing that the problem of maintaining adequate aggregate demand is going to be very persistent – that we may face something like the 'secular stagnation' many economists feared after World War II." Krugman wrote that fiscal policy stimulus and higher inflation (to achieve a negative real rate of interest necessary to achieve full employment) may be potential solutions.^[19]

Larry Summers presented his view during November 2013 that secular (long-term) stagnation may be a reason that U.S. growth is insufficient to reach full employment: "Suppose then that the short term real interest rate that was consistent with full employment [i.e., the "natural rate"] had fallen to negative two or negative three percent. Even with artificial stimulus to demand you wouldn't see any excess demand. Even with a resumption in normal credit conditions you would have a lot of difficulty getting back to full employment."^[20][21]

Robert J. Gordon wrote in August 2012: "Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. A provocative 'exercise in subtraction' suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades".^[22]

One hypothesis is that high levels of productivity greater than the economic growth rate are creating economic slack, in which fewer workers are required to meet the demand for goods and services. Firms have less incentive to invest and instead prefer to hold cash. Journalist Marco Nappolini wrote in November 2013: "If the expected return on investment over the short term is presumed to be lower than the cost of holding cash then even pushing interest rates to zero will have little effect. That is, if you cannot push real interest rates below the so-called short run natural rate [i.e., the rate of interest required to achieve the growth rate necessary to achieve full employment] you will struggle to bring forward future consumption, blunting the short run effectiveness of monetary policy...Moreover, if you fail to bring it below the long run natural rate there is a strong disincentive to increase fixed capital investment and a consequent preference to hold cash or cash-like instruments in an attempt to mitigate risk. This could cause longer-term hysteresis effects and reduce an economy's potential output."^[20]

Historical periods of stagnation in the United States

• The years following the Panic of 1873 were known as the Long Depression were followed by periods of stagnation intermixed with surges of growth until steadier growth resumed around 1896. The period was characterized by business bankruptcies, low interest rates and deflation. According to David Ames Wells (1891) the economic problems were the result of rapid changes in technology, such as railroads, steam-powered ocean ships, steel displacing iron and the telegraph system.^[23] Because there was so much economic growth overall, how much of this period was stagnation remains controversial. See: Long Depression

• The Great Depression of the 1930s and the rest of the period lasting until World War II. Post War Economic Problems, Harris (1943) was written with the expectation that the stagnation would continue after the war ended. See: Causes of the Great Depression

The end of the stagnation in the U.S. following the Great Depression

Construction of structures, residential, commercial and industrial, fell off dramatically during the depression, but housing was well on its way to recovering by the late 1930s.^[24]

The depression years were the period of the highest total factor productivity growth in the United States, primarily to the building of roads and bridges, abandonment of unneeded railroad track and reduction in railroad employment, expansion of electric utilities and improvements wholesale and retail distribution.^[24] This helped the United States, which escaped the devastation of World War II, to quickly convert back to peacetime production.

The war created pent up demand for many items as factories that once produced automobiles and other machinery converted to production of tanks, guns, military vehicles and supplies. Tires had been rationed due to shortages of natural rubber; however, the U.S. government built synthetic rubber plants. The U.S. government also built synthetic ammonia plants, aluminum smelters, aviation fuel refineries and aircraft engine factories during the war.^[24] After the war commercial aviation, plastics and synthetic rubber would become major industries and synthetic ammonia was used for fertilizer. The end of armaments production free up hundreds of thousands of machine tools, which were made available for other industries. They were needed in the rapidly growing aircraft manufacturing industry.^[25]

The memory of war created a need for preparedness in the United States. This resulted in constant spending for defense programs, creating what President Eisenhower called the military-industrial complex.

U.S. birth rates began to recover by the time of World War II, and turned into the baby boom of the postwar decades. A building boom commenced in the years following the war. Suburbs began a rapid expansion and automobile ownership increased.^[24]

High-yielding crops and chemical fertilizers dramatically increased crop yields and greatly lowered the cost of food, giving consumers more discretionary income. Railroad locomotives switched from steam to diesel power, with a large increase in fuel efficiency. Most importantly, cheap food essentially eliminated malnutrition in countries like the United States and much of Europe.

Many trends that began before the war continued:

• The use of electricity grew steadily as prices continued to fall, although at slower rate than in the early decades. More people purchased washing machines, dryers, refrigerators and other appliances. Air conditioning became increasingly prevalent in households and businesses. See:Diffusion of innovations#Diffusion data
• Infrastructures: The highway system continued to expand.^[24] Construction of the interstate highway system started in the late 1950s. The pipeline network continued to expand.^[26] Railroad track mileage continued its decline.
• Better roads and increased investment in the distribution system of trucks, warehouses and material-handling equipment, such as forklift trucks continued to reduce the cost of goods.
• Mechanization of agriculture increased dramatically, especially the use of combine harvesters. Tractor sales peaked in the mid-1950s.^[27]

Permanent decline in workweek

The workweek never returned to the 48 hours or more that was typical before the Great Depression.^[28][29]

Stagflation in the United States

The period following the 1973 oil crisis was characterized by stagflation, the combination of low economic and productivity growth and high inflation. The period was also characterized by high interest rates, which is not entirely consistent with secular stagnation. Stronger economic growth resumed and inflation declined during the 1980s.

Although productivity never returned to peak levels, it did enjoy a revival with the growth of the computer and communications industries in the 1980s and 1990s.^[30] This enabled a recovery in GDP growth rates; however, debt in the period following 1982 grew at a much faster rate than GDP.^[31][32]

The U.S. economy experienced structural changes following the stagflation. Steel consumption peaked in 1973, both on an absolute and per-capita basis, and never returned to previous levels.^[33] The energy intensity of the United States and many other developed economies also began to decline after 1973. Health care expenditures rose to over 17% of the economy.

Stagnation and the financial explosion: The 1980s

A prescient analysis of stagnation and what is now called financialization was provided in the 1980s by Harry Magdoff and Paul Sweezy, coeditors of the independent socialist journal Monthly Review. Magdoff was a former economic advisor to Vice President Henry A. Wallace in Roosevelt’s New Deal administration, while Sweezy was a former Harvard economics professor. In their 1987 book, Stagnation and the Financial Explosion, they argued, based on Keynes, Hansen, Michał Kalecki, and Marx, and marshaling extensive empirical data, that, contrary to the usual way of thinking, stagnation or slow growth was the norm for mature, monopolistic (or oligopolistic) economies, while rapid growth was the exception.^[34]

Private accumulation had a strong tendency to weak growth and high levels of excess capacity and unemployment/underemployment, which could, however, be countered in part by such exogenous factors as state spending (military and civilian), epoch-making technological innovations (for example, the automobile in its expansionary period), and the growth of finance. In the 1980s and 1990s Magdoff and Sweezy argued that a financial explosion of long duration was lifting the economy, but this would eventually compound the contradictions of the system, producing ever bigger speculative bubbles, and leading eventually to a resumption of overt stagnation.

The "Great Stagnation"

Productivity growth began to slow down sharply in developed countries after 1973, but there was a revival in the 1990s which still left productivity growth below the peak decades earlier in the 20th century.^[30][35][36] Productivity growth in the U.S. slowed again since the mid-2000s.^[37]

A recent book titled The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick and Will (Eventually) Feel better by Tyler Cowen is one of the latest of several stagnation books written in recent decades. Turning Point by Robert Ayres and The Evolution of Progress by C. Owen Paepke were earlier books that predicted the stagnation.

Further reading

• Ayres, Robert U. (1998). Turning Point: An End to the Growth Paradigm. London: Earthscan Publications. ISBN 978-1-85383-439-4. 
• Rifkin, Jeremy (1995). The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era. Putnam Publishing Group. ISBN 0-87477-779-8. 
• Ayres, Robert (1989). "Technological Transformations and Long Waves" (PDF). 
• Constable, George; Somerville, Bob (2003). A Century of Innovation: Twenty Engineering Achievements That Transformed Our Lives. Washington, DC: Joseph Henry Press. ISBN 0-309-08908-5. 
• Paepke, C. Owen. The Evolution of Progress: The End of Economic Growth and the Beginning of Human Transformation. New York, Toronto: Random House. ISBN 0-679-41582-3. 
• Bloomberg-Secular Stagnation

See also

• The End of Work
• Era of Stagnation
• Agflation
• Biflation
• Business cycle
• De-growth
• Recession
• Stagflation

References