When we think of economic downturns, we generally think of them as flat up or down. We are all familiar with terms like recession. That is what we are now very slowly getting out of. We know, from our parents and grandparents, what the utter devastation of a depression is. We know, from our most recent experience, the Great Recession, what that feels like. Some months back, a term was added to the economic conversation: secular stagnation. Though the concept isn’t a new one, it has recently been reintroduced.
Secular stagnation isn’t as intuitive as any of the terms I list above. It also isn’t a flat up or down kind of feeling. Imagine a 3-D graphic that describes movement: it’s got depth and is more akin to a creep, with sudden jerks, followed by more creeping, more jerks, going in widening concentric circles, until that cycle is broken, either with a period of growth, or another sudden slump. The theory is that each crisis is deeper, longer, and more severe than its predecessors.
In order for us to better understand the secular stagnation that now underlies our economy, we need to go back a ways and compare successive downturns and the rebounds that followed them.
Secular stagnation is a condition of negligible or no economic growth in a market-based economy. When per capita income stays at relatively high levels, the percentage of savings is likely to start exceeding the percentage of longer-term investments in, for example, infrastructure and education, that are necessary to sustain future economic growth. The absence of such investments (and consequently of the economic growth) leads to declining levels of per capita income (and consequently of per capita savings). With the reduced percentage savings rate converging with the reduced investment rate, economic growth comes to a standstill – ie, it stagnates. In a free economy, consumers anticipating secular stagnation, might transfer their savings to more attractive-looking foreign countries. This would lead to a devaluation of their domestic currency, which would potentially boost their exports, assuming that the country did have goods or services that could be exported.
Persistent low growth, especially in Europe, has been attributed by some to secular stagnation initiated by stronger European economies, such as Germany, in the past few years.
Professor Paul Krugman illustrates here what stagnation looks like with three charts:
Secular stagnation is the proposition that periods like the last five-plus years, when even zero policy interest rates aren’t enough to restore full employment, are going to be much more common in the future than in the past — that the liquidity trap is becoming the new normal. Why might we think that?
One answer is simply that this episode has gone on for a long time. Even if the Fed raises rates next year, which is far from certain, at that point we will have spent 7 years — roughly a quarter of the time since we entered a low-inflation era in the 1980s — at the zero lower bound. That’s vastly more than the 5 percent or less probability Fed economists used to consider reasonable for such events.
Beyond that, it does look as if it was getting steadily harder to get monetary traction even before the 2008 crisis. Here’s the Fed funds rate minus core inflation, averaged over business cycles (peak to peak; I treat the double-dip recession of the early 80s as one cycle):
And this was true even though there was clearly unsustainable debt growth, especially during the Bush-era cycle:
The point is that even if deleveraging comes to an end, even stabilizing household debt relative to GDP would involve spending almost 4 percent of GDP less than during the 2001-7 business cycle.
Finally, the growth of potential output is very likely to be much slower in the future than in the past, if only because of demography:
Click here to be taken to this blog post on nytimes.com.
All of the present conditions that allow for secular stagnation to set in have been in place since 2010, especially since the cessation of Keynesian economics as the GOP took over the House of Representatives. Whether you are in your late forties trying to resume a career interrupted by Great Recession layoffs, or are starting out after college, you are affected by secular stagnation. For middle-aged and older workers, by now, the chances of resuming a career are almost nil. For young workers, especially those who graduated from college as the Great Recession began, starting a career in their field of training may be a futile and fruitless pursuit, without an economic policy that promotes investment and growth. For older workers, first and foremost, the most urgent need is for legislative intervention to prevent anti-99er discrimination and ageism. Incentives to hire and retain experienced workers would also be a great step.
This round of discussion of secular stagnation was sparked by this speech by Lawrence Summers at the International Monetary Fund, in November 2013.
Secular stagnation: Facts, causes, and cures – a Vox eBook
Six years after the Crisis and the recovery is still anaemic despite years of zero interest rates. Is ‘secular stagnation’ to blame? This column introduces an eBook that gathers the views of leading economists including Summers, Krugman, Gordon, Blanchard, Koo, Eichengreen, Caballero, Glaeser, and a dozen others. It is too early to tell whether secular stagnation is really secular, but if it is, current policy tools will be obsolete. Policymakers should start thinking about potential solutions.
Economic growth is still anaemic despite years of zero interest rates.
- Is ‘secular stagnation’ to blame? What does secular stagnation really mean? And if it’s for real, what must be done?
Click here to download the eBook at VoxEU.org.