The gloom boom
Secular stagnation has become a vague rallying cry for all sorts of economic pessimists. But the whole debate is basically an unhelpful distraction.
The term was coined in the 1930s and revived by Larry Summers in 2013. The Harvard economist and former U.S. Treasury Secretary used it to tie several decades of disappointing GDP growth in developed countries with ever-looser monetary policy. He argues that real interest rates have not fallen enough to stimulate the investment needed for fast, sustainable growth.
Summers focuses on investments, savings and monetary policy, but other doomsayers have turned secular stagnation into a catchphrase. The concept has been tied to high unemployment, technological stasis, increasing inequality and overall cultural-economic gloom. It has also been applied to slowing but still quite positive GDP growth in developing markets.
Last week International Monetary Fund economists caught the mood. While not using the term, they argued “potential output growth” has fallen in both rich and poor countries.
The first response to such claims, at least for rich countries, should be that secular stagnation might actually be desirable. There is much to be said for stable output which supports a historically unprecedented level of prosperity. Of course, most economists and voters are not impressed with such ethical arguments. They want high GDP growth numbers. Should they be worrying? Probably not.
For one thing, in developed economies, the long climb out of a deep recession may well be just as it appears: a weak and slow recovery. So argues Ben Bernanke, the former chairman of the U.S. Federal Reserve, himself a distinguished economic historian.
In addition, national GDP numbers should be adjusted for a great demographic shift – the slowing growth in the working age population. With fewer additional new families, fewer new houses, roads, schools and cars need to be built to keep living standards steady. In other words, it takes less GDP to provide the same average lifestyle. In Japan, Europe and the United States, slower national growth does not imply slower increases in prosperity.
Inadequate measurements also lead to an exaggeration of the problem. Lifestyle gains from new technologies cannot really be measured. Statisticians try, but they have missed a large portion of the true value of the internet, much of which is provided free to users.
There are also substantial problems with both the leading economic arguments for a pernicious decline in potential output growth.
The first argument concerns technological exhaustion. Robert Gordon of Northwestern University says new developments, for example the internet and biotechnology, are less impressive than older ones such as electricity and clean water. He may be right, but the drop is to be expected. So much of the material world has already been mastered that today’s innovations inevitably change life less than past breakthroughs.
Summers focuses elsewhere, on falling investment in developed economies. He could cite the IMF study, which shows declining ratios of investment to existing capital stock. However, such numbers are misleading. Less investment is needed as population growth slows.
Besides, in developed economies the investments most likely to increase prosperity are increasingly in skills and organisations, not in the traditional plants and equipment. Human investments cannot be measured with any accuracy, so no one knows if they are declining.
In developing nations, growth has slowed, but this is not any sort of secular stagnation. The biggest drop is in China, which has simply become too rich to increase GDP at its previous extraordinary rate. Its population is also ageing. In other poor and middle incomes countries, the fall is basically a reversion from an unsustainable boom to the longstanding and generally disappointing norm.
All these qualifications and doubts limit the concept’s value. Secular stagnation does not even do what Summers wants, justify historically unusual monetary policy. Yes, it provides theoretical support for the claim that negative real interest rates are needed to stimulate demand and investments. History, though, teaches a different lesson. Low policy rates in most of the decade before the 2008 financial crisis did not obviously encourage healthy economic activity, but did aggravate the financial system’s weaknesses.
More widely, the debate is a distraction. Economists could use their time better suggesting remedies for specific problems. The volatile, expensive and often ineffective global financial system is a good place to start. The problem is not inadequate GDP growth and the solution is not even more bizarre monetary policies.