Economic stagnation is a prolonged period of slow
economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
(traditionally measured in terms of the
GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
growth), usually accompanied by high unemployment. Under some definitions, "slow" means significantly slower than potential growth as estimated by
macroeconomists, even though the growth rate may be nominally higher than in other countries not experiencing economic stagnation.
Secular stagnation theory
The term "secular stagnation" was originally coined by
Alvin Hansen
Alvin Harvey Hansen (August 23, 1887 – June 6, 1975) was an American economist who taught at the University of Minnesota and was later a chair professor of economics at Harvard University. Often referred to as "the American Keynes", he was a w ...
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".
Warnings similar to secular stagnation theory have been issued after all deep recessions, but they usually turned out to be wrong because they underestimated the potential of existing technologies.
[Pagano and Sbracia (2014]
"The secular stagnation hypothesis: a review of the debate and some insights."
Bank of Italy ''Questioni di Economia e Finanza'' occasional paper series number QEF-231.
Secular stagnation refers to "a condition of negligible or no economic growth in a market-based economy". 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.
Alan Sweezy described the difference:
But, whereas business-cycle theory treats depression as a temporary, though recurring, phenomenon, the theory of secular stagnation brings out the possibility that depression may become the normal condition of the economy.[
]
According to Alan Sweezy "the idea of secular stagnation runs through much of Keynes ''General Theory''".
Stagnation in the United States
Historical periods of stagnation in the United States
* The years following the
Panic of 1873
The Panic of 1873 was a financial crisis that triggered an economic depression in Europe and North America that lasted from 1873 to 1877 or 1879 in France and in Britain. In Britain, the Panic started two decades of stagnation known as the ...
, known as the
Long Depression
The Long Depression was a worldwide price and economic recession, beginning in 1873 and running either through March 1879, or 1896, depending on the metrics used. It was most severe in Europe and the United States, which had been experiencing st ...
, 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
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation ...
. According to
David Ames Wells
David Ames Wells (June 17, 1828 – November 5, 1898) was an American engineer, textbook author, economist and advocate of low tariffs.
Born in Springfield, Massachusetts, he graduated from Williams College in 1847. In 1848 he joined the staff ...
(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
Telegraphy is the long-distance transmission of messages where the sender uses symbolic codes, known to the recipient, rather than a physical exchange of an object bearing the message. Thus flag semaphore is a method of telegraphy, whereas p ...
system. Because there was so much economic growth overall, how much of this period was stagnation remains controversial. See:
Long Depression
The Long Depression was a worldwide price and economic recession, beginning in 1873 and running either through March 1879, or 1896, depending on the metrics used. It was most severe in Europe and the United States, which had been experiencing st ...
* The
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
of the 1930s and the rest of the period lasting until
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
. ''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 causes of the Great Depression in the early 20th century in the United States have been extensively discussed by economists and remain a matter of active debate. They are part of the larger debate about economic crises and recessions. The sp ...
.
19th century
The U.S. economy of the early 19th century was primarily agricultural and suffered from labor shortages.
Capital was so scarce before the
Civil War
A civil war or intrastate war is a war between organized groups within the same state (or country).
The aim of one side may be to take control of the country or a region, to achieve independence for a region, or to change government policies ...
that private investors supplied only a fraction of the money to build railroads, despite the large economic advantage railroads offered.
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 the last two decades of the 19th century.
[
]
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.
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.
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.
End of stagnation in the U.S. after 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.
[
]
The depression years were the period of the highest
total factor productivity
In economics, total-factor productivity (TFP), also called multi-factor productivity, is usually measured as the ratio of aggregate output (e.g., GDP) to aggregate inputs. Under some simplifying assumptions about the production technology, growt ...
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.
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 had stopped producing automobiles and other civilian goods to convert 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
A synthetic rubber is an artificial elastomer. They are polymers synthesized from petroleum byproducts. About 32-million metric tons of rubbers are produced annually in the United States, and of that amount two thirds are synthetic. Synthetic rubbe ...
plants. The U.S. government also built
ammonia
Ammonia is an inorganic compound of nitrogen and hydrogen with the formula . A stable binary hydride, and the simplest pnictogen hydride, ammonia is a colourless gas with a distinct pungent smell. Biologically, it is a common nitrogenous was ...
plants, aluminum smelters,
aviation fuel
Aviation fuels are petroleum-based fuels, or petroleum and synthetic fuel blends, used to power aircraft. They have more stringent requirements than fuels used for ground use, such as heating and road transport, and contain additives to enhanc ...
refineries and aircraft engine factories during the war.
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 freed up hundreds of thousands of
machine tool
A machine tool is a machine for handling or machining metal or other rigid materials, usually by cutting, boring, grinding, shearing, or other forms of deformations. Machine tools employ some sort of tool that does the cutting or shaping. All ...
s, which were made available for other industries. They were needed in the rapidly growing aircraft manufacturing industry.
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.
High-yielding crops and chemical fertilizers dramatically increased
crop yield
In agriculture, the yield is a measurement of the amount of a crop grown, or product such as wool, meat or milk produced, per unit area of land. The seed ratio is another way of calculating yields.
Innovations, such as the use of fertilizer, the c ...
s and greatly lowered the cost of food, giving consumers more
discretionary income
Disposable income is total personal income minus current income taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major ...
. Railroad locomotives switched from steam to
diesel
Diesel may refer to:
* Diesel engine, an internal combustion engine where ignition is caused by compression
* Diesel fuel, a liquid fuel used in diesel engines
* Diesel locomotive, a railway locomotive in which the prime mover is a diesel engin ...
power, with a large increase in
fuel efficiency. Most importantly, cheap food essentially eliminated
malnutrition
Malnutrition occurs when an organism gets too few or too many nutrients, resulting in health problems. Specifically, it is "a deficiency, excess, or imbalance of energy, protein and other nutrients" which adversely affects the body's tissues a ...
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 a slower rate than in the early decades. More people purchased washing machines, dryers,
refrigerators and other appliances.
Air conditioning
Air conditioning, often abbreviated as A/C or AC, is the process of removing heat from an enclosed space to achieve a more comfortable interior environment (sometimes referred to as 'comfort cooling') and in some cases also strictly controlling ...
became increasingly prevalent in households and businesses. See:
Diffusion of innovations#Diffusion data
*Infrastructures: The highway system continued to expand.
Construction of the
interstate highway system
The Dwight D. Eisenhower National System of Interstate and Defense Highways, commonly known as the Interstate Highway System, is a network of controlled-access highways that forms part of the National Highway System in the United States. Th ...
started in the late 1950s. The pipeline network continued to expand. Railroad track mileage continued its decline.
*Better roads and increased investment in the distribution system of trucks, warehouses and
material-handling equipment Material handling equipment (MHE) is mechanical equipment used for the movement, storage, control, and protection of materials, goods and products throughout the process of manufacturing, distribution, consumption, and disposal. The different types ...
, such as
forklift trucks
A forklift (also called lift truck, jitney, hi-lo, fork truck, fork hoist, and forklift truck) is a powered industrial truck used to lift and move materials over short distances. The forklift was developed in the early 20th century by various c ...
, 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.
The
workweek
The weekdays and weekend are the complementary parts of the week devoted to labour and rest, respectively. The legal weekdays (British English), or workweek (American English), is the part of the seven-day week devoted to working. In most of t ...
never returned to the 48 hours or more that was typical before the Great Depression.
Stagflation
The period following the
1973 oil crisis
The 1973 oil crisis or first oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries (OAPEC), led by Saudi Arabia, proclaimed an oil embargo. The embargo was targeted at nations that had supp ...
was characterized by
stagflation
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since action ...
, 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.
This enabled a recovery in GDP growth rates; however, debt in the period following 1982 grew at a much faster rate than GDP.
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. 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.
Productivity slowdown
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.
Productivity growth in the U.S. slowed again since the mid-2000s.
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
Tyler Cowen (; born January 21, 1962) is an American economist, columnist and blogger. He is a professor at George Mason University, where he holds the Holbert L. Harris chair in the economics department. He hosts the economics blog ''Marginal R ...
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.
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
Harry Samuel Magdoff (August 21, 1913 – January 1, 2006) was a prominent American socialist commentator. He held several administrative positions in government during the presidency of Franklin D. Roosevelt and later became co-editor of the M ...
and
Paul Sweezy
Paul Marlor Sweezy (April 10, 1910 – February 27, 2004) was a Marxist economist, political activist, publisher, and founding editor of the long-running magazine ''Monthly Review''. He is best remembered for his contributions to economic theory ...
, 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
The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs agencies included the Civilian Cons ...
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
Michał Kalecki (; 22 June 1899 – 18 April 1970) was a Polish Marxian economist. Over the course of his life, Kalecki worked at the London School of Economics, University of Cambridge, University of Oxford and Warsaw School of Economics ...
, 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.
[
]
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.
Post-2008 period
![U](https://upload.wikimedia.org/wikipedia/commons/4/47/U.S._GDP_-_Real_vs._Potential_Per_CBO_Forecasts_of_2007_and_2016.png)
Secular stagnation was dusted off by
Hans-Werner Sinn
Hans-Werner Sinn (born 7 March 1948) is a German economist who served as President of the Ifo Institute for Economic Research from 1999 to 2016. He currently serves on the German economy ministry’s advisory council. He is Professor Emeritus ...
in a 2009 article dismissing the threat of inflation, and became popular again when
Larry Summers
Lawrence Henry Summers (born November 30, 1954) is an American economist who served as the 71st United States secretary of the treasury from 1999 to 2001 and as director of the National Economic Council from 2009 to 2010. He also served as pres ...
invoked the term and concept during a 2013 speech at the IMF.
However, ''
The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Econo ...
'' criticizes secular stagnation as "a baggy concept, arguably too capacious for its own good".
Warnings similar to secular stagnation theory have been issued after all deep recessions, but they all turned out to be wrong because they underestimated the potential of existing technologies.
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...
, 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." At its root is "the problem of building consumer demand at a time when people are less motivated to spend".
One theory is that the boost in growth by the internet and technological advancement in computers of the
new economy
The New Economy refers to the ongoing development of the American economic system. It evolved from the notions of the classical economy via the transition from a manufacturing-based economy to a service-based economy, and has been driven by ...
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
An assembly line is a manufacturing process (often called a ''progressive assembly'') in which parts (usually interchangeable parts) are added as the semi-finished assembly moves from workstation to workstation where the parts are added in se ...
production method of
Fordism
Fordism is a manufacturing technology that serves as the basis of modern economic and social systems in industrialized, standardized mass production and mass consumption. The concept is named after Henry Ford. It is used in social, economic, and ...
. The general form of the argument has been the subject of papers by Robert J. Gordon. It has also been written about by Owen. C. Paepke and Tyler Cowen.
Secular stagnation has also been linked to the rise of the digital economy.
Carl Benedikt Frey
Carl Benedikt Frey is a Swedish-German economist and economic historian. He is Oxford Martin Citi Fellow at Oxford University where he directs the programme on the Future of Work at the Oxford Martin School.
Career
After studying economics, his ...
, for example, has suggested that digital technologies are much less capital-absorbing, creating only little new investment demand relative to other revolutionary technologies.
Another is that the damage done by the
Great Recession
The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
was so long-lasting and permanent, so many workers will never get jobs again, that we really can't recover.
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.
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.
Episodes
Japan: 1991–present
Japan has been suffering economic or secular stagnation for most of the period since the early 1990s. Economists, such as
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...
, attribute the stagnation to a
liquidity trap (a situation in which monetary policy is unable to lower nominal interest rates because these are close to zero) exacerbated by demographics factors.
World since 2008
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: "
ere 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.
Larry Summers
Lawrence Henry Summers (born November 30, 1954) is an American economist who served as the 71st United States secretary of the treasury from 1999 to 2001 and as director of the National Economic Council from 2009 to 2010. He also served as pres ...
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
.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."
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".
The
German Institute for Economic Research
The German Institute for Economic Research (german: Deutsches Institut für Wirtschaftsforschung), or, more commonly DIWBerlin, is a economic research institute in Germany, involved in basic research and policy advice. It is a non-profit acad ...
sees a connection between secular stagnation and the regime of low interest rates (
Zero interest-rate policy
Zero interest-rate policy (ZIRP) is a macroeconomic concept describing conditions with a very low nominal interest rate, such as those in contemporary Japan and in the United States from December 2008 through December 2015. ZIRP is considere ...
,
negative interest rates
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
).
German Institute for Economic Research
The German Institute for Economic Research (german: Deutsches Institut für Wirtschaftsforschung), or, more commonly DIWBerlin, is a economic research institute in Germany, involved in basic research and policy advice. It is a non-profit acad ...
, January 30th, 2017
"The Natural Rate of Interest and Secular Stagnation"
/ref>
See also
* Brezhnev stagnation
The "Era of Stagnation" (russian: Пери́од засто́я, Períod zastóya, or ) is a term coined by Mikhail Gorbachev in order to describe the negative way in which he viewed the economic, political, and social policies of the Soviet Uni ...
*Lost Decade (Japan)
The was a period of economic stagnation in Japan caused by the asset price bubble's collapse in late 1991. The term originally referred to the 1990s, but the 2000s (Lost 20 Years, 失われた20年) and the 2010s (Lost 30 Years, 失われ ...
*''The End of Work
''The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era'' is a non-fiction book by American economist Jeremy Rifkin, published in 1995 by Putnam Publishing Group.
Synopsis
In 1995, Rifkin contended that worl ...
''
*Business cycle
Business cycles are intervals of Economic expansion, expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are ...
* Degrowth
*Recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
References
Further reading
*
*
*
*
*
Bloomberg-Secular Stagnation
{{Authority control
Unemployment
Economic growth
Market trends
Business cycle