Is the U.S. economy in a permanent slump? These economists fear it is

The GDP gap
U.S. economic growth has fallen below even the reduced expectations of government economists, according to this chart of Congressional Budget Office projections and measures.
(Summers, CEPR)

The scariest term that economists have been throwing around lately is “secular stagnation.” That sounds technical, but it’s easy enough to explain: it means the economy is in a slump that it may never be able to escape.

It’s one thing to say things will have to get worse before they get better; quite another to say they’ll just keep getting worse. But that’s the fear expressed by former Treasury Secretary and White House chief economist Lawrence Summers in an essay published last week.

Summers observes that growth in the U.S. and Europe--and projections for future growth--have been dismal and getting worse. (See graph above.) “U.S. economic growth has averaged only 2% over the last five years, despite having started from a highly depressed state,” he writes.

What’s worse, he asserts that growth was meager even in the pre-recession period, when it appeared to be quite healthy. But its fundamental sickness was masked by risky financing--"vast erosion of credit standards, the biggest housing bubble in a century, the emergence of substantial budget deficits, and what many criticize as lax monetary and regulatory policies.... It has been close to 20 years since the American economy grew at a healthy pace supported by sustainable finance.”


Summers’ concerns are echoed by a clutch of leading economists--among them Barry Eichengreen of Berkeley and Paul Krugman of Princeton--who contributed to a remarkable volume on secular stagnation published in August by the London-based Centre for Economic Policy Research; the Summers essay appeared as its keynote. The pamphlet is downloadable for free here

Many of them find that the evidence of secular stagnation is inescapable, though they disagree about its causes and therefore its remedies. The causes include a slowdown of technological advances aiding productivity--electricity and the internal combustion engine are behind us; a slowdown in population growth; a rise in income inequality; and a failure to invest in infrastructure. The latter two get most of the blame, with good reason.

As Eichengreen reflects, “Pessimists have been predicting slowing rates of invention and innovation for centuries, and they have been consistently wrong.” Robotics and genomics, he argues, bear as much potential for improving human productivity as the industrial revolution did in the 19th century. 

On the other hand, federal spending “devoted heavily to infrastructure, education and training has been cut to the bone.”


Robert J. Gordon of Northwestern adds that “salaries for CEOs and celebrities march ever upwards,” while for workers in the lower 90% of income, “corporations are working overtime to reduce wages, reduce benefits, convert defined benefit pension plans to defined contribution, and to use Obamacare as an excuse to convert full-time jobs to part-time status.... For the disposable (after-tax) incomes of the bottom 99%, it is hard to find any room for growth at all.”

Not all the economists are as pessimistic: Nicholas Crafts of the University of Warwick observes that the term “secular stagnation” was coined by economist Alvin Hansen in 1938 as a projection of a permanent post-Depression slump, but his fears turned out to be “the delusions of a hypochondriac,” proved wrong by World War II and the postwar boom.

Yet Summers and his fellows struggle to find the light. “It is certainly possible that some major exogenous event will occur,” he writes. “Short of war, it is not obvious what such events might be.”

The greatest reason they find for despair is the failure of government in the U.S. and Europe to respond. Summers writes that improving financial stability, increasing economic output and raising employment require “increased public investment, reductions in structural barriers to private investment ... a commitment to maintain basic social protections so as to maintain spending power, and measures to reduce inequality and so redistribute income toward those with a higher propensity to spend” (that is, middle- and lower-income households).

The U.S. is moving away from, not toward, those policies; if the Republicans take the Senate on Tuesday, the prospects for such a program grow dimmer.

All isn’t lost, but the future is in our hands. Says Eichengreen: “If the U.S. experiences secular stagnation, the condition will be self-inflicted.... It is important not to accept secular stagnation, but instead to take steps to avoid it.”

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