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Secular Stagnation

We thought the crisis was fading out. We thought we had suppressed a financial crisis, a global economic crisis, a debt crisis and a Eurozone crisis. After all, economic growth rates were starting to increase, world trade starting to recover and unemployment rates starting to fall. But November 2013 Lawrence Summers made it very clear that we were too optimistic. Summers, former Secretary of Treasury under the Clinton administration and Director of the National Economic Council under the Obama administration, held a famous speech in Washington DC at the 14th Annual IMF Research Conference. Some considered it in the light of Summers’ failure becoming the successor of Ben Bernanke as chairman of the Fed. But the speech was much more than that. Summers’ speech was a very clear statement that one cannot count on economic regularities to conclude that the crisis will ebb away automatically after some time. Things might be very different.

The economy could turn in a state of secular stagnation

Summers’ speech was about the effectiveness or ineffectiveness of monetary policies. That the economy turned into depression in 2008 was not a unique event. The drop in output levels and the rise in unemployment rates were in a sense unique as they were larger than experienced in earlier crises. But Summers’ point was a different one. He argued that monetary policies had turned so expansionary that interest rates had hit the zero lower bound. At this bound, interest rates cannot be lowered any further, reducing the effectiveness of monetary expansionary policies. His judgement is confirmed by the move in industrialized countries towards quantitative easing, a new form of monetary policies. The consequence of this reduced effectiveness of monetary policies is that the government should employ other types of policies in order to start the economy growing again. And that the economy could turn in a state of secular stagnation if more adverse economic shocks would follow and governments would fail to reinvent their economic policies.

Growth of consumption per capita could structurally fall below 0.5 percent per year

The scenario of more adverse economic shocks hitting the world economy echoes an analysis that Robert Gordon made one year earlier. Gordon claimed that we should not expect the same numbers of economic growth as in the past decades. He claimed that we should not expect a new industrial revolution; there was not that much left to be invented. He claimed instead that the world economy was facing strong headwinds in the decennia to come. Changes in demography (the ageing of the population), education, inequality, globalization, energy and the overhang of debt would all contribute to lower rates of economic growth for a long period of time. According to Gordon, growth of consumption per capita could structurally fall below 0.5 percent per year for the majority of the population.

Robotics is now starting to change dramatically our patterns of consumption, production, work and leisure

Now, it is important to note that these are possibilities; things could turn different. Indeed, today would not be the first time in history that future economic scenarios are formulated that later on turn out to have been too pessimistic. Moreover, there are more and more signals that robotics is now starting to change dramatically our patterns of consumption, production, work and leisure. Many consider it to be a new digital revolution that may significantly upgrade the levels of productivity. One could add to this that in today’s world economy that is so heavily globalized, technological innovations may spread much faster over the globe than they did in the past. In other words, globalization could act as a multiplier, aggravating the economic changes that the technologically leading countries in the world will bring about.

In addition, there are more factors that may speed up the pace of technological change. Population ageing is a well-known example. In an aged society in which labour is scarce, wage rates will be high, inducing entrepreneurs to seek for innovations that will economize on the labour factor. Increasing longevity is another factor. This will contribute to a large and increasing market for technological innovations that increase the quality of life for people that are in some way physically handicapped. Climate change may be an even more important factor. Increased attention for the world climate and the perhaps irreversible changes that may occur in it if our consumption and production habits fail to change calls for a wave of technological innovations.

The end of a perhaps exceptionally long period of a quite standard economic crisis

In the end, the current episode may turn out not to have been the beginning of a period of secular stagnation, but rather the end of a perhaps exceptionally long period of a quite standard economic crisis. This is the view held by Kenneth Rogoff, co-author of the ironically titled book ‘This time is different’. Rogoff has pointed out several times that previous financial crises, in different time episodes and in different parts of the world, feature a large number of similarities. These similarities pertain to the build-up of a crisis, its course (in general a very sudden drop in some financial economic variables) and its follow up, as regards the private and the public sector of the economy. Particularly, the behaviour of housing prices, equity prices, unemployment, output and the public debt is not too far away from what earlier crises have showed. He argues that forecasters were generally too optimistic that the recovery from the crisis would be V-shaped. That the recovery was more U-shaped could have been derived from the experience with earlier financial economic crises in the world. Hence, Rogoff warns not to conclude too fast that this time is different and to take seriously the scenario in which economic growth will return to what can be considered normal in a historical sense.

Unfortunately, Rogoff also admits that different crises all have their unique features as well. Hence, despite their similarities, historical experience cannot be used to come up with detailed forecasts of future economic developments. Eventually, it is time that will tell whether secular stagnation was a brilliant new insight or more of a red herring.


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