The specter of secular stagnation
But there are reasons to suggest that the preoccupation with secular stagnation is overly pessimistic - By Livio Di Matteo
THUNDER BAY - The chronic low growth and slow recoveries of world economies since 2009 has re-ignited speculation that we are in the midst of a period of exceptionally low economic growth or what has been termed 'secular stagnation,' particularly in Europe and America where average annual growth rates in real GDP have been on the decline since the 1960s.
Even Canada is marked by this phenomenon. The average annual rate of real per capita GDP growth in the 1960s was just under 4 per cent and this fell below 3 per cent in the 1970s and then below 2 per cent after the 1980s where it has remained since.
In the 1970s and 1980s, this poor economic performance was generally referred to as a productivity decline and was attributed to the cost effects of the oil price shock, debts and deficits, trade restrictions and uncompetitive tax structures. Secular stagnation has become a fashionable term to describe current poor economic performance, but the term was first used during the Great Depression by economist Alvin Hansen. However, the concept extends back to the 19th century classical economists.
Along with his theory of population, Malthus was also known for his ideas on the possibility of long-term under-consumption. The classical economists argued that any imbalances between demand and supply of goods in an economy were temporary, as the self-correcting market mechanism would eliminate them. Malthus argued that oversupply or "general gluts" could persist as a result of over saving and excess capacity. Indeed, John Maynard Keynes built on this type of thinking and suggested government economic intervention that boosted spending to counter economic downturns.
The more dire proponents of secular stagnation have argued that we have reached the end of growth. Economist Robert Gordon argues that we are reverting to pre-18th century growth rates. The past 250 years were unique in human history as the industrial revolution harnessed steam power, hydro-electricity, diesel, gasoline and the atom to generate a vast pantheon of technological innovations that boosted growth and the standard of living. Fundamental breakthroughs since 1970 in energy production and productivity have declined, growth has faltered and the affluent are taking steps to protect their share of the pie, resulting in greater inequality.
Unfortunately, there is not an agreement on what secular stagnation actually is - even among economists. Secular stagnation occurs if the long run growth of an economy is below its potential rather than just a slower growth rate. Nevertheless, high unemployment rates around the world combined with low interest rates suggest that there indeed may be a glut of savings sloshing around the world, generating under consumption.
Yet, there are reasons to suggest that the preoccupation with secular stagnation is overly pessimistic - especially with respect to perceptions of technological slowdown. Technological change was the biggest contributor to the surge in per capita income and standards of living over the last two centuries and there is no effective way to forecast future breakthroughs. Moreover, technological change has always been accompanied by significant economic dislocation.
Information technology, biotech and new material manufacture seem to be proceeding by leaps and bounds and yet economic growth is stagnant. It may be that current statistical techniques that evolved in response to measuring a manufacturing-based economy are not capturing their full impact. Or, it could be that their effect the economy has yet to fully occur. For example, television was invented in the 1920s and it was not until the 1950s that it began to make significant inroads into broader consumer culture and spending.
The current situation may be more rooted in demographics. Populations are aging, particularly in developed countries. The low interest rates being observed could simply be the result of the increased pool of savings from an aging population. The long-term cure for slow economic may lie in the developing countries where rapid population growth and economic development combined with new technology will create new markets and demand to counter-balance the aging populations of the old world.
What we are observing is not necessarily secular stagnation but the transition to a world of more rapid technological change combined with the oldest demographic structure in human history.
Livio Di Matteo is Professor of Economics at Lakehead University.