How best to fight sec­u­lar stag­na­tion

China Daily (USA) - - VIEW -

Much of the world, es­pe­cially the ad­vanced economies, has been mired in a pat­tern of slow and de­clin­ing GDP growth in re­cent years, caus­ing many to won­der whether this is be­com­ing a semi-per­ma­nent con­di­tion— so-called “sec­u­lar stag­na­tion”. The an­swer is prob­a­bly yes, but has lim­ited util­ity. There are, after all, dif­fer­ent types of forces that could be sup­press­ing growth, not all of which are beyond our con­trol.

Many of the growth-de­stroy­ing head­winds that we cur­rently face would be dif­fi­cult, if not im­pos­si­ble, to counter in the near term without en­dan­ger­ing fu­ture growth and sta­bil­ity. The re­sult of th­ese per­sis­tent con­di­tions can be called “sec­u­lar stag­na­tion one” (SS1).

The first in­di­ca­tion that we are ex­pe­ri­enc­ing SS1 re­lates to tech­nol­ogy. If we are, as the econ­o­mist Robert Gordon ar­gues, ex­pe­ri­enc­ing a slow­down in pro­duc­tiv­i­tyen­hanc­ing tech­no­log­i­cal in­no­va­tion, long-term po­ten­tial growth would be con­strained.

A sec­ond con­di­tion sup­port­ing SS1 is rooted in the im­pact of height­ened un­cer­tainty— about growth, job se­cu­rity, poli­cies and reg­u­la­tions, and the many de­vel­op­ments that could af­fect any of those fac­tors— on in­vest­ment and con­sump­tion.

With fu­ture de­mand far from guar­an­teed, pri­vate in­vest­ment has been de­clin­ing in many coun­tries, in­clud­ing, most re­cently, China. The same goes for house­hold con­sump­tion, par­tic­u­larly in the ad­vanced economies, where a larger share of con­sump­tion is op­tional (for ex­am­ple, re­plac­ing con­sumer durables, trav­el­ing and eat­ing out at restau­rants). And it seems that a re­ver­sal in th­ese trends will not ar­rive any­time soon.

Debt is the third in­di­ca­tor of SS1. House­holds, cor­po­ra­tions, fi­nan­cial in­sti­tu­tions, and gov­ern­ments are all fac­ing bal­ance-sheet con­straints, which it seems plau­si­ble to as­sume, are hold­ing back ex­pen­di­ture and in­vest­ment, el­e­vat­ing sav­ings, and con­tribut­ing to a broadly de­fla­tion­ary en­vi­ron­ment.

Ac­tions aimed at sup­port­ing delever­ag­ing and bal­ance-sheet re­pair— such as rec­og­niz­ing losses, writ­ing down as­sets and re­cap­i­tal­iz­ing banks— carry longert­erm ben­e­fits but short-term costs. In­deed, bal­ance-sheet re­pair takes time, es­pe­cially in the house­hold sec­tor, and pro­duces an un­avoid­able drag on growth.

The pic­ture is some­what bleak. But there’s a more pre­cise ques­tion: Is there a set of pol­icy re­sponses that could, over time, in­crease the level and qual­ity of growth? The an­swer again seems to be yes. This sug­gests we are also fac­ing an­other type of sec­u­lar stag­na­tion: “sec­u­lar stag­na­tion two” (SS2) that is dic­tated by our un­will­ing­ness or in­abil­ity to im­ple­ment the right pol­icy mix.

A key ele­ment of that pol­icy mix would fo­cus on tack­ling ris­ing in­equal­ity. While the forces fuel­ing this trend— es­pe­cially glob­al­iza­tion and progress in dig­i­tal tech­nol­ogy— will be dif­fi­cult to counter fully, their ad­verse ef­fects can be mit­i­gated through re­dis­tri­bu­tion via the tax and so­cial-se­cu­rity sys­tems.

More­over, mon­e­tary pol­icy, which has been shoul­der­ing much of the bur­den of re­cov­ery since the 2008 global eco­nomic cri­sis, must be rethought, be­cause years of ul­tra-low in­ter­est rates and mas­sive quan­ti­ta­tive eas­ing have not in­creased ag­gre­gate de­mand suf­fi­ciently or ad­e­quately re­duced de­fla­tion­ary forces.

But rais­ing in­ter­est rates uni­lat­er­ally car­ries se­ri­ous risks, be­cause in a de­mand-con­strained en­vi­ron­ment, higher in­ter­est rates at­tract cap­i­tal in­flows, thereby driv­ing up the ex­change rate and un­der­min­ing growth in the trad­able part of the econ­omy. Given this, ad­vanced-coun­tries’ pol­i­cy­mak­ers should con­sider im­pos­ing some con­trols on their cap­i­tal ac­counts (much as suc­cess­ful emerg­ing economies do).

A third pri­or­ity should be to strengthen fis­cal re­sponses, es­pe­cially with re­spect to pub­lic-sec­tor in­vest­ment. Europe, in par­tic­u­lar, is pay­ing a heavy price for un­der­us­ing its fis­cal ca­pac­ity— a de­ci­sion that has been driven by the po­lit­i­cal un­pop­u­lar­ity of debt and fis­cal trans­fers.

There are more ar­eas where coun­tries should con­sider re­forms, in­clud­ing tax pol­icy, in­ef­fi­cient or im­proper use of pub­lic funds, im­ped­i­ments to struc­tural change in prod­uct and fac­tor mar­kets, and mis­matches be­tween the reach of global fi­nan­cial in­sti­tu­tions and the ca­pac­ity of sovereign bal­ance sheets to in­ter­vene in case of fi­nan­cial dis­tress.

SS1 will make ad­dress­ing SS2 much more dif­fi­cult. But that is no rea­son to delay ac­tion in the ar­eas where pol­icy can make a dif­fer­ence. Just as our past pol­icy choices helped gen­er­ate the SS1 we face today, fail­ure to im­ple­ment poli­cies aimed at tack­ling SS2 could cre­ate a much more in­tractable and po­ten­tially un­sta­ble sit­u­a­tion to­mor­row. The au­thor, win­ner of the No­bel Prize for eco­nom­ics, is a pro­fes­sor of Eco­nom­ics at New York Univer­sity’s Stern School of Busi­ness and a se­nior fel­low at theHoover In­sti­tu­tion. Project Syn­di­cate

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