The myth of sec­u­lar stag­na­tion

Financial Nigeria Magazine - - Contents -

Those re­spon­si­ble for man­ag­ing the 2008 re­cov­ery found the idea of sec­u­lar stag­na­tion at­trac­tive, be­cause it ex­plained their fail­ures to achieve a quick, ro­bust re­cov­ery. So, as the econ­omy lan­guished, a con­cept born dur­ing the Great De­pres­sion of the 1930s was re­vived.

In the af­ter­math of the 2008 fi­nan­cial cri­sis, some econ­o­mists ar­gued that the United States, and per­haps the global econ­omy, was suf­fer­ing from “sec­u­lar stag­na­tion,” an idea first con­ceived in the af­ter­math of the Great De­pres­sion. Economies had al­ways re­cov­ered from down­turns. But the Great De­pres­sion had lasted an un­prece­dented length of time. Many be­lieved that the econ­omy re­cov­ered only be­cause of govern­ment spend­ing on World War II, and many feared that with the end of the war, the econ­omy would re­turn to its dol­drums.

Some­thing, it was be­lieved, had hap­pened, such that even with low or zero in­ter­est rates, the econ­omy would lan­guish. For rea­sons now well un­der­stood, these dire pre­dic­tions for­tu­nately turned out to be wrong.

Those re­spon­si­ble for man­ag­ing the 2008 re­cov­ery (the same in­di­vid­u­als bear­ing cul­pa­bil­ity for the un­der­reg­u­la­tion of the econ­omy in its pre-cri­sis days, to whom Pres­i­dent Barack Obama in­ex­pli­ca­bly turned to fix what they had helped break) found the idea of sec­u­lar stag­na­tion at­trac­tive, be­cause it ex­plained their fail­ures to achieve a quick, ro­bust re­cov­ery. So, as the econ­omy lan­guished, the idea was re­vived: Don’t blame us, its pro­mot­ers im­plied, we’re do­ing what we can.

The events of the past year have put the lie to this idea, which never seemed very plau­si­ble. The sud­den in­crease in the US deficit, from around 3% to al­most 6% of GDP, ow­ing to a poorly de­signed re­gres­sive tax bill and a bi­par­ti­san ex­pen­di­ture in­crease, has boosted growth to around 4% and brought un­em­ploy­ment down to a 18year low. These mea­sures may be ill­con­ceived, but they show that with enough fis­cal sup­port, full em­ploy­ment can be at­tained, even as in­ter­est rates rise well above zero.

The Obama ad­min­is­tra­tion made a cru­cial mis­take in 2009 in not pur­su­ing a larger, longer, bet­ter-struc­tured, and more flex­i­ble fis­cal stim­u­lus. Had it done so, the econ­omy’s re­bound would have been stronger, and there would have been no talk of sec­u­lar stag­na­tion. As it was, only those in the top 1% saw their in­comes grow dur­ing the first three years of the so-called re­cov­ery.

Some of us warned at the time that the down­turn was likely to be deep and long, and that what was needed was stronger and dif­fer­ent from what Obama pro­posed. I sus­pect that the main ob­sta­cle was the be­lief that the econ­omy had just ex­pe­ri­enced a lit­tle “bump,” from which it would quickly re­cover. Put the banks in the hospi­tal, give them loving care (in other words, hold none of the bankers ac­count­able or even scold them, but rather boost their morale by invit­ing them to con­sult on the way for­ward), and, most im­por­tant, shower them with money, and soon all would be well.

But the econ­omy’s tra­vails were deeper than this di­ag­no­sis sug­gested. The fall­out from the fi­nan­cial cri­sis was more se­vere, and mas­sive re­dis­tri­bu­tion of in­come and wealth to­ward the top had weak­ened ag­gre­gate de­mand. The econ­omy was ex­pe­ri­enc­ing a tran­si­tion from man­u­fac­tur­ing to ser­vices, and mar­ket economies don’t man­age such transitions well on their own.

What was needed was more than a mas­sive bank bailout. The US needed a

Joseph Stiglitz

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