Today’s Headlines: The Specter of “Secular Stagnation”

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Today’s Headlines: The Specter of “Secular Stagnation”
August 19, 2020

Could Economic Stagnation be Permanent?

Stanley Fischer, Vice Chairman of the Federal Reserve, raised some eyebrows in a recent speech when he suggested economist and former Secretary of the Treasury Larry Summers might be right in his view that the US could be entering a period of “secular stagnation” – a permanent period of slow or flat growth.

An economy in secular stagnation requires effectively negative interest rates (rates that are lower than inflation) to stimulate economic growth and reach “full” employment. However, if inflation is already low, central banks can’t make interest rates low enough to spur investment, even with literal negative rates as the European Central Bank produced recently.

The Fed’s supplementary approach has been to pump money into the system through buying assets. This has helped the stock market out nicely and given banks plenty of reserves, but it has not translated into investment (US companies are hoarding over $1 trillion in cash today), stronger job growth, and wage increases that will spur demand.

Some influential economists are wondering if Summers is right, and if so, what to do about it.

A Variety of Diagnoses

Some dismiss this concept outright. David Beckworth, in the Washington Post, uses multiple graphs to argue that our current woes are merely a prolonged business cycle, similar to that after the Great Depression (which took twice as long as our current recovery time). It is worth noting that the term “secular stagnation” was first used in 1938 to describe the post-Depression economy.

CNBC’s Larry Kudlow, in an article at Real Clear Politics, blames a series of bad fiscal policies throughout the Bush and Obama years – everything from bailouts to Dodd-Frank to Obamacare, claiming that Keynesian cheap money and government spending/debt policies have been discredited as an economic booster.

Summers argues in a recent Washington Post article that a large increase in government spending is both needed (for vital infrastructure) and warranted (due to historically low borrowing costs). The former Director of the White House United States National Economic Council for President Barack Obama further suggests that altering policies to raise demand through increasing private spending is required – although his example of regulation to require rapid replacement of coal-fired power plants would make free marketers wince.

Who’s right? We think all of them… in some ways.

Beckworth suggests that the situation will remedy itself but in essence is taking it on faith that the business cycle will turn because it always does.

Kudlow has a point with policies that have focused too much on government control and micromanagement of the economy. However, merely cutting taxes and removing regulations does not miraculously revive the overall economy, and government spending can play a reasonable stimulus role if applied correctly.

Summers is right in that government spending on infrastructure is a wise use of money during times of cheap money, but the effects on the debt cannot be ignored. The debt-GDP ratio now is over 100% and approaching the all-time high of 121.7% in 1946 – after the “Keynesian stimulus” of World War II had taken effect.

It appears we have accumulated this debt towards unproductive ends, and we are not convinced that the current government will direct new debt toward more productive purposes.

The Takeaway

We don’t have the answers to solve the economic problems of the US, but we are not convinced that the current flat growth is the new normal. Secular stagnation seems to be a philosophy that “because our favorite controls aren’t working, this must be a permanent new condition.”

It seems more likely that, as we have been consistently predicting, we’re in a period of slow growth that will eventually spark the economy and create more jobs. We still have significant economic slack to take up first.

Consider that many of the current wealth creators – Google, Facebook, etc., – require less capital and fewer employees than smokestack industries to create disproportionate wealth. For full economic recovery with sufficient employment, these kinds of information-based enterprises must spur further innovations and support industries that require significant hiring, and the training of our workforce must match the needs of these industries.

That should happen, but it will take time – and government policies that attempt to accelerate the process are likely to do just as much harm as good.

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