Larry Summers is talking about it. So is Paul Krugman. So are other economists. And everyone else is talking about the folks who are talking about it.
The “it” is secular stagnation, which seems to be the New New Thing or the new new normal: a way to describe the persistent state of subpar economic growth plaguing developed nations. Think of it as Japan’s lost decade gone global.
The diagnosis? Too much saving and a lack of investment opportunities, according to Harvard University’s Summers. And with the funds rate close to zero, the Federal Reserve can’t deliver the negative real interest rates he says the economy needs unless it creates higher inflation.
So what do Summers and Krugman advocate for the secular malaise? Why, a cyclical solution: government spending on infrastructure. They want the kinds of things Keynesians typically promote to stabilize the economy during a recession to become a permanent part of the fiscal architecture.
A bit of history is in order. Summers didn’t coin the phrase “secular stagnation,” which has been gaining traction since he used it in his presentation at the International Monetary Fund Research Conference last month. It traces back to Harvard economist Alvin Hansen, who adopted it in the 1930s to explain why the Great Depression lasted so long. Hansen said that all the ingredients for economic growth — technological innovation, population growth, territorial expansion — had dissipated. The solution was constant deficit spending by the government.
The post-World War II boom discredited Hansen’s theories. History may do the same for Summers’.
“Secular stagnation sounds cool and profound,” says economist Arnold Kling of askblog. “It’s appealing after five years of slow growth and high unemployment, but no one has defined it or written a peer-reviewed paper on the topic. No one knows what it means.”
Even Summers seems to be backing away from his advice from 2008 that fiscal stimulus should be “timely, targeted and temporary.”
“Now he’s saying we need a permanent stimulus,” Kling says. “He has to rationalize why the economy is doing what it’s doing based on what he recommended.”
Real secular problems need real secular solutions, not some Keynesian pump-priming dressed up as a long-term remedy. The focus should be on potential growth, or the supply side of the economy.
Fed policymakers are concerned that slower productivity growth — 1 percent over the last four years, less than half the 30-year average — is becoming the trend. The economy’s potential growth is circumscribed by the rate of increase in the labor force and in productivity. Labor-force growth has averaged 1.5 percent since 1950, boosted by a 2.6 percent increase in the 1970s with an influx of working women and baby boomers. The current growth rate is well below 1 percent.
Productivity growth depends on technical innovation and business investment. If businesses aren’t investing, it isn’t because the cost of capital is too high. It’s because the perceived return is too low. One solution is to lower the U.S. corporate tax rate, which at 35 percent is among the highest in the world. Another is to simplify rules and regulations in order to minimize compliance costs that impede small business.
A 2009 study by the Kauffman Foundation found that more than half the companies on the Fortune 500 list that year were started during a recession or a bear market. Some entrepreneurs obviously view bad times as an opportunity. They aren’t waiting to see increased demand for an as-yet uninvented product to invest.
“Andrew Carnegie built new plants during recession,” says Michael Lotus, co-author with James C. Bennett of “America 3.0: Rebooting American Prosperity in the 21st Century.” The United States’ “productive potential is not materially different than what it’s always been. The obstacles in its path are what’s different.”
In other words, American exceptionalism is alive and well and waiting to be liberated from the growing welfare state.
The good news is that immigrants still want to come to the U.S. (news of secular stagnation hasn’t reached their shores). Many have visions of starting a company in a garage and seeing it become the next Apple or Google. More than half of Silicon Valley startups were founded or co-founded by immigrants. The lottery for the 65,000 H1-B visas the U.S. issues each year to skilled foreign workers — down from the 200,000 peak — is always oversubscribed. The government should step up to meet the demand. And no, immigrants don’t steal jobs. They create them.
The bad news is that immigrant entrepreneurship has slowed in recent years, posing a risk to a crucial U.S. growth engine, according to another Kauffman study that formed the basis for a book. The authors say the trend can be reversed with a startup visa program and an increased number of green cards for skilled foreigners who want to work at those startups.
To be sure, there are economists, such as George Mason University’s Tyler Cowen, who are talking about real secular stagnation, based on the idea that the U.S. has already picked all “the low-hanging fruit.” It’s not unlike Hansen’s claim in 1938 that everything that could be invented had been invented. It wasn’t true then. And I doubt it’s true now.
Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist.