ABA Banking Journal
By Carl Tannenbaum
During one particularly stormy day this winter, I asked my daughter unearth herself from the couch and help me clear the snow from the driveway. Unfortunately, the prospective reward of industry was no competition for the television remote, and I was left to fend for myself.
Before braving the accumulating squalls, I warned her that prolonged inactivity could doom her to secular stagnation. She rolled her eyes at the econo-speak and turned her attention back to The Walking Dead marathon.
I found irony in her choice of programming as I shoveled. Some in my profession have suggested that developed economies are heading for a zombie-like state, with little growth and frightening consequences for those left alive. Dark-siders suggest that measures aimed at animating things have become increasingly extreme and have done little to slow the advancing danger.
Growth has been re-established in some places but not in others, requiring significant amounts of performance-enhancing policy to keep things from getting worse.
It is this combination of circumstances that led some observers back to the secular stagnation argument. Former U.S. Treasury Secretary Larry Summers has been the most vocal adherent, but economists from around the world have joined him.
Robert Gordon of Northwestern University has highlighted troublesome trends on the supply-side of the economy. Potential growth is often described as the sum of labor force expansion and increases in productivity. On both of these fronts, many world economies are struggling.
The demographic challenge faced by many developed countries is well-documented. Increased living standards and the entry of women into the workforce have both served to depress birth rates. Sizeable post-war generations are gradually moving into retirement, reducing labor force participation. Projections from the International Monetary Fund suggest that the size of the workforce in many nations may struggle to show any growth over the next 20 years.
Further, older populations are more risk-averse and less innovative. This may be contributing to the clear downward trend in the rate of productivity growth, which had averaged around 2 percent annually in the United States and double that level in Europe over the decades prior to the Great Financial Crisis. More recently, productivity has been advancing modestly. Soft productivity growth makes labor less valuable and increases the challenge of reaching full employment.
Gordon points to advancing income inequality as another factor limiting global consumption. The propensity to spend declines with earnings levels, so in his view, bolstering incomes among society’s lower quintiles could add importantly to demand.
Strong aggregate demand is always helpful. But the best policy for the moment on this front might be patience. The balance sheet repair necessitated by the Great Financial Crisis is gradually becoming less of a limiting factor and should continue to improve in the years ahead.
If secular stagnation is truly upon us, the consequences could be severe. Standards of living and asset values might regress. Limited economic mobility would add fuel to political uncertainty. Debtors could struggle to meet their obligations.
But we’ve heard these jeremiads many times in history, and they’ve yet to come true. Populations tend to find a way to be resourceful, and there is no reason to think they won’t continue to operate this way.
My daughter redeemed herself when I returned from my battle against the elements. Much to my surprise, she had looked up secular stagnation on the Internet, and she had formulated a proposal to deal with the issue. “Buy a snow blower,” she said. “Investment in technology is the key to boosting potential output.” For a moment, I was a very proud papa.
Carl Tannenbaum is senior vice president and chief economist at Northern Trust Corporation and a member of ABA’s Economic Advisory Committee.
