Economy’s supposed slow recovery is really a ‘secular stagnation’
In 1939, the United States and much of the world were still struggling to exit the Great Depression that had begun a decade earlier. In that context, Alvin Hansen – the prominent economist and disciple of John Maynard Keynes – famously argued before the American Economic Association that the underlying problem was not cyclical, but rather “secular stagnation.”
Mr. Hansen anticipated an extended period of sluggish growth and high unemployment, due to a structural shortage of demand compared with already existing productive capacity. Under such circumstances, there were few profitable investment opportunities for business, resulting in excess savings and idle resources.
Massive mobilization for the Second World War soon put an end to those fears, finally restoring low unemployment. And, to the surprise of Mr. Hansen and many others, the subsequent peace ushered in the “Golden Age,” a long period of strong growth and low unemployment led by robust business investment across the advanced industrial world.
Today, we might not be so lucky.
Unlike previous postwar cycles of recession and recovery, there has been only a very tentative and sluggish recovery from the Great Recession of 2008-09 in the advanced industrial world. Growth rebounded at first due to extraordinary fiscal measures, but then slowed significantly.
Gross domestic product per capita in the advanced industrial countries fell 4.1 per cent in 2009 before recovering by 2.4 per cent in 2010. But growth then shrank to just 1.1 per cent in 2011 and just 0.7 per cent in 2012, and is forecast at 0.7 per cent again in 2013. Canadian performance has been only slightly above average. (See Table B1 in this statistical report from the International Monetary Fund.)
Some European countries have experienced double-dip recessions, and almost all of the advanced industrial countries have much lower levels of employment than before the recession. Tepid growth has failed to close the large gap between actual and potential output.
The IMF continues to revise down its already low growth forecasts, and anticipates well below potential growth for the advanced industrial countries in at least the short term.
Closer to home, the Bank of Canada also recently cut its short-term growth forecast, and now expects that our economy will be operating below potential until late 2015, due to sluggish exports and low levels of business investment.
This most recent ratcheting downward of already low growth expectations is part of a recurrent pattern, in which hopes of a more robust global recovery have been repeatedly dashed. This is despite the fact that central banks have kept interest rates at extraordinarily low levels in an attempt to kick-start spending growth through cheap credit.
The very weak recovery increasingly suggests that the problem is “secular stagnation” rather than a temporary, cyclical phenomenon. Some of the underlying reasons are explored in a recent book, The Age of Oversupply, by U.S. investment banker Daniel Alpert.
Mr. Alpert’s key argument is that the advanced industrial world is only slowly adjusting to the enormous increase in productive capacity that took place when millions of workers in the developing world, especially China, joined the global labour force as part of a process of export-led industrialization and growth.
Collectively, the developing world has added much more to global supply than to global demand. This problem was papered over before the Great Recession, by recycling developing-country export surpluses and savings to finance debt-fuelled household consumption and government deficits in the advanced industrial world. But chronic oversupply now weighs heavily on new investment.
The reasons for a slow recovery in the advanced industrial countries are generally understood by economists to include the difficulty of reviving household demand when household debt is still very high; a still fragile financial system; and the turn of governments, especially in Europe, toward fiscal austerity after the expiry of the extraordinary stimulus programs enacted during the Great Recession
When consumption and government spending are subdued, countries may seek to grow by boosting exports. But this is clearly a zero-sum game in a world in which overall demand is sluggish. Moreover, attempts to become more globally competitive by cutting wages and squeezing domestic consumption will further shrink global demand.
Notwithstanding these obstacles to growth, the expectation of many economists and policy makers is that entrepreneurial animal spirits will revive and higher levels of business investment will eventually bring about a more robust recovery.
That may well be true, in the long run. But in the here and now, businesses see little or no growth in demand, and are accordingly reluctant to undertake new investments despite healthy profits, strong balance sheets and ultra-low interest rates.
Mr. Alpert argues, very much in the spirit of Alvin Hansen, that governments must recognize the underlying problem, stop hoping that there will be a magical revival of business confidence, and fill the gap in demand though major increases in public investment.
As he notes, at current interest rates, there is no shortage of major public investment projects, from transit to clean energy to basic infrastructure, that would pay for themselves and attract business investment.
The conventional view as set out in the most recent Bank of Canada Monetary Policy Report is that a normal business-investment-led recovery may have been delayed, but that it will come. But how long must we wait?
This article originally appeared in the Globe & Mail's Economy Lab.
Photo: igoussev. Used under a Creative Commons BY-SA 2.0 licence.