Stagnation in a Historical Perspective
Davide Gualerzi
University of Padova, Italy
Please cite the paper as:
Davide Gualerzi, (2018), Stagnation in a Historical Perspective, World Economics Association (WEA) Conferences, No. 2 2018, The 2008 Economic Crisis Ten Years On, 15th October to 30th November, 2018
This paper has been included in the publication
“The 2008 Crisis Ten Years On: in Retrospect, Context and Prospect Paperback”
Abstract
The paper focuses on the recent resurfacing of the question of secular stagnation. Prompted as it appears from the severity and continuing effects of the financial crisis and the 2008-2009 recession the paper argues that this is a good example of how the history of economic ideas is indispensable to understand current issues.
General Comments:
I am a history of thought person, so I enjoyed the tour through the literature on secular stagnation. In my younger days, I thought the stagnation literature was interesting, but I lost interest in it. I find Summers reintroducing the idea interesting. However, I am a sceptic.
About the Paper:
I am not sure I understand how the various parts of your paper fit together. You start with the Great Recession and the policy response in the US and Europe. I am more familiar with the US side of the crisis so my comments will be US centered. A simple way to view the crisis in the US is that it consisted of three wild fires that had to put out to restore growth. The three fires were the financial crisis, the collapse in demand, and the aftermath of the popping of the housing bubble. Policy makers in the US were able to extinguish the financial crisis (There are details on this that you left out, like the role of the Fed in providing support for the financial system.), but this left the financial system still wobbly, risk adverse, and unable to resume “normal’ lending. The collapse in aggregate demand was treated using monetary and fiscal policy. Monetary policy had obvious problems doing its job because the financial system was still unwilling to resume normal lending, the housing investment did not respond to a drop in mortgage rates, and the collapse in demand was too large for a fall in interest rates to matter that much. The use of QE, at most, prevented a second downturn, but was unable to restart vigorous growth. You did a good job explaining the limits of fiscal policy–the inadequate Obama stimulus and the rise of austerity after 2010. In terms of the housing market, I think it fair to say that policy makers just allowed the fire to burn itself out. Housing prices collapsed, defaults mushroomed, and housing investment declined dramatically.
If the above is mostly true, why would we expect a rapid recovery? Why would a slow and inadequate recovery be a sign of some long-run, secular stagnation problem? Is the fact that the US (at least judging from the unemployment rate) has fully recovered from the crisis inconsistent with the secular stagnation hypothesis?
Thanks for posting the paper.
I agree with Davide Gualerzi’s analysis, and would add a couple of complementary factors which can explain economic stagnation.
Such tendency, after all, can also reflect a long term trend towards some kind of steady state (or even de-growth).
Among other factors, I would underscore the following, which can also account for the chronic tendency of effective demand to lag behind the supply of full employment:
(I) As analysed by various authors – a classic in this sense is Skidelsky, R. and Skidelsky, E. (2012), “How Much Is Enough? Money and the Good Life” – since the needs of consumers are becoming increasingly tied to the immaterial and the intellectual side
of consumption, their fulfillment tend to depend less and less on the “material and quantitative” aspects of consumption.
In fact, we do not buy books by kilos and cultural activities by mere numbers. Also, if we buy a high-tech product, we are likely to be more interested in learning how to use it, rather than in changing it with every new model.
These aspects constitute a significant explanation of the tendency – underlined also by J.M.Keynes in the “Essays in Persuasion” – of the socio-economic systems to move from work activities resting on “the economic motive” to activities (social, cultural, scientific, artistic) more based on the expression of the real needs and inclinations of persons.
(II) What are the effects of technological progress on job creation? On the one side, the increase in productivity originating in process innovation requires a growing amount of goods for guaranteeing the same level of employment.
On the other side, firms can introduce new products on the market, but this would not solve that structural issue. In fact, even if new jobs are created in these fields, the increase in productivity extends also, and perhaps even more, to the new products. This could help explain that every innovative wave tends to create fewer and fewer jobs (or even a jobless recovery). For instance, it is easily observable that, whereas the durable goods typical of 1960’s and 1970’s involved hundred thousand workers, innovative cycles of today high-tech products would employ (at the best) some thousand workers.
All this suggests that a kind of “forced” over-consumption is the only and very imperfect way, in our present economies, for attaining some kind of full employment level. How many high-tech items, cars, clothes, etc., should we buy to sustain the effective demand? For a host of economic, social and environmental reasons, this system is untenable in the long run. In this respect, the problem becomes to identify the set of institutional and policy arrangements for moving along a new avenue of economic and social progress.
I do agree with your analysis of economic stagnation. However, for the very reasons you have put forward, is it not perhaps better to appraise such phenomenon also as a long tendency towards steady state? And so avoiding the negative connotation related to an economic growth centered vision prevailing in economics? After all, several economists underscore the structural tendency towards a steady state which, however, is interpreted in a more positive way, as a move towards a society of free time. Such perspective of steady state (or even de-growth) would lead towards a more balanced and sustainable policy action for addressing the contradictions of our economies.