The increasingly frequent arguments that the US may be for in a period of secular stagnation – that is, long term slow growth- brings to mind the ex-baseball player Yogi Berra’s (alleged) statement that he was observing “déjà vu all over again”. It is all over again because during the latter part of the Great Depression, and again immediately after Word War II, many economists were warning about the prospects of slow growth unless governments invested at a high rate. I do not believe this is the prospects for the present economy.
The arguments made at that time are eerily similar to those currently made. Alvin Hansen of Harvard University claimed in the latter part of the 1930s that because of presumed modest technological progress and weak private investment, the economy would move forward with little economic progress unless the government provided substantial stimulus. Many economists after the Second World War believed that because of high savings rates, especially among richer persons, savings would be too large compared to private investment to produce full employment without large-scale government investments. Present proponents of the secular stagnation thesis make closely related arguments, even though the economy has greatly changed over the past 70 years.
On the technological front, the claim is that despite the development of computers and the Internet, the prospects for major innovations in the next decade are not bright. I believe these arguments are wrong (see my post, “Will Long-Term Growth Slow down, 10-07-12), although the longer-term future is not knowable with any confidence.
Most of the pessimism about prospects for technological advances does not recognize the latest developments in energy and medical care. Fracking and the extraction of oil and natural gas from shale rock have greatly increased the supply and lowered the price of natural gas, and to a lesser that of oil. Also neglected is the revolution going on in personalized treatments of cancer and other major diseases. That advances in life expectancy and the quality of life are not captured in GDP measures (they could be included without too much effort) should not blind us to their robust advances in recent year that have added immense value to consumer welfare. Personalized medicine, which is about to explode, will raise that value much further.
Perhaps as a result of their presumed limited advances in technology, secular stagnation proponents believe there will be insufficient private and public investment relative to the level of savings, even at nominal interest rates that have been close to zero. They cite the weak investment in the US, and even more so in Europe, during the slow recovery from the depths of the Great Recession. The growth in GDP has also been disappointing compared to the recovery in GDP from other severe recessions, and the decline from peak unemployment has been slow.
However, It would seem strange that the US cannot generate enough investment even though the 1990s was a decade of good overall growth in GDP and rapid growth in employment. The first 7 years of this century also had low unemployment and high investment, although part of this investment was in the housing industry that led to an unsustainable bubble in housing prices. I doubt that the American economy underwent such a large structural change over this relatively short period, especially given the continuing stimulus in world demand from a rapidly growing Chinese economy and that of other developing countries.
I agree with the secular stagnation thesis that the government should increase overall investment in various kinds of infrastructure, including bridges, airports, and road. However, I strongly urge that, whenever feasible, user fees are implemented, including time-of-use fees on roads (see, for example, the case for congestion fees in my “The Solution to Traffic Congestion”, 2-12-06).
The main way governments can help the economy is by reforming tax and regulatory policies. For example, the US has one of the highest corporate income taxes in the developed world at about 35 percent. A reduction in this rate to no more than 30 percent, and preferably to 25 percent, combined with giving firms the right to expense all investments, would be a major stimulant to corporate and other investment.
The growth in regulation in the US has been rapid since the end of the Reagan administration, sufficiently so that America’s world ranking in the degree of regulation has greatly worsened over time. The US standing will get even worse as a result of the convoluted and extensive financial regulations in the Dodd- Frank Act, and the messy and extensive regulations that seem to be developing in the healthcare industry as a result of the Affordable Care Act. One way to simplify and reduce these and other regulations is to increase the role of clear simple rules, such as higher equity requirements for banks, in place of regulator discretion. This would provide investors with clearer and simpler guidelines about what they can and cannot do.
To conclude, I do not believe the American economy will experience secular stagnation over the next decade because technology will continue to advance at a good pace, and there will be no dearth of private investment opportunities. But it would be valuable to cut corporate income taxes and reduce the massive amount of regulation. These changes would stimulate investment and growth in a way that also improves the efficiency of the American economy,