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,
Once quality improvements, like healthy longevity, are monetized, the measure of economic success is not GDP, but GDP per capita.
I don't get it, but economists like these two continue to talk about how to raise the GDP, ignoring entirely the denominator of the equation. In other words, economic success could be achieved at low cost by putting a stop to all the breeding.
If I'm trying to make it though the winter in a snowbound sailing ship together with 10 dogs and 10 cats, all breeding away, it should soon occur to me to: first, stop their breeding; second, start killing them off to lower the competition for food; third, start eating them. Folks like Shackleton have actually done this.
Now I don't (yet) recommend killing or eating Amerikan kids, but we sure as hell could put a stop to all the gummint policies that encourage breeding. If we needed workers (sometime in the distant future), we could turn to importing potty-trained workers from nearby countries who are ready and willing to contribute to the GNP without our having had to spend over $10,000 each over 13 years to give them a public mis-education.
A sure road to economic disaster is to continue to overtax the producers among us in order to support the indigent unemployed that go on breeding away.
Posted by: jim kirby | 01/20/2014 at 11:26 AM
Japan is the poster child and living proof that low interest rates do not guarantee economic growth and prosperity. Years ago before the "Bernanke has all the answers" era, many of us criticized Japan for failing to own its problems. Many people thought Japan should face up to the mess it had created and do the right thing. Broadly accepted was the concept that only by letting its zombie banks and industries fail could Japan clean out the system and move forward.
While they claim otherwise, in many ways Bernanke and the Fed have put America on a path that mirrors the same unsuccessful path taken by Japan. A path that avoids real reform and bails out the very people that caused many of our problems. More on this subject in the post below,
http://brucewilds.blogspot.com/2013/11/we-are-on-path-to-lost-decades.html
Posted by: B Wilds | 01/20/2014 at 10:10 PM
Tax policy and government regulation do impact domestic growth, but the fear of the same also has a beneficial or detrimental effect, as well. The fiscal multiplier produced by government stimulus will change depending on what the stimulus is spent on (maintaining high employment in the public sector vs. improving unemployment in the private sector) as well as, what other uncertainties exist in the minds of the consumer (increasing savings vs. consumption).
Monitary policy at this zero lower bound level has obvious limitations. Fiscal Policy probably would have a greater impact; however, the type of legislation that private industry infers or fears from the political party in power and how the government spends any stimulus (private or public)is very difficult to put into a mathematical model; thus making the prediction of the benefit of such a fiscal policy less reliable.
Posted by: Bill Goode | 01/21/2014 at 10:00 AM
I disagree with your statement:"It is difficult to imagine productive activities that cannot be automated—mining, construction, many medical services, house cleaning: the list goes on and on." Indeed it is easy to imagine many types of (now) luxury type services where demand would continue to increase. For instance the whole category of educational/athletic services, such as personal trainer, dance instructor, ski instructor. Similarly, people like to learn to improve many fun skills, such as getting group lessons in cooking, painting, ceramics, wood working, playing a musical instrument. Pets will be pampered more, increasing demand for veterinarians, dog walkers, pet psychologist. And if the cost of travel comes down due to automation, demand for air craft, tour guides et.c. would go up. Protective services, such as security guards and police would increase, too as people spend less on other areas. Just look at what the currently wealthy consume: they do not prefer robots but actual personal service.
Posted by: Gertrud Fremling | 01/21/2014 at 03:36 PM
Ooops! My comment was meant to be posted for Posner.
Posted by: Gertrud Fremling | 01/21/2014 at 03:39 PM
Simply because we can do something, doesn't necessarily mean we should do it. Socio-economic benefits many times outways our ability to do things. QEI was once advised by her Counsel to throw open the Nation to vast imports. Her response, "But then what will our Craftsman and Artisans do"? And so, a Golden age was born. Or, when the Emperor Augustus and cohort Agrippa was approached by their construction Engineers who told him that they had machines that could drastically reduce the amount of Labor and time required to rebuild Rome. Augustus's response, "That's not the point" and so another Golden age was born. Talk about "Deja Vu"...
Posted by: Neilehat | 01/22/2014 at 08:01 AM
I remember standing on the shore at Messina in 1981 and looking over to mainland Italy, and asking my local contact why there was no bridge. He said the mafia ran the ferry. A few connected ferry operators benefited, and tens of thousands of residents on both sides were burdened, many to the point that they'd avoid the trip whenever possible.
If the government wants to step in and regulate product quality or features, as they have now done with health insurance, maybe they can beat back the Chinese import machine. Meanwhile, millions of Wal-Mart customers vote every day that Its products are good enough to get the job done. Should 300 million people pay higher prices for clothes so a few thousand textile workers can luxuriate in their less than competitive production level? I'm suspicious.
Posted by: Terry Bennett | 01/22/2014 at 11:14 AM
Terry, Having lived in Sicily, Ragusa/Siracusa as a matter of fact, I can tell you that you don't want a bridge between Sicily and the Mainland (if the bridge had been needed, they'd have put one in thousands of years ago). As for the "Mafia" response from a "local contact", that's a common Sicilian response to most Tourists. Especially "Ugly Americans" and other "invaders" throughout the Centuries... ;)
Posted by: Neilehat | 01/22/2014 at 06:45 PM
I'd agree with Prof Becker on there being many more technical breakthroughs in computers (and robotics) in the coming decade. But even were the pace of development to slow the more widespread adoption of what we have should produce substantial productivity increases.
Most of us likely remember almost spending more time and energy than we saved with under-powered computers running the clumsy DOS. Today, ha! despite frustration with "Obamacare" we're seeing not only a roll out of a system empowering both buyer and seller to "meet" at a competitive market place, but IT systems moving ahead, finally! that should greatly improve productivity of docs, nurses and all, but with more "big data" available and searchable, we should be able to find and adopt the procedures offering the best outcomes or same at less cost.
Haha! "Trouble is....." the productivity gains seem to be getting wasted with, from a recent report, employees spending two hours a day at "work" on social media.
Well! after the positive outlook on increasing productivity in about every endeavor that comes to mind but teaching? and lawyering? what about Neil's question as to "What will our craftsmen do?"
One answer and Becker has it right, is to be honest with ourselves and no longer ignore over $2 trillion on LONG delayed maintenance and upgrades of our infrastructure. A simple equation really, pay the hard hit construction sector extended unemployment and eventually welfare and "disability" or put them to productive work fixing our nation up so that when this mess is over well have the playing field for a brighter future.
Much of the rest of the answer ------ lacking an especially insightful queen, is that of resorting to democratic processes that might guide the "invisible hand" to more favorably "develop our nation's resources for the benefit of THE people" ie NOT one in a hundred.
"Two hours of social media" ie the new version of squandering the day yakking at the water cooler, gives us one big clue. "Send 'em home early!" Yes! even as our "40 hour week" seems to have all too often become more hours and the expectation of text messages being answered during all waking hours, what we need is a shorter work week and say the number of holidays as France. Spread more of what work there is over more employees.
Next, is to quit caterwauling about "productive and "jobless leeches"" and pull out ALL the stops to begin the long awaited "trickle down". Start at the bottom where the costs are very small by SUBSTANTIALLY increasing the min wage. Instead of glorying in the demise of the collective bargaining that built the middle class from THEIR share of the mfg era and instead work to further empower unions like SEIU that are seeking to represent the lowest paid and least powerful working folks.
As Gertrud hopes there will be Demand for new products and services, but ONLY IF far more of us have the time and discretionary income to take Bush's advice to "go shopping". If not we continue to ha! take advantage of IT to buy stuff on Ebay to fix our aging gas hogs and eat our discounted food purchased in bulk at Costco at home, while, one more chuckle, even McD's tries to figure out how to improve its numbers.
Stagnant wages ---------------- stagnant economy.
Posted by: Jack | 01/25/2014 at 04:08 AM