On November 3, 2014, Michael Hiltzik writes in the Los Angeles Times:
The scariest term that economists have been throwing around lately is “secular stagnation.” That sounds technical, but it’s easy enough to explain: it means the economy is in a slump that it may never be able to escape.
It’s one thing to say things will have to get worse before they get better; quite another to say they’ll just keep getting worse. But that’s the fear expressed by former Treasury Secretary and White House chief economist Lawrence Summers in an essay published last week.
Summers observes that growth in the U.S. and Europe–and projections for future growth–have been dismal and getting worse. (See graph above.) “U.S. economic growth has averaged only 2% over the last five years, despite having started from a highly depressed state,” he writes.
What’s worse, he asserts that growth was meager even in the pre-recession period, when it appeared to be quite healthy. But its fundamental sickness was masked by risky financing–“vast erosion of credit standards, the biggest housing bubble in a century, the emergence of substantial budget deficits, and what many criticize as lax monetary and regulatory policies…. It has been close to 20 years since the American economy grew at a healthy pace supported by sustainable finance.”
Summers’ concerns are echoed by a clutch of leading economists–among them Barry Eichengreen of Berkeley and Paul Krugman of Princeton–who contributed to a remarkable volume on secular stagnation published in August by the London-based Centre for Economic Policy Research; the Summers essay appeared as its keynote. The pamphlet is downloadable for free here.
Many of them find that the evidence of secular stagnation is inescapable, though they disagree about its causes and therefore its remedies. The causes include a slowdown of technological advances aiding productivity–electricity and the internal combustion engine are behind us; a slowdown in population growth; a rise in income inequality; and a failure to invest in infrastructure. The latter two get most of the blame, with good reason.
As Eichengreen reflects, “Pessimists have been predicting slowing rates of invention and innovation for centuries, and they have been consistently wrong.” Robotics and genomics, he argues, bear as much potential for improving human productivity as the industrial revolution did in the 19th century.
On the other hand, federal spending “devoted heavily to infrastructure, education and training has been cut to the bone.”
Robert J. Gordon of Northwestern adds that “salaries for CEOs and celebrities march ever upwards,” while for workers in the lower 90% of income, “corporations are working overtime to reduce wages, reduce benefits, convert defined benefit pension plans to defined contribution, and to use Obamacare as an excuse to convert full-time jobs to part-time status…. For the disposable (after-tax) incomes of the bottom 99%, it is hard to find any room for growth at all.”
Not all the economists are as pessimistic: Nicholas Crafts of the University of Warwick observes that the term “secular stagnation” was coined by economist Alvin Hansen in 1938 as a projection of a permanent post-Depression slump, but his fears turned out to be “the delusions of a hypochondriac,” proved wrong by World War II and the postwar boom.
Yet Summers and his fellows struggle to find the light. “It is certainly possible that some major exogenous event will occur,” he writes. “Short of war, it is not obvious what such events might be.”
The greatest reason they find for despair is the failure of government in the U.S. and Europe to respond. Summers writes that improving financial stability, increasing economic output and raising employment require “increased public investment, reductions in structural barriers to private investment … a commitment to maintain basic social protections so as to maintain spending power, and measures to reduce inequality and so redistribute income toward those with a higher propensity to spend” (that is, middle- and lower-income households).
The U.S. is moving away from, not toward, those policies; if the Republicans take the Senate on Tuesday, the prospects for such a program grow dimmer.
All isn’t lost, but the future is in our hands. Says Eichengreen: “If the U.S. experiences secular stagnation, the condition will be self-inflicted…. It is important not to accept secular stagnation, but instead to take steps to avoid it.”
Yes, the American economy, and for that matter the world economies, is in a slump, but it is a man-made slump from which we can recover with a proper reform of the system.
Growth has been anemically dismal as evident in the overall 2 percent GDP during the past five years, and further depressed and meager before the so-called “Great Recession.”
The fundamental sickness afflicting the system is that real upward economic opportunity is exclusive, and restricts broadening productive capital asset growth to ONLY those in the population who have meaningful “past savings” or equities to secure the financing for FUTURE capital asset formation. Thus, those with “money,” that is the wealthy ownership class, constantly invest and re-invest that which they do not need for product and service consumption uses. Thus, they constantly are acquiring more and more capital asset wealth, which produces income for its owners.
Rather than reform the system, the political machine has opted to finance the industrial-military complex and social welfare programs using national debt, which is creating enormous budget deficits, which now exceeds $17 trillion (http://www.usdebtclock.org/). This continuing debt scenario is not sustainable.
In an economy, production and consumption are interdependent. The purpose of production is consumption. In a free market economy, such as the U.S., the distributive principle is “to each according to his production.” The problem of anemic growth is that ONLY a minority of already wealthy people are producing through their privately-owned capital assets, while the vast majority of the population is shackled to stagnate jobs or dependent on redistributive taxpayer and debt-supported government welfare as their ONLY means of an income. Those dependent on a JOB are constantly subject to insecurity due to on-going tectonic shifts in the technologies of production, which eliminate jobs and devalue the worth of labor.
Technological change makes tools, machines, structures, and processes ever more productive while leaving human productiveness largely unchanged (our human abilities are limited by physical strength and brain power––and relatively constant). The technology industry is always changing, evolving and innovating. The result is that primary distribution through the free market economy delivers progressively more market-sourced income to capital owners and progressively less to workers who make their contribution through labor. Yet without income distribution to the market majority there can be no market growth as there will be fewer and fewer “customers with money” to demand and purchase the products and services increasingly resulting from technological invention and innovation.
In a democratic growth economy, based on binary economics (rather than the one-factor JOBS ONLY paradigm), the ownership of capital would be spread more broadly as the economy grows, without taking anything away from the 1 to 10 percent who now own 50 to 90 percent of the corporate wealth (until death, at which time it would be subject to a transfer tax imposed on the recipients whose holdings exceeded, for example $1 million). Instead, the ownership pie would desirably get much bigger and their percentage of the total ownership would decrease, as ownership gets broader and broader, benefiting EVERY citizen, including the traditionally disenfranchised poor and working and middle class. Thus, productive capital income would be distributed more broadly and the demand for products and services would be distributed more broadly from the earnings of capital and result in the sustentation of consumer demand, which will promote economic growth. That also means that society can profitably employ unused productive capacity and invest in more productive capacity to service the demands of a growth economy.
According to binary economist Louis O. Kelso: “When consumer earning power is systematically acquired in the course of the normal operations of the economy by people who need and want more consumer goods and services, the production of goods and services should rise to unprecedented levels; the quality and craftsmanship of goods and services, freed of the cornercutting imposed by the chronic shortage of consumer purchasing power, should return to their former high levels; competition should be brisk; and the purchasing power of money should remain stable year after year.”
Without this necessary balance hopeless poverty, social alienation, and economic breakdown will persist, even though the American economy is ripe with the physical, technical, managerial, and engineering prerequisites for improving the lives of the 99 percent majority. Why? Because there is a crippling organizational malfunction that prevents making full use of the technological prowess that we have developed. The system does not fully facilitate connecting the majority of citizens, who have unsatisfied needs and wants, to the productive capital assets enabling productive efficiency and economic growth.
Kelso said, “We are a nation of industrial sharecroppers who work for somebody else and have no other source of income. If a man owns something that will produce a second income, he’ll be a better customer for the things that American industry produces. But the problem is how to get the working man [and woman] that second income.”
There are solutions to achieve that objective such as the proposed Capital Homestead Act (http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/ and http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/).
