by Michael Roberts
Are the major capitalist economies now stuck in a state of
long-term stagnation? The idea that capitalism has been in a ‘secular
stagnation’ since the end of the Great Recession was first raised by
Larry Summers, the former Treasury secretary under President Clinton, ex
Goldman Sachs economist, then Harvard University scholar and general
all-round super star mainstream economics expert. And Summers’ idea has
been enthusiastically adopted by Paul Krugman, doyen of Keynesian
economics.
The term ‘secular stagnation’ was first coined by the Keynesian
economist, Alvin Hansen, in 1938, when he predicted that after the war,
modern economies would stagnate because of a crisis of underinvestment
and deficient aggregate demand. Investment opportunities had
significantly diminished in the face of the closing of the frontier for
new waves of immigration and declining population growth. So, according
to Hansen, the US was faced with a lower natural rate of growth to which
the rate of growth of the capital stock would adjust through a
permanently lower rate of investment.
This turned out to be wrong, as in the post-war period, the major
capitalist economies experienced a ‘golden age’ of relatively fast real
GDP growth, rising employment and incomes as the teeming population of
emerging economies were sucked into the capitalist mode of production,
the unemployed of Europe were put to work and American capital was used
to finance investment globally. And all this was possible because of the
record level of profitability for capital in the US during the war.
I criticised this idea of secular stagnation in a post last year (http://thenextrecession.wordpress.com/2013/11/30/secular-stagnation-or-permanent-bubbles/.)
Hansen was wrong and his idea of secular stagnation has recently been
described by leading neoliberal Chicago economist Steve Williamson as “the delusions of a hypochondriac rather than the insightful diagnosis of a celebrated economist.”
Nevertheless, the idea has been revived by Summers and now various
strands of argument around this theme have been published in an e-book
called, Secular stagnation: facts, causes and cures (http://www.voxeu.org/article/secular-stagnation-facts-causes-and-cures-new-vox-ebook) with all the leading proponents of the idea contributing.
The reason that Hansen’s idea of ‘secular stagnation’ and its revival
by Summers has gained new traction is because it is obvious to all
observers that, since the end of the Great Recession, the world
capitalist economy is struggling at below trend growth and employment
and, above all, with very low investment levels, keeping ‘effective
demand’ inadequate just as Hansen predicted would happen in the post-war
period.
So maybe Hansen’s idea is right now? As the editors of the e-book put it: “Six
years after the Global Crisis exploded and the recovery is still not
going well. Pre-Crisis GDP levels have been surpassed, but few advanced
economies have returned to pre-Crisis growth rates despite years of
near-zero interest rates. Worryingly, the recent growth is fragranced
with hints of new financial bubbles.”
There are two basic arguments for secular stagnation in the e-book.
There is the argument that what drives economic growth are the factor
inputs for production i.e. more and higher quality labour, more and
better technology and that unfathomable extra factor of innovation and
human ingenuity. Back in the 1960s, Robert Solow developed a factor
model of economic growth that concluded that the main driver of growth
was this last factor, called total factor productivity (TFP), which was
measured as the residue in the contribution to growth after taking into
account the impact of capital and labour inputs. Solow reckoned that 80%
of growth was accounted for by ‘human ingenuity’ or TFP. A modern study
by Hsieh and Klenow found that we can account for 10-30% in income
differences across countries by differences in human capital, about 20%
by differences in physical capital, and 50-70% by differences in TFP.
Now, according to Robert Gordon (in the e-book), TFP growth has been
in long term decline since the 1970s in the major capitalist economies –
they are just getting more unproductive and unable to take the
productive forces forward at the same pace in the past. “US real GDP
has grown at a turtle-like pace of only 2.1% per year in the last four
years, despite a rapid decline in the unemployment rate from 10% to 6%.”
I have discussed Gordon’s thesis before (http://thenextrecession.wordpress.com/2014/03/06/is-capitalism-past-its-use-by-date/and http://thenextrecession.wordpress.com/2012/09/12/crisis-or-breakdown/)
and it remains a worrying one for the future of the capitalist mode of
production. Gordon is at pains to say that he is not expecting future
TFP growth to drop away post the Great Recession, but simply return to
the slow rate of TFP growth experienced after the end of golden age
between 1950-70. That’s enough to keep economic growth low, along with
other factors. “US economic growth will continue to be slow for the
next 25 to 40 years – not because of a slowdown in technological growth,
but rather because of four ‘headwinds’: demographics, education,
inequality, and government debt.” The population is stagnant, life
expectancy is increasing rapidly. The mass education revolution is
complete, no further increase in the average US education level is to be
expected. The rising share of the top 10% of the income distribution
has deprived the middle class of income growth since 1980 and the gloomy
outlook for public debt makes current public services unsustainable.
Gordon’s pessimism about capitalism is attacked in the e-book by Joel
Mokyr who reckons that Gordon underestimates human ingenuity and the
impact of technology. After all, modern capitalism since the ‘industrial
revolution’ has dramatically expanded the productivity of labour, as
Marx recognised as early as 1848 in the Communist Manifesto. Indeed,
capitalism is growth driven by technological progress. Right now, says
Mokyr, there is much important scientific advance happening right under
our noses and much of the effects of current and future innovations on
economic welfare may not be measured well. For example, information has
become much more accessible in myriad ways that make us better off, but
not all of that is captured in GDP. The contribution of IT to our
wellbeing is not evident from the productivity statistics because the
way “we measure GDP and productivity growth is well designed for the wheat-and-steel economy. It works when pure quantities matter; it does not for measuring the fruits of the IT revolution.” The
key is that the development of high value-added services by Google,
Microsoft, Amazon, Facebook and the like require relatively little
investment. Summers makes a similar point in noting that WhatsApp has a
greater market value than Sony but required next to no capital
investment to achieve it.
This is the optimistic view that capitalism will come through with a
new burst of innovation that will boost TFP growth as it has done in the
past, at least in the post-war golden age. Gordon retorts sarcastically
that “techno-optimists” like Mokyr “are whistling in the
dark, ignoring the rise and fall of TFP growth over the past 120 years.
The techno-optimists ignore the headwinds, seeming ostrich-like in their
refusal to face reality. ” They claim that GDP is fundamentally
flawed because it does not include the fact that information is now free
due to the growth in internet sources such as Google and Wikipedia. But
says, Gordon, TFP growth sagged decades before the popularisation of
smart phones and the internet. And GDP has always been understated.
Henry Ford reduced the price of his Model T from $900 in 1910 to $265 in
1923 while improving its quality. Yet autos were not included in the
CPI until 1935. Indeed, the most important omission from real GDP was
the conquest of infant mortality, which by one estimate added more
unmeasured value to GDP in the 20th century, particularly in its first
half, than all measured consumption.
No says, Gordon, “Future generations of Americans who by then
will have become accustomed to turtle-like growth may marvel in
retrospect that there was so much growth in the 200 years before 2007,
especially in the core half century between 1920 and 1970 when the US
created the modern age.” For Gordon, the golden age of American imperialism in the mid-20th century is over and will not return.
This particular debate about long-term economic growth has little to
with the original theory behind ‘secular stagnation’ proposed by Hansen
and taken up again by Summers and Krugman. The issue for them is a
permanent lack of ‘effective demand’, not the failure of capitalism to
innovate. Capitalism can grow faster if only investment and consumption
rise faster. But capitalism is stuck below its true potential because,
despite interest rates being reduced to near zero, the real rate
necessary to boost demand is still too high. As Krugman puts it: “Secular
stagnation is the proposition that periods like the last five-plus
years, when even zero policy interest rates aren’t enough to restore
full employment, are going to be much more common in the future…And Summers adds: “We
may well need, in the years ahead, to think about how we manage an
economy in which the zero nominal interest rate is a chronic and
systemic inhibitor of economic activity, holding our economies back
below their potential.”
So what’s the answer? Increase government spending and print money. This may create credit ‘bubbles’. But “bubbles
are an alternative way for society to deal with excess saving when
fiscal policy does not take up the challenge. Buying bubbly assets with
the intention of selling them at a later date is an alternative route of
saving for future consumption. When nobody wants to invest because r is
below g, and hence buys bubbly assets, the price of these assets goes
up, yielding windfall profits to their sellers who are therefore able to
increase their consumption. This additional consumption restores the
balance between supply and demand for loanable funds on the capital
market”.
So we need to print money, give it to speculators in financial assets
and when they make profits from speculation, they will spend. In other
words, give the already rich even more money to spend! Summers
recognises that this could produce a new contradiction. If we
deliberately create bubbles “this might involve substantial financial instability.” But the choice is between the risk of financial instability or having permanently high unemployment. Great!
Summers’ argument came under deflected criticism from the current
governor of the Reserve Bank of India and former IMF chief economist,
Raghuram Rajan. He criticised the idea of more quantitative easing or
‘unconventional’ monetary boost as endangering the capitalist economy: “We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” Rajan told the Central Banking Journal. “Investors
are counting on “easy money” being available for the foreseeable future
and thinking they can sell before everyone else does; They put the
trades on even though they know what will happen as everyone attempts to
exit positions at the same time,” he said. “There will be major market
volatility if that occurs.”
Now Rajan has ‘form’. This week, the annual Jackson Hole economic
symposium in the US is taking place with all the world’s leading central
bankers and other top economic strategists meeting to discuss how to
handle the faults of capitalism. Back at the 2005 symposium, two years
before the global financial crash began, Rajan presented a paper warning
of the coming crisis. (http://chronicle.com/article/Larry-Summersthe/124790/).
Rajan argued that the structure of financial-sector compensation, in
combination with complex financial products, gave bankers huge cash
incentives to take risks with other people’s money, while imposing no
penalties for any subsequent losses. Rajan warned that this bonus
culture rewarded bankers for actions that could destroy their own
institutions, or even the entire system, and that this could generate a “full-blown financial crisis” and a “catastrophic meltdown.” When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a “Luddite,”
dismissing his concerns, and warning that increased regulation would
reduce the productivity of the financial sector. (Ben Bernanke, Tim
Geithner, and Alan Greenspan were also in the audience.)
It seems that the debate has not moved on between those Keynesians
who prefer the risk of another financial crash in trying to avoid high
unemployment and those mainstream economists who want ‘financial
stability’ over more jobs. That’s Rajan’s position (see my post http://thenextrecession.wordpress.com/2012/05/23/sensible-and-popular-keynesians-the-sophistry-of-raghuram-rajan/).
Neoliberal economist Steve Williamson dismisses the Summers’ thesis
and solution as so much hot air. He reckons that, far from getting the
government to print money indefinitely to raise inflation (Summers wants
a 4% inflation rate target compared to the usual 2%) and so get the
real rate interests down to achieve lower unemployment, all that will do
is lead to financial ‘moral hazard’ and the same financial bust that
the major economies have just come out of. For Williamson, it is would
be better to restore interest rates to ‘normal’ levels and let the
market economy do its good work. Secular stagnation is just
hypochondria: capitalism is fine.
This sums up the essence of the division among mainstream economics
about the future of capitalism. Most think that capitalism will
eventually ‘return to normal’ (see my post,
http://thenextrecession.wordpress.com/2014/08/14/the-myth-of-the-return-to-normal/)
without ‘unconventional policies’ and new technology will drive things
forward. Summer and Krugman reckon that cannot be done without permanent
government intervention to drive down real interest rates through more
inflation and speculation. Gordon thinks the productive powers of
capitalism are exhausted and only permanent government intervention to
foster human ingenuity through education and research can help. Not a
pretty picture on the whole.
The problem with the thesis of secular stagnation is that it does not
address the heart of the issue. It either considers the problem for
capitalism to be one of lower productivity growth (supply) or one of the
wrong monetary policy and too high interest rates (demand). But the
heart of the issue is the capitalist mode of production: production for
profit by the private owners of the means of production. Profitability
and its potential lies at the heart of whether capitalism will go into
new crises or stay stagnating.
At a presentation to the Communist University summer school in London this week (http://www.cpgb.org.uk/home/action/communist-university-2014), I
raised the issue of whether capitalism would eventually come out of the
current Long Depression and so avoid ‘secular stagnation’. I argued
that it could do so if profitability could be restored to levels not
seen the late 1990s at the very least (see my paper, A world rate of profit (roberts_michael-a_world_rate_of_profit).
That would require major deleveraging of private sector debt (still not
completed) and probably another slump or two to liquidate and devalue
costly unproductive assets. It’s not so much ‘stagnation’ that
capitalism faces, but yet more violent economic upheavals that will
destroy capital values and, of course, the lives and livelihoods of
millions across the globe.
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