ASSA part two – permanent stagnation?

by Michael Roberts

The economic news since the New Year has not been so promising as the consensus expected. After the supposed acceleration in real GDP growth in the US recorded for Q3-2014 of a 5% annual pace (see my post,
http://thenextrecession.wordpress.com/2014/12/24/us-economy-ends-on-a-high-the-uk-less-so/),
the data since suggest a slowdown in the US, deflationary pressures mounting everywhere as oil prices plummet and near recession data for parts of Europe and Japan.

I’ll analyse these data in my next post, but the latest economic news highlights probably the most important macroeconomic debate at the recent annual ASSA/AEA conference in Boston (see my previous post, http://thenextrecession.wordpress.com/2015/01/06/assa-part-one-the-rise-in-inequality-and-the-fall-in-piketty/).

This is the issue of whether modern capitalist economies face ‘secular stagnation’ (i.e. very slow or near zero growth, low investment in technology and thus low income and employment growth for the foreseeable future). The issue here is less whether capitalism is unjust, unfair and unequal (and thus perhaps unstable), but more whether it cannot deliver the goods and services the people of the world need. This is now concentrating the minds of the mainstream even more than Piketty’s rising inequality theme.

I have discussed the argument of secular stagnation before in previous posts (http://thenextrecession.wordpress.com/2014/08/22/capitalism-stagnation-or-hypochondria/), but one AEA session in Boston had the two main protagonists presenting papers, Robert Gordon from NorthWestern University and Larry Summers. I have discussed Gordon’s thesis before (see my post, http://thenextrecession.wordpress.com/2014/03/06/is-capitalism-past-its-use-by-date/) and he reiterated his main arguments that the US economy (the world too?) will slow to a crawl not because population growth will slow as the original proponent of secular stagnation, Alvin Hansen, argued in the late 1930s (but that too), but because the productivity of labour will stop growing at anything like fast enough.

The reason is that the major capitalist economies have run out of innovation and technology to boost productivity. According to Gordon, even the hi-tech internet revolution of the 1990s failed to raise productivity growth in the whole economy, compared to the industrial revolution of the 19th century or the electrical/auto revolution of pre-1945. And now the internet revolution is nearly exhausted without significant new innovations. This is what is called ‘supply-side’ of the secular stagnation thesis.

The ‘demand side’ was presented by Larry Summers (former US Treasury Secretary under Clinton and former Harvard University president). Again, I have reported on his arguments in a previous post (http://thenextrecession.wordpress.com/2013/11/20/a-keynesian-or-marxist-depression/). Summers adopts Keynesian perspective that economies have got ‘stuck’, with interest rates near or at zero (zero-bound) and still cannot return to normal growth. In effect, they are in what Keynes called a permanent ‘liquidity trap’. As a result, economies can only jolt forward in series of credit-fuelled bubbles to avoid slipping back into recession.

Summers was heckled during his contribution by some young economists for having supported the deregulation of the banking system in the 1990s that contributed to the banking bust in 2008 and also for having rejected the warnings that some economists had made about the dangers of the credit bubble in the early 2000s. It was an irony that he now raised the issue of the failure of credit bubbles and instead advocated that second arm of Keynesian policy to save capitalism from recession, namely government spending on infrastructure.

The other participants in the debate were there to take to alternative optimistic view. The first was by Greg Mankiw, from the right, if you like, who, as in the inequality debate (see my previous post on ASSA), reckoned that there was no problem anyway. The US economy was now growing at a 5% rate, unemployment had fallen back to normal levels and indeed economies like the US and the UK were ‘returning to normal’. When we get to AEA 2016, Mankiw said, the issue of ‘secular stagnation’ will be seen as dead, just as ‘rising inequality’ has been this year.

This superficial and basically charlatan approach can be contrasted with more serious arguments from Bill Nordhaus, an economist from Yale University, who has produced serious analyses and empirical work on the costs of wars and climate change. At ASSA, Nordhaus argued that Gordon was wrong to dismiss technological innovations still in the pipeline and yet to have an impact on labour productivity, perhaps in a new wave. Nordhaus referred to graphine, genomics, 3D printing etc and above all to the ‘science fiction’ becoming fact in Artificial Intelligence (AI) and the ‘singularity’, namely that robotic/computer intelligence will outstrip human intelligence within a generation and in a sense even end the term ‘labour productivity’. I’ll return to this important issue in future posts.

Barry Eichengreen, another eminent macroeconomist, made a critique of Summer’s position (DoesHistoryLendAnySupportToTheSec_preview). Eichengreen argued that interest rates, although they have fallen since the 1980s, are not ‘zero-bound’. The Fed or ECB policy rate might be near zero but borrowing rates for corporations and households are not zero. There is still plenty of slack there to lower the cost of borrowing. And anyway, history shows that interest rates can have both upswings and downswings and not be ‘zero-bound’.

While the mainstream economists argued the toss to big audiences at ASSA, smaller groups heard presentations from heterodox economists at the URPE sessions on the cause of the Great Recession and the economic slowdown observed by the mainstream. John Weeks from SOAS queried the use of the word ‘crisis’ (TheGlobalFinancialCrisisOf2008How_preview). There were lots of recessions but very few crises, if we define that as a significant deviance from long-term trend growth in economies, he said. The data showed that only the Great Depression of the 1930s and the Great Recession fitted that criterion and could be called crises. Moreover, he was not convinced that even these were global in origin and therefore may be we cannot talk about global capitalist crises at all!

I had sympathy with the view that we should distinguish between recessions that happen every 8-10 years and what I prefer to call depressions, which are deep, deflationary, widespread and last a long time (see my post, http://thenextrecession.wordpress.com/2014/09/30/debt-deleveraging-and-depression/). So yes, there have been only three depressions in modern capitalism: the late 19th century, the 1930s and now. But that is why the current period is so important to understand. Weeks seemed to dismiss all crises!

Al Campbell from the University of Utah argued that the Great Recession was not caused by Marx’s law of profitability but was caused by the collapse of the neoliberal response to the profitability crisis of the 1970s. The policies of the ruling class in the major economies to hold down wages, allow deregulation, promote privatisation and introduce financialisation, eventually turned profitability round but only at the expense of opening up a new 'undersonsumption or financial crisis with a falling wage share in income and reckless credit fuelled bubbles in housing that eventually burst. This approach was generally agreed with by most participants, including as far as I could tell by David Kotz from the UMASS-Amhearst too in his paper (RootsOfTheCurrentEconomicCrisis_preview).

But it fell short for me.

Neoliberalism was a political and economic ideology that broke with Keynesianism and government action in the economy. Sure, it was designed to restore profitability. But it leaves out the much more important objective factors that restored profitability: namely, much higher unemployment, the deep double-dip recession of 1980-2, globalisation in the 1980s onwards and the hi-tech revolution in the 1990s. I would argue that these objective factors were key to the success of neoliberalism and when they faded in the late 1990s and profitability peaked, we entered a new period of profitability downturn that eventually cut the legs from neoliberalism with the bust in the housing and financial sectors.

The Great Recession was not some ‘Minsky moment’ (solely a financial debt crisis), but the result of growing contradictions in the productive sectors.  Indeed, if we are going to talk of the roots of the Great Recession, then I prefer the analysis that G Carchedi and I presented in our paper of last year, The long roots of the present crisis.  In that paper, we also explain why the 'recovery' has been so weak.

No doubt the debate among us heterodox and Marxist economists will continue on this issue, as will ‘secular stagnation’ among the mainstream. On the latter issue, I think both the pessimists and the optimists are right. The pessimists are right that capitalism is finding it increasingly difficult to expand at a sufficient rate to meet the needs of the world, leaving aside the unequal distribution of that production. The optimists are right that capitalist crises are not permanent and, as long as the ruling class is in power and the capitalist mode of production survives, economies will revive and exploit new technologies and labour forces.

The issue as always is profitability not the forces of innovation. Under capitalism, innovation is applied to raise the productivity of labour, only if it raises profitability. Innovation is not applied to reduce the working day and toil of the labour force or to raise living standards. If there is sufficient devaluation of capital (writing off of fixed assets, lower commodity prices and reduced labour costs) to boost profitability, then a new wave of innovation will be applied to drive up productivity. That is not yet the case even six years after the Great Recession, in my view. But it could be after another deep recession.