Slouching towards secular stagnation.

Since this is my first post a few prefatory comments are in order. This blog is not necessarily directed (or at least not uniquely directed) at people with a technical understanding of economics. The second prefatory comment is a disclaimer: the last few years of my life have been a blur of either teaching (as a professor at a teaching University I have a high teaching load), or, performing the duties of my second job as President of the faculty Union. So I am not claiming originality or cutting edge insights in this post. Needless to say, the opinions I express herein are my own and do not represent those of my Union or my University. I’ll also apologize ahead of time for the formatting and say, I’ll get better.

There seems to have been a sudden outbreak of interest in Alvin Hansen’s secular stagnation hypothesis and this interest is coming from people with decidedly mainstream, respectable credentials. I offer two examples here: Here ( in a blogpost by the editor of the Journal of Economic Perspectives) and an address by Larry SummersAnd in addition, there is Robert Gordon’s very interesting and provocative paper “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”, which is not devoted per se to Hansen’s secular stagnation thesis, but is relevant.

So what is Hansen’s secular stagnation thesis? In simple terms, there is a tendency for long run economic growth to slow in mature capitalist economies due to a decline in private Investment spending (spending on new plants and equipment). Put into perspective in today’s economy what we see is clear if you are able to drill down a bit from the official BLS data on unemployment. Here’s the punch line: U.S. headline unemployment has come down from its high in 2009 to 4.7%, which gets us almost to where we were in 2006 before the current malady began, but not quite as good as the last two years of the Bill Clinton’s administration. However, it has now become widely recognized that a significant part of this gain is due to declining labor force participation. How can we know this isn’t just a surge in retirement? Because the percentage of males of prime working age in the workforce is down by about 10 percentage points since 1948 and down about 4 percentage points since 2008 (for the details see: The White House Report). Larry Summers, (see above) does a really good job of demonstrating just how far below potential we really are. As of now, per capita income is growing only at a little below one half of one percent per year. And if we add to this the steady worsening in income equality, then what we are presented with is:

  1. A stagnant (or declining) standard of living for people in the bottom half of income distribution;
  2. Greater and greater difficulty finding full time work that pays a living wage.

Or in other words, to use a phrase from a long forgotten economist whose name is generally not spoken in polite economic company, the long term level of the reserve army of the unemployed is going up.

This is not supposed to happen under capitalism. For all its faults, capitalism is supposed to deliver the goods and mainstream economics bought into this. Or, as Larry Summers puts it:

“Macroeconomics, just six or seven years ago, was a very different subject than it is today. Leaving aside the set of concerns associated with long-run growth, I thinkit is fair to say that six years ago, macroeconomics was primarily about the use of monetary policy to reduce the already small amplitude of fluctuations about a given trend, while maintaining price stability. That was the preoccupation. It was supported by historical analysis emphasizing that we were in a great moderation, by policy and theoretical analysis suggesting the importance of feedback rules, and by a vast empirical program directed at optimizing those feedback rules.”


And this was the problem: that is exactly how mainstream macro has been organized. It’s gratifying that people like Summers and others now recognize that there was something wrong with their macro model, and I would also embrace Summers’ recommendation for public spending on infrastructure, though notably, Hansen was skeptical of this path.

The point I want to turn to now is not whether Hansen was right or wrong, or how much he did and did not share with Keynes (I might address that in a separate post down the road), but that I find Summers’ argument here to be a bit like walking into Rick’s and discovering that there is gambling going on. Heterodox economists have been writing about these issues for a long time.

Here, are a few notes towards a general theory of long run secular stagnation, drawn very loosely from Keynes, Kalecki, Schumpeter, Kondratieff, a few other odds and ends.

  1. What economists call the long run secular growth path is primarily a function of the level of Investment spending in capital goods that lead to significant increases in worker productivity;
  2. The kinds of increases that really matter is not about adding more machines, but introducing different kinds of machines that disrupt existing organizations and institutions;
  3. Investment spending in capital goods that lead to significant increases in worker productivity are driven by business expectations on future rates of profit;
  4. Business expectations and decisions are formed in part by subjective and objective factors and are the result of satisficing agents making decisions under tight informational constraints. Forecasting is prone to systematic error.
  5. Any path of accumulation depends on the ability to capture energy from depletable raw materials.

Where does this lead? In my mind this results in a multi-cycle model a la Kondratieff. There is a long run path of growth which is nothing more than a fitted log linear line of past historical data. The steepness of this path is a function of the severity of the business cycle, or if you prefer, short run fluctuations in the level of output. There are long periods of path dependency and also, of hysteresis, in which the economy is thrown of the old and onto a new path. A period in which the business cycle is relatively tame and in which growth periods are strong and long, and recessions are short and shallow, results in a steeper path. Underlying this is the long cycle driven by the introduction (and ultimately faltering) of new, disruptive technologies.

As I said, these are notes. There is a lot more to be done, a lot of missing pieces, and I may not even be the person to do it. Among other things, it needs to incorporate the role of money and finance into the picture. But starting from these kinds of premises, instead of trying to patch up the mainstream model of rational, maximizing agents, natural rates of unemployment and short run deviations from optimal growth paths, is in the end, likely to be more fruitful.

And in conclusion…I find the mainstream rehabilitation of Hansen to be intriguing and possibly even fruitful but not terribly original.


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