Gordon is essentially a supply-side pessimist, though he also points out that income inequality can act as a drag on growth, by lowering effective demand. Another gloomy take on future growth, advanced by former U. The balance between saving and investment could be achieved, Summers argues, only with a nominal interest rate that is below the zero lower bound. The fact that ample corporate profits were not being invested seemed to support this hypothesis, which also took root outside the U. After all, Summers—and Gordon even more so—was making an argument about the long term. If the current growth acceleration peters out after six months or a year, they could yet be vindicated.
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In December , one of the most eminent economists of the time, Alvin E. Looking at the economy of the late s, Hansen wrote:"This is the essence of secular stagnation--sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment.
In this post, I'll sketch out what Hansen actually said, give a sense of why the "secular stagnation" hypothesis was widely disregarded in recent decades, and suggest how I see the modern lessons.
Hansen argued that an economy needed strong and healthy levels of investment if it was to maintain full employment. He wrote: "For it is an indisputable fact that the prevailing economic system has never been able to reach reasonably full employment or the attainment of its currently realizable real income without making large investment expenditures. Each of these in turn, severally and in combination, has opened investment outlets and caused a rapid growth of capital formation.
Thus, he argued: "We are thus rapidly entering a world in which we must fall back upon a more rapid advance of technology than in the past if we are to find private investment opportunities adequate to maintain full employment. It is my growing conviction that the combined effect of the decline in population growth, together with the failure of any really important innovations of a magnitude sufficient to absorb large capital outlays, weighs very heavily as an explanation for the failure of the recent recovery to reach full employment.
Further, Hansen was skeptical about whether either monetary or fiscal policy could provide a long-lasting answer. He was skeptical that lower interest rates could encourage the large and vigorous investment levels that he felt were needed: "Less agreement can be claimed for the role played by the rate of interest on the volume of investment.
Yet few there are who believe that in a period of investment stagnation an abundance of loanable funds at low rates of interest is alone adequate to produce a vigorous flow of real investment. I am increasingly impressed with the analysis made by Wicksell who stressed the prospective rate of profit on new investment as the active, dominant, and controlling factor, and who viewed the rate of interest as a passive factor, lagging behind the profit rate.
This view is moreover in accord with competent business judgment. I venture to assert that the role of the rate of interest as a determinant of investment has occupied a place larger than it deserves in our thinking.
If this be granted, we are forced to regard the factors which underlie economic progress as the dominant determinants of investment and employment. While he cautiously favored such steps, he also worried that continual rises in government debt were troublesome, too. When we look back at Hansen's speech of late , we see the issues of his time a little differently. Of course, Hansen does not have access to the luxuries of historical hindsight and modern economic statistics.
For example, Hansen discusses a slowdown in population growth, which was certainly a fair reading of the trends at that time, but completely missed that US fertility rates were about to take off less than a decade later at the start of what we call the "baby boom. In retrospect, the notion that technological innovation stopped in the s seems clearly incorrect. Economic Growth, that the s experienced a great deal of technological growth.
At a macro level, Field points out that essentially the same number of people were employed in as in , using what seems to be the same value of capital stock, and yet real output was one-third or more higher in than in implying substantial productivity growth even with the period of the Great Depression taken into account.
If one just looks from to , real U. Here's an readable interview with Field laying out his views. In contrast, Hansen seemed to perceive the later s as nothing but the long aftermath of the the Great Depression. After a few years of fairly vigorous recovery, the Federal Reserve, chasing a premonition of a shadow of a ghost of possible inflation that no one else could see, decided to raise interest rates, triggering a severe recession starting in May that lasted through June Field and others have argued that the U.
Yet here we are in late , more than four years after the Great Recession technically ended in mid, but without a real resurgence of catch-up economic growth that has followed other recessions. We also have the disturbing example of Japan's economy, which suffered a financial crisis and melt-down in real estate prices back in the early s, and has now been stuck in slow growth for more than two decades.
Hansen's spirit would surely point out that a surge of population growth or an expansion of territory are unlikely. Thus, much turns on investment spending. Louis Fed. Investment often drops during recessions, and sometimes between recessions, but the investment drop during the Great Recession was especially severe, and the bounceback even to usual levels is not yet complete.
Moreover, the investment surge of the mids was largely in residential real estate, and whatever the other virtues of such investments, additional houses don't do much to raise future rates of productivity growth. From Hansen's secular stagnation point of view, the key problem of the U. This perspective doesn't rule out using monetary or fiscal policy to stimulate the economy in the short run, but neither does it see these as long-term answers. It would also be an economy where a large share of profits flowing to the financial sector would be troubling, because it suggests that nonfinancial firms are not perceiving profitable opportunities for real investments in plant, equipment and technology.
It's an economy where we would think seriously about finding ways to ease the tax and regulatory burdens on investment. Here are some words from Hansen's speech that ring true to me today: "The problem of our generation is, above all, the problem of inadequate private investment outlets.
Of first-rate importance is the development of new industries. But there is equally no basis for the assumption that we can take for granted the rapid emergence of new industries as rich in investment opportunities as the railroad, or more recently the automobile, together with all the related developments, including the construction of public roads, to which it gave rise.
Nor is there any basis, either in history or in theory, for the assumption that the rise of new industries proceeds inevitably at a uniform pace. The growth of modern industry has not come in terms of millions of small increments of change giving rise to a smooth and even development.
Very often the change can best be described as discontinuous, lumpy, and jerky And when giant new industries have spent their force, it may take a long time before something else of equal magnitude emerges. Some small recovery must indeed arise sooner or later merely because of the growing need for capital replacement. But a full-fledged recovery calls for something more than the mere expenditure of depreciation allowances.
It requires a large outlay on new investment, and this awaits the development of great new industries and new techniques. But such new developments are not currently available in adequate volume I hear relatively little discussion focused directly on an agenda for creating a supportive environment for private domestic investment. Newer Post Older Post Home.
In December , one of the most eminent economists of the time, Alvin E. Looking at the economy of the late s, Hansen wrote:"This is the essence of secular stagnation--sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment. In this post, I'll sketch out what Hansen actually said, give a sense of why the "secular stagnation" hypothesis was widely disregarded in recent decades, and suggest how I see the modern lessons. Hansen argued that an economy needed strong and healthy levels of investment if it was to maintain full employment. He wrote: "For it is an indisputable fact that the prevailing economic system has never been able to reach reasonably full employment or the attainment of its currently realizable real income without making large investment expenditures. Each of these in turn, severally and in combination, has opened investment outlets and caused a rapid growth of capital formation. Thus, he argued: "We are thus rapidly entering a world in which we must fall back upon a more rapid advance of technology than in the past if we are to find private investment opportunities adequate to maintain full employment.
Have we dodged the secular stagnation bullet?
Alvin Harvey Hansen August 23, — June 6, , often referred to as "the American Keynes ", was a professor of economics at Harvard , a widely read author on current economic issues, and an influential advisor to the government who helped create the Council of Economic Advisors and the Social Security system. He is best known for introducing Keynesian economics in the United States in the s. More effectively than anyone else, he explicated, extended, domesticated, and popularized the ideas embodied in Keynes' The General Theory. In , Paul McCracken , chairman of the President's Council of Economic Advisers, saluted Hansen: "It is certainly a statement of fact that you have influenced the nation's thinking about economic policy more profoundly than any other economist in this century.
American economist at Harvard , that began as an American Institutionalist but converted into one of the leading proponents of Keynesianism in the United States. He received in Ph. D in , with a thesis on business cycles. Hansen famous "secular stagnation" thesis came out the next year, in his presidential address to the AEA , with the harrowing vision of an economy trapped permanently in a slump of low population growth and low investment.. At first suspicious of Keynes 's General Theory when it first came out, Hansen soon converted c. His treatise re-articulated American business cycle history in terms of Keynesian theory. Hansen served on several government advisory posts, e.