Secular Stagnation?

There is not a consensus among economists that the rich economies are stagnating in the long term compared to the experiences of the last two centuries. But there are some heavyweights who have suggested the possibility. There is even less consensus on why it may be happening.

Even so, while reading recent discussions by economists I respect, I am often left with the feeling that their analysis would be simpler and easier to understand if there actually was secular stagnation. This column sketches possible explanations and then go onto to discuss the implications if secular stagnation is actually occurring.

It is generally accepted that international real interest rates are low and are likely to remain low for a long time according to the rates for long bonds (thirty year ones).

In principle, low interest rates ought to stimulate an investment boom, but none is evident. That seems to suggest that in rich countries businesses do not see growth opportunities.

(New Zealanders use low interest rates to buy houses, pushing up their prices in a Ponzi scheme which does not add to economic growth but does to financial instability.)

It is true that business sees opportunities in poorer countries, although they may be hesitant to invest there because of political instability. Many poorer economies will grow faster than the rich ones. But when they catch up, their growth rate will slow down to the rich economy rate. That is exactly what happened to Japan about thirty years ago.

Why might the growth rates be much lower in the future? Any answer centres on what we think causes economic growth. Until about sixty years ago, economists thought that capital accumulation drove economic growth. Then they found out that the driver was something else which is called loosely ‘technology’. The importance of capital is that, usually, it is the vehicle by which technology is introduced.

Such a theory explains why poorer countries are still growing. They are upgrading their technologies to rich-country levels. When they reach that level, they will grow at the rich-country rates.

So why are there no new growth-promoting technologies coming on as they have in the last two centuries?

The eminent American economist Robert Gordon, who has done more research in the area that anyone else, argues that today’s innovations are not comparable to those of a century ago – like electricity and the internal combustion engine.

We may know whether he is right in a hundred years, although there certainly seems to be a multitude of new innovations. So the Gordon argument can be revised to argue that it is difficult to commercialise them – that is, to invest in a way that makes a commercial profit.

It is certainly true that there are some very profitable activities today. Economic theory says that where profits are high, they should be undermined by additional investment, especially if interest rates are low. That does not seem to be happening. For the theory to work, it assumes that monopolies can be challenged by new investments. However, the degree of monopolisation seems to be increasing in the world, in which case their power to resist new entrants is increasing. The result may be high profits and low interest rates.

A third possibility is that there are investment opportunities for infrastructure but that public-debt-constrained governments are unable to fund them.

Nor should we forget the possibility that, as we move into a service economy, there are increasingly severe difficulties measuring economic growth.

The list of possibilities is long. I finish this section with one more. Economic growth may have been more dependent on consuming natural resources than the conventional wisdom allows. If so, that part of growth is a kind of Ponzi scheme and we are reaching the point where it is coming to an end, especially if, as well as key resources running down, we need to fix the sumps of pollution and waste such as air (carbon and smoke emissions) and fresh (waste and runoff) and sea water (including plastic bags).


Suppose that the hypothesis of secular stagnation is even partly true. It is a major challenge to come terms with its implications.

Of course the commentariat will cling to the dead economics of unlimited and rapid growth until it dies off. Practically, that means that politicians will press for policies based on growth, arguing that we should take measures to stimulate growth even though they will not work.

But even professional economists can get trapped. Macro-forecasting, which ought to be thinking systematically about the current state of the economy – it is not always, I’m afraid – basically assumes a trend rate of growth and thinks about fluctuations around the trend. If too high a trend growth rate is forecast, not only will the predictions be wrecked but there will be faulty policy reactions.

Another consequence seems to be that economic inequality will remain high if the monopoly profit rate remains high. Perhaps eventually it may lead to revolutions, perhaps not. (They may be different sorts of ‘revolutions' from what we generally think, like Brexit, Trump and authoritarian populism.)

Another distributional impact will be on the elderly. The retired will receive less from their defined-contribution pensions and their investments and will be relatively poorer. That will create further fiscal pressures as the economy ages. Meanwhile, a low interest rate regime will have Crown investment funds struggling.

It does not follow that there is nothing for economists to do in an economy experiencing secular stagnation – except to make false predictions. We may have to shift from focussing on the material standard of living to a notion of wellbeing where there is still much to be done.

We have based so much of our past thinking and policy on highish growth, that a substantial lowering of the economic growth rate will be very disruptive. Perhaps we should bury our heads in the sand hoping the big impacts are some way off. But as I remarked at the beginning, I already see in some of the current research and analysis evidence of secular stagnation.