WARNING SIGNALS
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Focus on: Secular Stagnation
The Turtle's Progress: Secular Stagnation Meets the Headwinds - R. Gordon
SUMMARY - Robert J Gordon explains Secular Stagnation by a decline in Total Factor Productivity. He argues that the US economic growth will continue to be slow for the next 25 to 40 years, because of four factors: demographics, education, inequality, and government debt.
Indeed, the US unemployment rate has fallen sharply during the last months, but all of that improvement has been offset by an unprecedented decline in labor-force participation.
According to Gordon, the slowdown in Total Factor Productivity is visible since 1972 and has continued to present. But in reality, it is not a slowdown, but a return to the normal situation. The real question that one should ask is how to explain the productivity miracle that happened to the US economy between 1920 and 1970.
For Gordon, it is impossible to compare the productivity gains that could be realized thanks to future inventions, such as robots and driverless car to the benefits from the inventions of the Second Industrial Revolution. But, for more optimistic economists such as McAfee and Mokyr, cited in Gordon’s article, today’s innovations have the same potential of growth as the previous ones. But these innovations are not included in the GDP figures because they are provided for free, such as Google and Wikipedia.
Source: VoxEu eBook on Secular Stagnation, August 2014.
Robert J Gordon
Northwestern University and CEPR
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%. This column argues that 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.
1. Distinguishing between secular stagnation and slow long-term growth
No single image captures the present concern about secular stagnation and slowing long-term economic growth better than the Economist cover of 19 July 2014, showing a frustrated jockey dressed in the colors of the US flag frantically trying to get some movement from the gigantic turtle that he is riding. US real GDP growth 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%. Almost all of that improvement in the unemployment rate has been offset by an unprecedented decline in labour-force participation, so that the ratio of employment to the working-age population has hardly improved at all since the trough of the recession.
I have recently (Gordon 2014a) restated the case for slow growth over the long run of the next 25 to 40 years. At the same time, Larry Summers (2013) has signaled his alarm about a return of ‘secular stagnation’, a term associated with a famous 1938 Presidential Address to the American Economic Association by the Harvard economist Alvin Hansen (see also Hansen 1939). However, Summers and I are talking about different aspects of the current US growth dilemma. His analysis concerns the demand side, “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”.
In contrast, my version of slow future growth refers to potential output itself. As the US unemployment rate declines toward the normal level consistent with steady nonaccelerating inflation, by definition actual output catches up to potential output. I have provided (Gordon 2014b) a layman’s guide to the numbers that link the performance of real GDP and the unemployment rate and have concluded that US potential real GDP over the next few years will grow at only 1.4 to 1.6% per year, a much slower rate that is built into current US government economic and budget projections. My analysis suggests that the gap of actual performance below potential that concerns Summers is currently quite narrow and that the slow growth he observes is more a problem of slow potential growth than a remaining gap.
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