Doom and gloom

By THE DATA TEAM

"SECULAR stagnation" is not a new idea. It was first popularised by Alvin Hansen, an economist and disciple of John Maynard Keynes, in the stagnant 1930s. Hansen thought a slowing of both population growth and technological progress would reduce opportunities for investment. Savings would then pile up unused, he reasoned, and growth would slump unless governments borrowed and spent to prop up demand. Following the economic boom of the 1950s, interest in the hypothesis dwindled. The theory is now popular again, thanks in large part to a 2013 speech by Larry Summers, an economist at Harvard University, in which he suggested that the rich world might be suffering from “secular stagnation”. Even as asset bubbles inflated before the financial crisis, growth in the rich world’s economies was hardly breakneck, suggesting a lack of productive investment opportunities. And there are a number of reasons to think it has since become harder to invigorate growth.

Adherents of the theory of secular stagnation emphasise different factors. Demography is one. An economy’s potential output depends on the number of workers and their productivity. In both Germany and Japan, the working-age population (those aged 15-64) has been shrinking for more than a decade, and the rate of decline will accelerate in coming decades. In Britain, the population will stop growing in coming decades while in America, it will grow at barely a third of the 1% rate that prevailed from 2000 to 2013. Population patterns affect investment and savings. Firms need a given capital stock per worker—equipment, structures, land and intellectual property—in order to produce a unit of output. If output growth is hampered by lack of workers, firms will need less capital. Ageing populations also mean that more people are saving heavily in order to fund their retirement, depressing consumption.

A propensity to save too much and consume too little has other causes than demography. Levels of income and wealth inequality across the rich world have been rising. The chart above concentrates on income and uses a number known as the Gini coefficient. In a hypothetical country with a coefficient of 0, everyone has exactly the same income; a nation with a coefficient of 1.0 is home to one extremely fat cat who takes everything. Because richer people are more likely than poorer people to save money than to spend it, rising inequality is also likely to dampen consumption and growth.

Adding to the squeeze on consumption, pay growth in the rich world has been throttled for several years now. Between 1991 and 2012 the average annual increase in real wages in Britain was 1.5% and in America 1%, according to the Organisation for Economic Co-operation and Development, a club of mostly rich countries. That was less than the rate of economic growth over the period and far less than in earlier decades. Other countries fared even worse. Real wage growth in Germany from 1992 to 2012 was just 0.6%; Italy and Japan saw hardly any increase at all. And, critically, those averages conceal plenty of variation. Real pay for most workers remained flat or even fell, whereas for the highest earners it soared. Technological changes may deepen such polarisation. In a 2013 paper Carl Benedikt Frey and Michael Osborne, of Oxford University, analysed over 700 different occupations to see how easily they could be computerised, and concluded that 47% of employment in America is at high risk of being automated over the coming years.

All of these factors, combined with others such as fiscal retrenchment and cash hoarding by companies, have had the effect of forcing interest rates downward. Real government-bond yields have been falling for more than a decade, hinting that too much saving has too few places to go. Whether that proves the theory of secular stagnation right is an open question—some think the economy is only suffering a cyclical hangover from the financial crisis. But the usual tactic of reviving growth through lower interest rates is unquestionably much harder to pull off. What might? Some advocate increasing deficit-financed public infrastructure investment; others raising the retirement age which, according to some models, should encourage households to spend more and save less. Still others suggest more vigorous monetary stimulus in order to raise inflation, which would make more negative real interest rates possible. Enacting a wealth tax to separate the rich from their unspent savings is another possible response, as is penalising companies who don't spend their spare cash on wages or investment. Coming up with a world-changing technological innovation that creates a rush of new investment would be pretty helpful, too.

Read more on "secular stagnation" here.