Democracy in America
"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.
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glitch
Chart 4 "Gini Coefficient" shows the problem. Decades of productivity whose wealth fed only the super-rich.
What percentage of the world's population now owns HALF of it's wealth? I have see numbers as small as 1% owning half the world now.
A rush of new investment? Stocks exploded in value since QE.
Tech which has been erasing the need for a labor force, any new grand innovation is only likely to salt the wound.
It may have been better to pin hopes on some new opportunity that demands millions of workers.
Also raising the retirement age, when employers will not hire past 50, only guarantees the unemployment rolls even as people need to prepare for retirement.
So yes, it will reduce savings... and earnings in parallel.
The issue of lack of workers in the future is bogus - that is not the issue, since unemployment is currently high and is likely to remain so.
Excellent article on secular stagflation.
AS a businessman and lecturer in business, I think you need to re-consider the issue of relative working age population data. The anecdotal (and rather silly) response of governments to this issue is to try and stimulate population growth which only staves off the problem for a short time and creates a bigger problem in future years (let alone the short term affect of increasing the fertility rate) and ignores the simple fact that people are living longer.
Why can't we find meaningful employment for older workers? There are plenty of older people who are healthy, fit and active and would never be considered for any job due to age. The long term objective is not to fight the structural changes in population patterns but by re-defining the workplace and actually employing people who are of "retirement age".
In Singapore (my adopted home) it is just about impossible for anyone over 45 let alone 65 to find a job even if you have a PhD and outstanding career record.
regards
Mark Dignam
Larry Sumner's featured in the film "Inside Job", ie the argued cause of the GFC. I was surprise by the Ecomomist's beinign description of him as an "Economist". He has "done" so much more.
The 20th century global "economic boom" was created by the "finance revolution"... otherwise known as "debt"... computers enabled trillions to be lent quickly and cheaply... now, most major countries are so bloated with debt, they can consume no more... we, the West, have become the fat old man sitting on the sofa in his pajamas, blowing out his face-cheeks, and with a cold half-eaten pizza resting down the side of the seat...
At the same time the West creates new bubbles in bond and equity markets in the US and EU and is not willing to invest in Russia, which would provide bonanza returns if only the west cared more about its citizes and wasn't so anachronicly politicized. You reap what you sow.
With due respect, the West DOES invest heavily in Russia and may do so more if not for a corrupted dictator and warmonger in Putin.
there are so many political, economic and financial risks inherent in Russia that it is surprising that anyone would invest there.
Russia dissolved Warsaw pact alliance and unilateraly removed army from Europe, destroyed most of its nukes. Warmongers in this case is US, EU and their cold-war mentality, which they use to overthrow governments and spread violence.
Risks are all in your head, Russia has always honoured its obligations.
Which does not seem to include honoring the rights of its own citizens.
Piecing back a broken shell won't make an egg whole.
Still Putin receives great approval rates. The West is the only party that is not happy with that.
All cost saving. Russia was broke. Nukes are very expensive to build and maintain. Russia could not longer afford to occupy Eastern Europe. Russia cold not even afford to keep the Soviet Union together.
Trust Russia? I think not.
Russia still has all these nukes, what are you talking about?
Not occupy, but save and liberate from western agressive mentality. It's more like EU is currently occupied by US.
Of course, the damaging impact of the sustained capture of economic rents by embedded and influential special interest groups which have successfully suborned governments of all complexions doesn't enter in to the 'mainstream' analysis. This would finger quite a large swathe of The Economist's subscription base. And this sustained capture of economic rents is doubly damaging because those capturing them have an incentive to expend as much as they capture to maintain continued capture. And it can be triply damaging when governments are forced to spend public money to ameliorate the regressive impact of this sustained rent capture on utility service prices.
But we wouldn't want to raise this as a contributing factor, now would we?. Far too many oowerful and influential folks with their snouts in the trough.
The US fought communism not to hear that opinion! You are ruining the whole plan!
The world seems to have reached the limit of what financial manipulation can accomplish. More of it will make things worse, not better.
Much like hackers, they are always 1 step ahead.
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Goldman accused of exploiting aluminum storage rules
Nov 19, 2014
http://www.cnbc.com/id/102201021
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http://www.businessinsider.com/goldman-commodities-investigation-2014-11
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NSFTL
Regards
More of it has already made things worse, but at this point in time the results are simply not that clear.
For example, the current bubbles in the stock and real estate markets is still viewed as something that the Fed can brag about, or at least try to. Once the bubble pops and the brown stuff hits the fan, there will be many economists who would discuss what led to the catastrophe. As always.
Nah, they'll return to worries about growth and spurring investment.