Reasons to Reject Secular Stagnation

The National Association for Business Economics recently published Larry Summers’ remarks on secular stagnation earlier this year. The conversation picked up after his speech at the IMF conference last year, though has been floating around for some time. Excluding gloomy prognostications from Alvin Hanson in the 1930s, I can trace back the idea that the US has fallen into a secular trap back to Paul Krugman at the Munk Debates in 2011.

Though Summers is seen today as the ringleader of the stagnationistas, Krugman’s formidable opponent was none other than Larry Summers. Summers has since undergone, as I’ve documented before, a remarkable intellectual evolution making very similar claims to Krugman in 2011 (though with more rigor and a stronger platform). While even the chance of a somewhat permanent slump is sobering, there are reasons to doubt both the theory and evidence behind this claim.

Let’s start with the labor force. Summers is understandably unhappy about the recent decline in participation rate. He controls for demographic factors by looking only at working age (25-54 yo.) men which should account for an older population and students staying in school longer:

But that is not the largest part of the story. Even if one looks at 25-to-54 year-old men, a group where  there is perhaps the least ambiguity because there is the greatest societal expectation of work, Figure 3 shows that the employment/population ratio declined sharply during the downturn, and only a small portion of that decrease has been recovered since that time. The recovery has not represented a return to potential; and, according to the best estimates we have, the downturn has cast a substantial shadow on the economy’s future potential.

With the graph:

lfpr3

While there is certainly a sense in which this has not recovered to trend level, there is also an argument that the crash just accelerated an already fermenting labor force. While Summers argues this is due to features of the recovery, and not structural or technological issues, the data may suggest otherwise:

graph

For example, the graph above demonstrates that the rough participation rate of those with a college degree or higher fluctuates within a very narrow band and has, if anything, continued on an increasing trend. This militates in favor of a skills-biased technological change hypothesis which is inconsistent with secular stagnation (of output at least).

The evidence is stronger still. Take these two charts from JP Morgan:

lfpr lfpr2

Discouraged workers are peripheral to the question of labor force participation. Nor is “working age men” the representative statistic it once was, as Summers analysis makes it out to be. If anything, females are obtaining college degrees at higher rates and are employable in a wide array of increasingly-important occupations, prominently healthcare and education. Traditionally male fields, on the other hand, are in largely tradable sectors and probably not coming back. This has worrisome implications for the distribution of income and the underlying social structure itself. And we should do something about that. But robots and cheap, Chinese goods are not “secular stagnation”.

This brings us to our next point:

Third, changes in the distribution of income, both between labor income and capital income and between those with more wealth and those with less, have operated to raise the propensity to save, as have increases in corporate-retained earnings. These phe- nomena are shown in Figures 9 and 10. An increase in inequality and the capital income share operate to increase the level of savings. Reduced investment demand and increased propensity to save operate in the direction of a lower equilibrium real interest rate.

This sounds good in theory, but in reality the very period over which income inequality has increased the most, total savings rates have fallen precipitously:

savings

Gross private saving is the broadest measure of saving and accounts for increased savings in the form of corporate profits. Government saving, to nobody’s surprise, has also fallen over this period. While richer people most certainly do have a lower propensity to consume, the magnitude of this effect is clearly dwarfed by forces like the Asian saving glut and potentially overvalued dollar. Luxury markets are booming: and it may not be to a good liberal’s taste, but demand for chauffeurs and butlers creates employment just like that for apparel and electronics. Indeed, to the extent richer people consume at the margin on non-tradable services, the leakage is also lower.

But Summers’ grander point here remains: real interest rates have been on a secular decline. This strikes at what may be the heart of the problem: low investment demand. While low equilibrium interest rates have other problems, like increasing the risk of a liquidity trap, the structural impact isn’t necessarily felt in investment. The interest-rate elasticity of investment has always been tough to measure and Treasury yields may not be the best gauge: lets look at the corporate bond market once yields start to diverge. This isn’t too important (yet).

Rather, advanced economies currently function on what Paul Krugman has called a “bicycle model”. Firms invest on the expectation of higher returns in the future due to economic growth. The accelerator model of output, therefore, frames investment demand as a function of long-run potential growth. When this expectation falls, so does investment. In other words growth is necessary for growth. If long-run growth expectations fall substantially the US is by the principle of recursion screwed. But the bicycle doesn’t have to fall if we transition to a steadier, consumption driven model. And that’s just what we’ve been doing:

consumption

So long as we’re able to keep consumption growth to meet a lower steady-state investment rate, the economy won’t self-implode (though, definition, will grow slower). Given that the largest projected increases in future private and public spending come from education, healthcare, and a geriatric economy this transition will be rather easy for the United States to make. (Not to mention the ample space for public investment, something I know Summers is on board with).

However, we should still be uncertain about the extent to which potential growth has fallen. As Summers notes:

Ponder that the leading technological companies of this age—I think, for example, of Apple and Google— find themselves swimming in cash and facing the challenge of what to do with a very large cash hoard. Ponder the fact that WhatsApp has a greater market value than Sony, with next to no capital investment required to achieve it. Ponder the fact that it used to require tens of millions of dollars to start a significant new venture, and significant new ventures today are seeded with hundreds of thousands of dollars. All of this means reduced demand for investment, with con- sequences for equilibrium levels of interest rates.

It is valuable here to think in terms of inputs and outputs. We need less “debt” to achieve a similar valuation that once required tons of borrowing. What Summers is describing is technological, if not economic, progress. Indeed the interest-rate elasticity of demand has probably fallen, but only in a small segment of the economy. I’ve written about this in some detail before:

————————

While he’s right that there are secular trends toward cheaper capital, I’m not sure we can attribute much of that to the information technology era. Even granting that the magnitude of technology is substantial, something I’ll get back to in a minute, it’s important to explore the consequences. I would argue that the information era doesn’t reduce the demand for investment, as Summers proposes, as much as the interest rate elasticity of demand – that is to say firms are less sensitive to changes in the cost of capital. The reason isn’t obvious. Interest rates matter a lot for long-term, capacity building investments—like opening a huge new factory. But software is usually rented on a monthly basis from the firm’s own cash—so interest rates matter a lot less. (Reduced demand and reduced need mean the same thing in English, but not economese).

But that’s coming from the same cash pile Summers is talking about—and it’s still investment. In general it’s not that there’s a lot less investment as much as the factors that affect its demand are changing. This is where we get back to magnitudes. Take a look at software’s share of total private investment:

investment

There are two stories here. One, in sheer magnitude, software (the blue line) is still only 15 percent of private investment and not significantly higher than points in the past two decades when interest rates were a lot higher. On the other hand, residential investment as a share of private investment, hasn’t changed much in structure since the mid-’60s and is still very sensitive to changes in the interest rate.

The point here is that while WhatsApp didn’t need any real investment, a lot of the economy does, and as sexy as Silicon Valley is, main street America is not irrelevant. There’s another point here, and I’d file it under, as Scott Sumner might say, “never reason from a price change.” The Silicon Valley story tells us that the returns on very small investments can be huge and, under competitive markets, this would imply that the marginal return on capital is falling rapidly after a certain level. However, that isn’t consistent with the broad increase in capital’s share of income we’ve noticed over the past decade or so. In a simple (but empirically powerful) Cobb-Douglas production function, the exponent on capital is its share of total income, and the higher the exponent, the larger the marginal product at any given point (other things equal).

Of course, other things are never equal, and that’s Sumner’s point.

Summers is right, that to the extent software is significant, there are important implications for the equilibrium interest rate. As the elasticity falls (that is, as the demand curve becomes more vertical) changes in the supply of loanable funds will be felt entirely through interest rate adjustment. So an increase in supply has a lot more potential to keep the economy under a low interest rate environment than before.

Ultimately, this is all pretty speculative. Calculating the importance of interest rates, as an empirical phenomenon, is notoriously difficult (studies disagree, for example, on whether higher interest rates even increase savings)—and observing shifts in the shape of the determining curves is harder still. While interest rates are low for a number of reasons, technology per se may not be one.

The practical point here is that since long-term interest rates are what drive the kind of investment Summers says is dwindling, it’s ever more incumbent that the Fed doesn’t let the term premium on long bonds rise too much. That is, keep quantitative easing hard.

————————

Lower interest rates and interest-rate elasticity of demand pose a real threat to the current model of monetary policymaking. These are good arguments for a slightly higher inflation target.

But maybe the most important problem with secular stagnation is the cyclical recovery, which to some extent are mutually exclusive. While the economy is still really tough for those at the bottom, there are signs of life with increasing quits, inflation, and pressure in the market in general. There’s a lot more we can and should be doing, but these should perhaps be considered for redistributive and supply-side – rather than purely demand-side – reasons.

Of course, until we do get consistently sufficient inflation, demand is still lacking. The question is whether that seems impossible, and I think it would be difficult to answer in the affirmative. Unfortunately, my post has none of the optimism with which Larry Summers and Ian Bremmer challenged Paul Krugman in the Munk Debate. The Depression was the last time we were in such a bad position. As horrific as that was, it was no secular stagnation.

Advertisements
7 comments
  1. You, Brad Delong, and Paul Krugman have no actual analytical disagreement. You think you disagree,but you actually do not.

    You say:

    But robots and cheap, Chinese goods are anything but “secular stagnation”.

    This is wrong. they are secular stagnation exactly, in that they are causing lower labor demand in the US, which caused everything else. Robots and Cheap chinese goods are the first cause of secular stagnation. Falling demand for labor is the cause of an increasing oversupply of capital, which is the cause of declining returns to that capital, and both of the two prior are the cause of increasing speculation, financialization, and increased volaility in the economy, leading ultimately to the economic meltdown of 2009.

    If you are arguing that Larry Summers argues that ‘secular stagnation’ is *only* a product of the fact that 2008-9 happened, I don’t think he said that at all.

    You and him both agree that falling demand for labor is the cause of stagnant median income, and you both would agree on what’s causing that in turn. He’s emphasizing the balance-sheet issues and debt overhang, perhaps, and you’re emphasizing the role of growth expectations in decisions by businesess to invest the capital you’re stashing away. All of you are right. All of these things are factors.

    secular stagnation is just a description of the place we are in, and everyone agrees that massive stimulus and redistribution are needed to get us out.

  2. I would add that ‘get us out’ is a relative term. We can improve our performance relative to the present day, but we’re still facing stagnation – reduced GDP performance – above the demographic decline trend and relative to the 20th century. That’s because of our decreasing ability to outcompete cheap labor without decreasing the cost of our own labor, which are two sides of the same coin in that they both lead to less consumption and less growth.

  3. Tom said:

    Interesting. I agree very much that “secular stagnation” is a poor choice of words to describe our situation. Words are important, and “stagnation” just doesn’t work as a name for negative effects of a rapid evolution.

    I agree very much with almost all you wrote about software, but I think you made the case too softly. Hundreds of thousands won’t get you very far in most of the software world, except perhaps with a hit game. Anyone who believes cheaply made hit games portend an investmentless future should have believed the same about Jailhouse Rock and Blue Suede Shoes back in the 50s. The app business is kind of like the movie business. Here and there a low budget flick becomes popular and ends up making big-time profits. But the vast majority of independent cinema is all investment and little or no returns. Even WhatsApp hasn’t yet made any of the kind of income that counts in GDP.

    Your history is correct as well: it was Krugman, not Summers, who introduced the modern “secular stagnation” idea. Indeed it comes right out of Alvin Hanson, the same place Krugman gets his favorite diagram. But from Krugman’s mouth and pen, the phrase just didn’t sound new or interesting. Somehow Summers, or a popular image of Summers, made it sound compelling. I can’t explain why. I didn’t find anything new or interesting in his stagnation speeches, or even a consistent line of thought. I see all the fawning on Summers’ stagnation speeches as a sort of emperor’s new clothes phenomenon. Maybe I remember too well how easily Chubais fooled Summers into helping him plunder the IMF.

    I would counter the “bicycle” paradigm very differently. It’s a very silly model, which imagines one giant investor making one homogeneous product who invests according to his estimation of future aggregate demand. Investment decisions are made on the basis of estimations of demand for particular products, especially new or improved ones. Growth is mainly about introducing new and improved products and services, not increasing the volumes of established ones.

    You lost me on two points.

    What does “equilibrium interest rate” mean in the context of an interest-rate-targeting regime? Or in a regime with so much excess reserves that rates would be near zero regardless of the level of investment demand? Is the equilibrium rate something other than the targeted rate? Is it the old “natural interest rate” concept? If so, what are the “natural” conditions in which this rate would prevail?

    I also don’t understand what you’re trying to say with your chart of the private consumption share of GDP. Do you see the rising consumption share as evidence of something other than declining investment? Does this other reason for the rising consumption share somehow counter the growth slowdown effect of declining investment?

  4. Next Page MoreMore about forskolinSupport Evaluations * Be the first to review/rate this medicine

    Zontivity Zontivity (vorapaxar) is really a protease-stimulated receptor-ONE (PAR-ONE) antagonist for your prevention of…

    buy forskolin
    Epanova Epanova (rr-THREE-carboxylic acids) can be a fish oil-taken blend of free-fatty chemicals for
    that cure of…

    Incruse Incruse (umeclidin

    ium) can be an anticholinergic bronchodilator advised for that preservation therapy…

    Is bound about the correct levels for diverse problems.
    A 2006 analyze also studies some great benefits of
    Forskolin with managing and fending off problems.
    This causes a drop in blood-pressure, that will be ideal for bodybuilders and dieters getting writers that are fat
    using stimulants.

    Truly unfortunate. The very next time you take a details of almond proteins powdered, reconsider that thought.
    Everyone is different. It is a dilemma. Flawless Skin Fashion – you are given the methods to get
    you to Sleek by us

    Join Date Scar 2003 Place Ohio Age 43 Posts21

    There have been safety concerns mentioned, firmly,
    hypothetical, which by lowering the dosage into a sensible range I labored to handle,.

    artichoke extract and forskolin side effects
    Clin Pharmacol Ther 1993;53:76- 83.Baumann GRAMS, Felix
    S, Sattelberger U, Klein GRAMS.

    Aerobic effects of forskolin (HL-362) in-patients with idiopathic congestiv cardiomyopathy.
    Incredibly benefits that are interesting on how many there are.let’s see how I am worked for by it.

    Material of the fundamental fat primarily contains mono, and is dependent upon moment and location of collection – and sesquiterpenes.

    At the least there have really been several human research that have
    examined forskolin, unlike some other weight loss fads in the past.
    Our man requires diabetic pills just: metforman, januvia,
    and amaryl , also simvastatin.

    MediaTech ResearchFacebookAnonymousMore topicsCard GamesMMOGsOther GamesPhotographyMore issues

    Sign in with your email and code. We advise forskohlii.

    But carnitine is not any longer just a fat-burning supplement.Carnitine is now referred to
    as a powerful anabolic product, thanks to analysis done at Connecticut’s University.
    If this review is not appropriate, please let us learn. But, presently there is zero trustworthy medical data
    that exhibits Coleus forskohlii components obtained by mouth are effective.How will
    it work?Forskolin functions on muscles within the center as well as in the walls of the
    blood-vessels. Aisle7.comThe information is for educational purposes.
    [49]
    forskolin raspberry ketones side effects dr. oz
    Coleus Forskohlii extract in rodents leads to induction of numerous chemical devices inside the liver at 0.5%
    of give ingestion, alongside an increase in liver weight.

    Et al, Mulhall JP, Daller L AM. These reviews
    shouldn’t be used as guidelines but rather customer
    opinions of the products they may or may well not purchased.
    A comparison study using dobutamine nitroprusside.

    You should consult a healthcare professional before starting any diet, exercise
    or supplementing plan, before using any medicine,
    or when you have or think you may have a medical condition. Indeed AND Number –
    it’s also possible to flag this reviewJun122013(0 of TWO clients identified this review helpful) 4.0Great Solution, Secure By
    Mstravatfrom West Red, NJSee many my evaluations
    ProsEasy To TakeEffective No Aftertaste Like OthersNutritionalConsBest UsesComments about CORR-JENSEN LABRADORS 1009787 Ab
    Cuts Sleek & Toned – Midsection Remedy:very good for
    that money.
    coleus forskohlii root pure green coffee bean extract vitamin shoppe
    Things were claimed by women like “we do not knowhow it happened, nonetheless it did… Another weight loss element associated with 7-Keto is its ability to positively produce liver enzymes that trigger thermogenesis—the creation of cell warmth. Are you able to tell myself everything you does to make your own hair mature back? Forskolin was revealed in canine research to market the service of adenylate cyclase and boost intracellular levels of cyclic adenosine monophosphate (camping) (1). (7). Ramifications of coleus forskohlii supplements on hematological profiles and body formula in mildly overweight women.

  5. Flynn said:

    Yoս have no goods within your shopping cart software.

    Ԝhenever Ӏ noify my bf that І’m in the TJ Maxx, his thouɡhts iss “that isn’t really a TJ… Richmond Middle leasing Leading searching, food and enjoyment venue in south-central KentuckyStoresRestaurantsEvents &firm . We are one block in the Wide. Most home executives are not irresponsible for advertising quickly or vacant -to-be items that are unfilled, according to Careeroverview.com. There was additionally the Plaza Theater that was a drive in moviehouse.
    anwar barbouti [Flynn]
    Situated 21 miles south of Lexington and straight off I75, Richmond Center could be the premier purchasing, dinner and leisure location in , Ky that is main that is southern. For a faculty city, fliers on bulletin boards in accordance aspects of the campus could be essentially the most reliable strategy to get renters that are fresh. Therefore, find a T.J.’s in your area and obtain searching. While some delegate that duty several condo administrators do the task themselves. Likewise the browse workers is usually not hostile and fast!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s