ECONOMICS textbooks talk of “business cycles”. After a recession, they say, economies are supposed to bounce back. So what has gone wrong in the rich world? Following the “great recession” of 2008-09 rich countries struggled to make up the ground that they had lost. Real GDP in the euro zone is still lower than it was in 2009. Britain only passed its pre-crisis peak last summer. Performance has been sluggish even though interest rates in the rich world have been at rock-bottom for years. To explain rich countries’ poor growth, some economists (most notably Larry Summers, a former American Treasury secretary, pictured above), suggest that they are stuck in “secular stagnation”. What does that mean?
Secular-stagnation theory originated with Alvin Hansen, a Keynesian economist, in the 1930s. Countries suffering from the stagnation bug are burdened with too much saving and too little investment. Hansen reckoned the slumping economies of the 1930s were doomed to stagnation by poor growth prospects, a product of slowing innovation and ageing populations. Mr Summers's diagnosis is not all that different. Saving today is high for a number of reasons. In recent years many emerging markets have embarked on a savings binge, accumulating massive foreign-exchange reserves. China’s are now worth over $3 trillion. But demography is also important. Rich countries are ageing fast, thanks to rising life expectancy and falling birth rates. In America in 1970, the required stock of savings to meet lifelong consumption needs equalled -228% of GDP. Households, in other words, ought to have been big borrowers rather than savers since the population was generally young, life expectancies were lower than at present, and future income was expected to grow rapidly. Repaying debts and financing retirement did not require much penny-pinching. Today's population, by contrast, is older and is expected to linger for longer in retirement. The estimated required level of savings therefore rose to 52% of GDP in 2010.
Demography also partially explains why investment is so low. Slower growth in the labour force means slower growth overall. And if there are fewer workers to hire, firms will also need less capital. The structure of today's rich economies does not help. Internet firms like Google and Facebook can grow to enormous size on very little capital. Net investment (gross investment minus depreciation) is close to its lowest level, as a share of the total capital stock, since the second world war. With low investment and high savings, economic growth slows down. Inflation tumbles, too, further complicating matters. Low inflation (or deflation) makes it hard for central banks to lower real interest rates (and stimulate the economy) since central banks cannot easily push their policy rates into negative territory; some have taken the plunge and suffered unhappy consequences. Others, including the American, British, Japanese and euro-zone central banks have tried unconventional monetary policies like “quantitative easing”—creating money to purchase financial assets—with mixed results.
In graphics: ”secular stagnation“ explained
Not everyone is convinced by the theory. Rich countries have been ageing for decades. There have been investment-light internet firms since the 1990s. But those things have not always mattered. During the 2000s, for instance, rich countries saw pretty strong growth. Stagnationists reckon this fast growth was a mirage. Low demand in an economy can be temporarily overcome through the inflation of financial bubbles, they argue. America's expansions in the 2000s (when the housing market bubbled) or the 1990s (when it was technology's turn) are prime examples. Without such manias, they suggest, growth would have been much slower. Some economists counter that the timing of the bubbles is off; the tech frenzy of the late 1990s got going after unemployment had already tumbled below 5%, for example. But the longer rich countries suffer from disappointing expansions punctuated by financial blow-ups, the harder the stagnationists' argument is to dispute.
