The concept of "secular
stagnation" — that the economy may be facing a protracted period of
low growth and high unemployment — has been seeping back into economic and
policy discourse. Once relegated to the margins of heterodox economic theory,
the idea of stagnation as a likely ongoing direction for the economy, in fact,
is now virtually mainstream, expounded by such well-known figures as Lawrence
Summers and Paul Krugman.
Stagnation, however, is not a new problem. Careful
examination of the U.S. economy over the last century suggests that stagnation
may not be the exception but just possibly the rule of modern economic performance — a
rule that was mainly broken only by the stimulus effects of massive military
expenditures at three crucial junctures.
Major economic floundering in the first quarter of the
20th century was relieved by the boost World War I gave to the economy, and the
tremendous economic collapse in the second quarter was ended by World War II's
huge increase in military spending. In the third quarter, the Korean War, the
Cold War and the Vietnam War added major stimulus at key times.
Moreover, several of the indirect consequences of World
War II — including wartime savings, the compression of wages, the strengthening
of unions, the GI Bill that educated millions of veterans, and the
reconstruction of Europe, together with the fact that major competitors had
been temporarily destroyed by war — all contributed to the third quarter's
great economic boom.
The modern trend, despite Iraq, Afghanistan and other
smaller-scale wars, is also clear. Defense expenditures declined decade by
decade from a Korean War high of 13.8% of the economy in 1953 to 3.7% in the
2000s, with steadily reduced economic impact. The financial bubbles in the late
1980s, 1990s and early 2000s produced only partial and highly unstable upswings
that masked the underlying decline.
The notion that stagnation is far more important than is
commonly understood has been bolstered by Thomas Piketty's landmark book
"Capital in the Twenty-First Century," which also emphasizes just how
unusual the era of the Depression and two world wars was. Piketty's analysis
suggests that the high growth rates of the post-World War II period were, by
and large, an aberration. "Many people think that growth ought to be at
least 3 or 4 percent a year," he wrote. "Both history and logic show
this to be illusory."
Viewed in this light, the latest long-range projections
from the Organization for Economic Cooperation and Development, the Paris-based
intergovernmental group for advanced economies, make for sobering reading. In a
new report, "Policy Challenges for the Next 50 Years," the OECD warns
that economic growth in the world's advanced industrial economies — including
Europe, North America and Japan — will likely slow even further from historic
levels over the next half-century, while inequality will rocket to new heights
and climate change will take an increasingly damaging toll on world GDP.
According to the projections, the OECD member nations'
annual average contribution to global GDP growth will steadily fall from 1.19%
this decade to 0.54% between 2050 and 2060. Meanwhile, inequality in these
countries may rise as much as 30% or more.
The OECD projections are, if anything, optimistic, since
they assume that Europe and the United States each will absorb in the
neighborhood of 50 million new immigrants over this period — an assumption that
may run contrary to the restrictive politics of immigration playing out on both
sides of the Atlantic.
The economic remedy for stagnation is relatively
straightforward — in theory: Faltering demand could be offset by large-scale
government spending on infrastructure, education and other much-needed
investments. In practice, however, it is painfully clear that large-scale
Keynesian policies of this kind are no longer politically viable.
The implications of the emerging possibility of a
sustained period of stagnation are profound. Through the repeated economic
downturns of recent U.S. history — 11 since 1945 alone — the expectation of
eventual sustained recovery has been the critical assumption underpinning both
politics and policy. An era of stagnation would undermine the economic basis of
traditional political hope of both left and right. It would mean ongoing high
unemployment, ongoing deficits, ongoing struggles to fund public programs and,
in all probability, ongoing and intensified political deadlock and wrangling as
unemployment continues, deficits increase and a profound battle over narrowing
economic possibilities sets in.
If stagnation is the new normal, we will likely be forced
to reassess the fundamental assumptions of politics and the economy and to
ultimately get serious about restructuring our faltering economic system in
more far-reaching ways than most Americans have contemplated.
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