Century US Economy INET Conference Session: A Decade of Stagnation, - - PowerPoint PPT Presentation

Secular Stagnation in the 21st Century US Economy

INET Conference Session: “A Decade of Stagnation, Why?” Edinburgh, Scotland—October 21, 2017 Steven Fazzari Washington University in St. Louis Departments of Economics and Sociology Weidenbaum Center on the Economy, Government, and Public Policy

A Decade of U.S. “Secular Stagnation”

• Summary of presentation
• Headline data: stagnation in aftermath of the Great Recession
• Theoretical debate: supply-side vs. demand-side
• Empirical case: it’s not supply, it’s demand
• Rising inequality and demand-side stagnation
• Acknowledgements
• Support from INET
• Co-authored work with Barry Cynamon

Recent Stagnation

(Peak-to-peak growth of real GDP per capita)

Peak Dates Growth per Year (per capita) 1973:4 to 1979:3

1.8%

1979:3 to 1990:2

2.1%

1990:2 to 2000:2

2.2%

2000:4 to 2007:4

1.4%

2007:4 to 2017:2*

0.6%

*Final cycle is incomplete

Stagnation: Supply-Side Theoretical Lens

• Mainstream theory: Keynesian demand problems relevant only in the “short run;”

supply side rules the long run

• The neoclassical synthesis
• Old version: wage and price adjustment
• New version: wise monetary policy
• Persistent stagnation
• 10 years since peak; 8 years since trough
• Beyond the short run, therefore, problems must be with supply

Stagnation: Demand-Side Theoretical Lens

• Critique of the neoclassical synthesis
• Destabilizing effects of deflation and disinflation
• Can we rely on monetary policy?
• Low interest elasticities of consumption and investment
• If monetary policy works, it creates financial instability (Minsky)
• If a “natural rate” exists, it is likely volatile and often negative
• Zero lower bound not the main issue
• No endogenous market or policy mechanism to restore

demand to potential output “beyond the short run”

• Demand growth dynamics are the engine of economic activity

most of the time

• Look at the evidence …

Weak Evidence for Supply-Side Stagnation

• Paper discusses some detailed evidence
• More slack in the labor market than suggested by low

unemployment rate

• Business investment not particularly low given slow growth
• Key test: supply-side stagnation should cause high real

interest rates

Real Interest Rates: No Evidence of Supply Stagnation

• 1.00

0.00 1.00 2.00 3.00 4.00 5.00 6.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 10-Year T Bond - Core PCE Infl 5-Year T Bond - Core PCE Infl 10-Year TIPS Real Yield

The Demand Side: Household Demand

(Adjusted household demand based on Cynamon & Fazzari, 2017)

4000 4500 5000 5500 6000 6500 7000 7500 8000 8500 9000 9500 10000 10500 11000 11500 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Real Adjusted Household Demand 2000-2006 Trend (HH Dem)

2016 Gap: 21.7% $2.3 trillion Trend re-joined in past cycles Unsustainable finance, but we needed this demand

Weak Household Spending and the Stagnant Recovery

(Based on Cynamon-Fazzari Review of Income & Wealth, 2017)

80.0 85.0 90.0 95.0 100.0 105.0 110.0 115.0 120.0 125.0 130.0 1 2 3 4 5 6 7 8 9 10 11 12 Index Peak=100 Years Since Peak

Real Household Demand Profiles (Population Adjusted)

1978-1989 1989-2000 2000-2006 2006-2015

Current cycle has not recovered peak value after 10 years!

Government Demand Did Not Replace Households

1500.00 2000.00 2500.00 3000.00 3500.00 4000.00 4500.00 5000.00 5500.00 6000.00

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Total Government Consumption, Investment, & Medical 2000-2006 Trend

Nuanced Role for Inequality

• Rising inequality as explanation for stagnant demand
• Rich spend or “recycle” a smaller share of income than others
• But, timing problem
• Borrow-and-spend era postpones demand drag
• Great Recession forces middle-class demand down
• Now more in line with stagnant incomes
• But we needed that demand
• Inequality can explain at least 10% slowdown of demand

path since mid 1980s (Cynamon & Fazzari, EJEEP, 2015)

Consequences

• Disappointing “recovery” and secular stagnation “beyond the short run”
• Demand leads supply: reverse Say’s Law
• Deleveraging not enough to restore robust demand growth
• Does not address root cause of rising income inequality
• Inconsistent calls for smaller government without addressing demand gap
• What engine of demand growth?
• New research on household sustainability not optimistic
• Recovery relies in large part on spending of the affluent

The Affluent as Growth Engine?

80 100 120 140 160 180 200 220 240 260 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Index of Real Consumption, Bottom 95% and Top 5% (1989=100)

Bottom 95% Top 5%