It was nearly six years ago that Larry Summers, a former US Treasury Secretary, resurrected the idea of “secular stagnation”, a concept originally formulated by the Depression-era economist Alvin Hansen to describe a prolonged period of sub-par economic performance in which growth can only be achieved via constant monetary and fiscal stimulus. This stimulus, Summers argued, would in turn make the economy prone to renewed financial crisis.
The idea was much poo-pooed when Summers applied it to our own times. Policymakers instead congratulated themselves on having avoided the mistakes of the 1930s in their handling of the financial crisis, and therefore the scourge of mass unemployment that cursed the inter-war years.
Give it time, they said, and the economy would return to “normal”. Six years on, and it plainly hasn’t. It’s true that unemployment is at historic lows in the US and large swathes of Europe, but growth and productivity are still subdued, debt is ballooning, interest rates remain at rock bottom, central banks are resuming their money printing, and the politicians are again talking about fiscal stimulus to stave off recession.
For many people, wages and living standards are no better today than they were a decade ago, a hiatus of unprecedented duration, at least for the modern age. In a speech to the International Monetary Fund last weekend, Mervyn King, former Governor of the Bank of England, suggested that economic performance since the financial crisis had in some respects been even worse than we saw after the banking meltdown of the early 1930s, when US GDP collapsed 30 per cent and American unemployment soared to 25 per cent.
Mervyn King, former Governor of the Bank of England: the Great Recession has turned into the Great Stagnation
The depths of the crisis back then were much worse, but the recovery from it far more robust, such that 20 years after the initial implosion, all the ground lost was made up, with growth per capita across those 20 years averaging its pre-Depression trend rate of 2 per cent per annum.
Today we are already trailing badly. For the same recovery to occur this time around would require the US to start growing by 5.5 per cent a year in the runup to the 20 year horizon, something which is plainly not going to happen. What’s more, search for yield has recreated some of the same vulnerabilities in the financial system as we saw before the last crisis – this time not in mainstream banking, which has been cleaned up, but elsewhere in the system.
Far from being eliminated, the risks from excessive debt have merely migrated elsewhere.
Into this doom-laden world steps our old friend Brexit, which many economists argue will further depress British and European growth in the years ahead.
Sajid Javid, the Chancellor, has refused to conduct an economic impact assessment of the latest deal; he is only too aware of what it will say, and doesn’t want to hear it.
According to an earlier assessment a year ago, the Free Trade Agreement with Europe the Government aspires to would reduce GDP by 4.9 per cent over the long term compared to current arrangements. This is better than the 7.6 per cent modeled for a no-deal Brexit, but worse than the 0.7 per cent assigned to Theresa May’s deal.
Javid is right to be sceptical. Like all forecasting of this sort, that assessment was based not just on arguable assumptions, but also necessarily on a steady state world where nothing else changes, which is extraordinarily unlikely. Policy and commerce will in practice adapt in unpredictable ways, some of which might prove beneficial. In any case, we will never know, because whatever happens over Brexit, there will be no counterfactual to judge it by.
For his part, Lord King said he didn’t think the long-term consequences of Brexit would be particularly large either way. “I have always been surprised about how the rest of the world thinks Brexit is so important”, he said. “It’s obviously important to the UK, but I don’t honestly think Brexit has much significance even for the rest of Europe, let alone the rest of the world.”
Brexit has undoubtedly added to the trade uncertainties hanging like a cloud over wider economic confidence. In Britain, it is also an all-consuming obsession which has sapped the energy for anything else.
Yet as an economic phenomenon, it is eclipsed by the much bigger challenge of “secular stagnation”, which is global and entrenched in nature.
One of the reasons the US was able to bounce back from the Great Depression was the stellar spending of the Second World War. The Manhattan Project alone cost $25 billion in today’s money. There is nothing comparable today to this great driver of growth, nor, as Lord King pointed out, are there any of the new ideas and institutions that came out of the traumas of the Great Depression.
I’m not suggesting that we need another war to release us from our economic funk, but there is something coming down the line that might help – climate change, and the massive investment in energy transition required to contain the problem. Saving the planet might just end up saving the economy as well.
The solution to the Great Stagnation of our times is staring us in the face