{"id":1057,"date":"2013-12-03T14:32:57","date_gmt":"2013-12-03T13:32:57","guid":{"rendered":"https:\/\/blog.iese.edu\/economics\/?p=1057"},"modified":"2015-04-07T10:47:07","modified_gmt":"2015-04-07T09:47:07","slug":"are-we-heading-for-permanent-stagnation","status":"publish","type":"post","link":"https:\/\/blog.iese.edu\/economics\/2013\/12\/03\/are-we-heading-for-permanent-stagnation\/","title":{"rendered":"Are We Heading for Permanent Stagnation?"},"content":{"rendered":"<p>The global downturn that followed <strong>the collapse of Lehman Brothers in 2008 has now lasted for more than five years and the world as a whole is far from normal employment or economic activity<\/strong>. Even the United States, which has seen a healthier recovery than much of Europe, is still struggling with high unemployment and sluggish growth. At a recent <a style=\"href=\"http:\/\/www.youtube.com\/watch?v=KYpVzBbQIX0\" target=\"_blank\">IMF summit<\/a>, <strong>Larry Summers articulated a concern that is increasingly held: What if we are \u201cback to normal\u201d, but the new normal is one of lackluster growth and high unemployment?<\/strong> The speech has received a remarkable amount of attention including from Martin Wolf and Paul Krugman.<br \/>\nSummers bases his worry on a few simple observations:<\/p>\n<ul>\n<li>There is almost universal agreement that in the United States the years leading up to the crisis were characterized by a boom in the real estate sector, overoptimistic lending and too loose monetary policy. Yet, <strong>even in booming times the economy didn\u2019t show the usual signs of very low unemployment or rising inflation<\/strong> (see charts).<\/li>\n<li>Even though swift policy actions meant that a depression was averted, it has now been four years and <strong>the American economy is still not back at anything resembling its previous pace of growth<\/strong>. The share of the working age population in employment is now lower than four years ago. <a class=\"inline-twitter-link inline-tweet-click\" href=\"#\" onclick=\"inline_tweet_sharer_open_win('https:\\\/\\\/twitter.com\\\/intent\\\/tweet?url=https%3A%2F%2Fblog.iese.edu%2Feconomics%2Fwp-json%2Fwp%2Fv2%2Fposts%2F1057%2F&text=The+economy+seems+to+be+stagnating+');\" title=\"Tweet This!\">The economy seems to be stagnating <span class=\"non-dashicons\"> <\/span><\/a>.<\/li>\n<\/ul>\n<figure style=\"width: 697px\" class=\"wp-caption alignnone\"><a href=\"https:\/\/blog.iese.edu\/economics\/files\/2013\/12\/Unemployement-rate.png\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/blog.iese.edu\/economics\/files\/2013\/12\/Unemployement-rate.png\" alt=\"Unemployement rate | IESE Economics Blog\" width=\"697\" height=\"506\" \/><\/a><figcaption class=\"wp-caption-text\">Figure 1. Unemployment and Inflation (CPI) rates in the United States: 1980 to 2014. Source: Federal Reserve Economic Data<\/figcaption><\/figure>\n<p><strong>This leads him to worry that the equilibrium real interest rate<\/strong> \u2013 the nominal interest minus the rate of inflation \u2013 <strong>has become negative over the past decade<\/strong>, requiring low or negative nominal interest rates, which is notoriously difficult to achieve through monetary policy (you can always put your money in cash which has a zero percent interest rate). If this is true it could imply increasingly sluggish demand, a trend that was only temporarily masked by the previous boom, but might now show its ugly face permanently. <a class=\"inline-twitter-link inline-tweet-click\" href=\"#\" onclick=\"inline_tweet_sharer_open_win('https:\\\/\\\/twitter.com\\\/intent\\\/tweet?url=https%3A%2F%2Fblog.iese.edu%2Feconomics%2Fwp-json%2Fwp%2Fv2%2Fposts%2F1057%2F&text=Fears+are+growing+that+the+United+States+will+experience+Japanese-style+lost+decades+of+growth+');\" title=\"Tweet This!\">Fears are growing that the United States will experience Japanese-style lost decades of growth <span class=\"non-dashicons\"> <\/span><\/a><strong>.<\/strong><\/p>\n<p><strong>Might Summers be right?<\/strong> He willingly admits that his hypothesis is speculative. <strong>There are a few reasons to be optimistic and hope that he is wrong<\/strong>.<\/p>\n<ul>\n<li>First, as demonstrated in Ken Rogoff and Carmen Reinhart\u2019s book <a href=\"http:\/\/www.amazon.com\/This-Time-Different-Centuries-Financial\/dp\/0691152640\" target=\"_blank\">\u201cThis Time it\u2019s Different\u201d<\/a>, <a class=\"inline-twitter-link inline-tweet-click\" href=\"#\" onclick=\"inline_tweet_sharer_open_win('https:\\\/\\\/twitter.com\\\/intent\\\/tweet?url=https%3A%2F%2Fblog.iese.edu%2Feconomics%2Fwp-json%2Fwp%2Fv2%2Fposts%2F1057%2F&text=Financial+crises+tend+to+lead+to+longer+recoveries%2C+often+of+up+to+8+or+10+years+');\" title=\"Tweet This!\">financial crises tend to lead to longer recoveries, often of up to 8 or 10 years <span class=\"non-dashicons\"> <\/span><\/a>, meaning we might have been too impatient as to expect a recovery of demand in less than five years. In many parts of the world, notably Europe, <strong>banks are still deleveraging which is imposing a drag on the European economy and consequently the world economy<\/strong>. A full recovery might still be a few years ahead.<\/li>\n<li>Second, the notions of \u00a0\u201cchronic insufficient demand\u201d and \u201cpermanent negative interest rates\u201d sit uneasily with standard economic theory. <strong>Though demand might be sluggish in the short run, prices and interest rates should adjust to ensure a supply-led economy in the long run<\/strong>. Further, permanent negative interest would require some peculiar assumptions (it would literally mean that the average citizen in the world would pay to save, losing 1 to 2 per cent of savings every year). Though, such concerns might seem academic and quaint, the lack of a formal theory to explore these issues makes it difficult to examine it properly.<\/li>\n<li><a class=\"inline-twitter-link inline-tweet-click\" href=\"#\" onclick=\"inline_tweet_sharer_open_win('https:\\\/\\\/twitter.com\\\/intent\\\/tweet?url=https%3A%2F%2Fblog.iese.edu%2Feconomics%2Fwp-json%2Fwp%2Fv2%2Fposts%2F1057%2F&text=Third%2C+though+much+hyped%2C+Japan+never+experienced+%3Flost+decades%3F+');\" title=\"Tweet This!\">Third, though much hyped, Japan never experienced \u201clost decades\u201d <span class=\"non-dashicons\"> <\/span><\/a>. True, <strong>GDP growth has been lacking for the past decades, but the working age population has been shrinking at the same time<\/strong>. Considering GDP per working age resident shows a much less gloomy picture (see Krugman\u2019s <a href=\"http:\/\/krugman.blogs.nytimes.com\/2012\/01\/09\/japan-reconsidered-2\/\" target=\"_blank\">blog<\/a> for details).<\/li>\n<\/ul>\n<p>Finally, <strong>much of the concern arises from a sluggish recovery of employment, which has in particular been evident in employment of the non-college educated<\/strong>. As I have previously <a href=\"https:\/\/blog.iese.edu\/economics\/2013\/05\/14\/the-rise-of-the-machines-will-technological-development-take-your-job\/\" target=\"_blank\">argued<\/a>, <strong>technological development makes it increasingly difficult for large fractions of the labor force to find employment<\/strong>. Though also a structural change, this is quite distinct from the hypothesis of negative real interest rates acting as systematic and chronic inhibitors of growth.<\/p>\n<p>Regardless of whether Summers is right or not, <strong>it is becoming increasingly clear that the structure of the economy is changing in many ways. <a class=\"inline-twitter-link inline-tweet-click\" href=\"#\" onclick=\"inline_tweet_sharer_open_win('https:\\\/\\\/twitter.com\\\/intent\\\/tweet?url=https%3A%2F%2Fblog.iese.edu%2Feconomics%2Fwp-json%2Fwp%2Fv2%2Fposts%2F1057%2F&text=Understanding+the+causes+of+the+current+downturn+is+paramount+for+policy+now+and+in+the+future+');\" title=\"Tweet This!\">Understanding the causes of the current downturn is paramount for policy now and in the future <span class=\"non-dashicons\"> <\/span><\/a><\/strong>.<\/p>\n<figure style=\"width: 649px\" class=\"wp-caption alignnone\"><a href=\"https:\/\/blog.iese.edu\/economics\/files\/2013\/12\/Participation-rate.png\"><img loading=\"lazy\" decoding=\"async\" title=\"Participation rate | IESE Economics Blog\" src=\"https:\/\/blog.iese.edu\/economics\/files\/2013\/12\/Participation-rate.png\" alt=\"Participation rate | IESE Economics Blog\" width=\"649\" height=\"475\" \/><\/a><figcaption class=\"wp-caption-text\">Figure 2. The Participation rates in the United States: 1980 to 2013. Source: Bureau of Labor Statistics<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>The global downturn that followed the collapse of Lehman Brothers in 2008 has now lasted for more than five years and the world as a whole is far from normal employment or economic activity. Even the United States, which has seen a healthier recovery than much of Europe, is still struggling with high unemployment and [&hellip;]<\/p>\n","protected":false},"author":886,"featured_media":1058,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[162,1411,969,1433],"tags":[],"class_list":["post-1057","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-crisis","category-unemployment","category-labour-market","category-united-states","megacategoria-mc-economics"],"acf":[],"aioseo_notices":[],"aioseo_head":"\n\t\t<!-- All in One SEO 5.0.1.1 - aioseo.com -->\n\t<meta name=\"description\" content=\"Are we heading for permanent economic stagnation? 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