Secular Stagnation and the Dual Economy in the US.
Secular economic stagnation could be defined as the proposition that periods like the last 10 years (i.e. when even zero interest rates are not enough to restore good employment levels) are going to be more common in the future (Krugman 2014) (Storm 2017a).
In a presentation at the 2013 IMF Annual Research Conference, Larry Summers gave a speech that, as Paul Krugman puts it, raised "the spectre of secular stagnation" (Krugman 2014:1). Since then, there was an ongoing debate about the causes of said stagnation and what types of policies would be best in order to promote growth. Nevertheless, the term can be traced back to 1939, when the economist Alvin Hansen argued in his book "Economic Progress and Declining Population Growth" that productivity growth would lower capital-goods prices and reduce potential investment (Mejorado & Roman 2017:152) (Krugman 2013:3). This problem of secular stagnation is persistent in the USA since the GFC (Great Financial Crisis), occurring in 2008. The relevance of this topic lies in the fact that during the last decade, economists as well as politicians were concerned with the stunted economic growth of the US. For instance, some of the things to blame for this phenomenon are 1) declining population growth, 2) Falling in the prices of investment goods, and 3) the use of cost-reducing techniques in production environments (Mejorado & Roman 2017:152). The purpose of this article will be to identify in simple terms the most likely cause for stagnation. This article will be structured in the following way. The first part will be about TFP and how this economic indicator is related to secular stagnation. Next, we will explore the phenomenon described as Dualism. In the third part, we will analyze the effects of automation on this persistent depression. The following part will deal with the idea of maximizing shareholder value in this context. Finally, a brief synthesis will be given.
One of the key terms for understanding this issue is that of productivity. Some people might be familiar with this idea. However, a somewhat more precise and technical use of the word will be needed for this explanation. In economics, productivity is usually measured by an indicator known as Total Factor Productivity (TFP), which is obtained by complex calculations of the factors of production (e.g. Capital used in the production process and labour) and output (the amount of goods produced).
To start with, Storm argues that the separation between actual and potential output in the economy is one of the main causes of stagnation (Storm 2017a:173). The reason of this gap can be traced back by looking at the TFP indicator. There has been an ongoing downward trend of this indicator (Servaas 2017a, 171). Empirical evidence collected by the author shows that there is a decline of TFP from the 1970s onwards. Data also shows that the decline was interrupted in the second half of the 1990s. Nevertheless, after the GFC of 2008, the downward trend continued (Storm 2017a:178). Behind the changes in TFP, there is an underlying cause for this depression. What we now know as the "gig economy" (an economy where jobs are mostly part-time or short contracts), is also one of the reason to blame for this stagnation in growth (Servaas 2017a, 170). Economic policies that were implemented during the 1980s in the US to maintain wages from rising were one of the reasons for this called "New Normal" (this refers to the sluggish output growth of the last decade) (Servaas 2017a, 170) (Mejorado & Roman 2017:155).
A solution proposed by the author to help with this was to increase the real wage, as this would cause a rise in productivity (TFP), thus helping the economy to achieve the potential level of output (Storm 2017a:178). Other benefits of this policy would include an increase in employment and investment (Storm 2017a:178).
Probably the main thing to blame as the cause of secular stagnation is Dualism. This term refers to the phenomenon where the economy is divided into two main sectors: a "dynamic" sector, and a "stagnant" one. It is claimed that the US crisis in productivity growth is then not just a generalized crisis of innovation but one located in particular sectors of the economy (Storm 2017a:189).
The dynamic sector, as defined by Storm, is formed by Manufacturing, Information, FIRE (Finance, Insurance, and Real Estate), and PBS (Professional & Business Services). Some key industries in this category presented an acceleration in productivity growth during the decade previous to the GFC (Storm 2017a:183). One of those booming sectors is technology. For instance, a handful of Information companies in the US govern that market worldwide. In terms of output, this sector was three times the size of the stagnant sector by the year 1950 (Storm 2017a:190).
The stagnant sector, on the other hand, is composed by Utilities and Construction (UC); Educational, Health, and Private Social Services (EHS); and the "Rest" (a sector made up of art, entertainment, recreation, food, and other services) (Storm 2017a:184). And, as the author points out, there is a crisis in productivity in these areas. Besides this crisis in productivity, this sector suffers from having mostly low-paying jobs. Therefore, the middle class now finds itself under severe stress due to the loss of "good jobs" and the polarization of the labor market (Storm 2017a:187). The option left, "alternative work arrangements", mean mediocre real wages and poor working conditions. For instance, one-fourth of all U.S. workers are in low-paying jobs, with poverty-level wages. Alternative measures of could even give a number of 55% workers earning « mediocre » wages (at 2010 values) (ibid.).
It is also important to take a look at the changes in sizes (absolute and relative) of these sectors. There was a vast seven-decade growth in service jobs, mostly in Business and Professional Services and in Education and Health (Galbraith 2017:213). Meanwhile, the absolute size of the manufacturing sector has shrunk, becoming quite small in relative values (ibid.). Counting by employment rate, the stagnant sector grew faster than the dynamic one (Storm 2017a: 191). The stagnant sector had an employment rate of 20% in the 1950s, and this number increased to 33% for the period of 2005-2015 (Storm 2017a: 190). At the same time, There has been a decline in the employment share of the dynamic sector, from 40% in 1950 to 32% in the period between 2005-2015 (Storm 2017a: 190). This employment structure shows a greater polarization between higher-paying jobs in sectors such as Manufacturing and Information, and lower-paying ones in UC, EHS, and the "Rest" (Storm 2017a:187). The main source of this wage inequality has been the decline in the wages earned in the stagnant sector, as well as the number of hours worked for employee (Storm 2017a: 188).
Another event that could be blamed for this secular stagnation in the US is the recent innovation in new technologies. Due to the increase use of automation techniques and artificial intelligence (AI), the most vulnerable sector of the economy (i.e. the stagnant sector) is being affected the most. Furthermore, robotization will not only depress actual growth, but also reduce potential growth (Storm 2017a:200). This could be because, new technologies lower the cost of business investment (Galbraith 2017:212). Besides that, there is a reduction of measured growth and productivity caused by the new availability of digital products that has low or zero marginal cost to produce (i.e. once produced, it is almost free to copy and distribute them). Nevertheless, this process still improves living standards to those who have access to them (ibid.). On the other hand, some economists such as Lazonick, argue that automation is not causing the lost of well-paying and secure jobs in the US (Lazonick 2017:222). The author argues that employment outcomes in terms of pay and promotion are determined within the employing organization—not by the market (ibid.).
Since the 1980s, companies adopted the view of maximizing shareholder value. Corporate performance was then defined as meeting Wall Street’s expectations for ever-higher quarterly earnings per share. This led to the massive stock repurchase by companies in order to manager their own stock prices (Lazonick 2017:221). That change in perspectives had grave repercussions on the labour markets in the US. Money that could have been spent on job creation and innovation in the US have been used to buy back stocks with the intention of manipulate stock prices (ibid.). US business corporations changed from a resource-allocation regime of "retain-and-reinvest", in which they trained employees and kept them within the company, to a regime of "downsize-and-distribute", laying off workers and cutting expenses (Lazonick 2017:221). Total shareholder return (that is, dividends plus the increase in the price of said stock) became the sole measure of corporate performance (Lazonick 2017:222).
As we have seen in this short piece, there are a few factor that could help us understand the issue of depressed economic growth of the last decade. Total Factor Productivity is a useful measure of this decline. This decrease in TFP could be argued to be caused by the lower wages paid to workers. Differences between the two presented sectors of the economy (the dynamic and stagnant sector) account for this phenomenon as well. While the dynamic sector seems to be shrinking, the stagnant sector increases in size, further fuelling this secular stagnation. We also found that there are diverse positions about the issue of automation. While some authors consider that this event could lead to an even greater depression of economic output, some argue that this problem is not serious enough and that appropriate redistributive policy could help to obtain many benefits from this new technical revolution. Finally, US corporate practices could be pointed out as the last reason for secular stagnation. Share buybacks and focus on dividend yield divert company resources from more productive activities for the economy such as reinvesting in the workforce and training younger generations.
Galbraith, J. K. (2017) A Comment on Servaas Storm’s "The New Normal." International Journal of Political Economy, 46:211-216. Taylor & Francis Group, LLC.
Krugman, P. (2013) Secular Stagnation, Coalmines, Bubbles, and Larry Summers. The New York Times, November 16, 2013. Url: http://www.bresserpereira.org.br/terceiros/2013/novembro/13.11.Secular_stagnation.pdf
Krugman, P. (2014) Four Observations on Secular Stagnation. In Secular Stagnation: Facts, Causes and Cures, edited by C. Teulings and R. Baldwin. Centre for Economic Policy Research (CEPR).
Lazonick, W. (2017) The New Normal is ¨Maximizing Shareholder Value¨: Predatory Value Extraction, Slowing Productivity, and the Vanishing American Middle Class. In International Journal of Political Economy, 46:217-226. Taylor & Francis Group, LLC.
Mejorado, A. & Roman, M. (2017) Profitability and Secular Stagnation: The Missing Link. In International Journal of Political Economy, 46:150-166. Taylor & Francis Group, LLC
Storm, S. (2017a) The New Normal: Demand, Secular Stagnation, and the Vanishing Middle Class. International Journal of Political Economy, 46:169-210. Taylor & Francis Group, LLC.
Storm, S. (2017b) The New Normal: Demand, Secular Stagnation, and the Vanishing Middle Class: A Reply to James K. Galbraith and William Lazonick. International Journal of Political Economy, 46:227-232. Taylor & Francis Group, LLC.