Secular staganation or technological lull?

Ramey, V. A., Secular Stagnation or Technological Lull?, Journal of Policy Modeling (2020), doi: https://doi.org/10.1016/j.jpolmod.2020.03.003.

Abstract: The slow recovery of the economy from the Great Recession and the lingering low real interest rates have led to fears of “secular stagnation” and calls for government aggregate demand stimulus to lift the growth rate of the economy. I present evidence that the current state of the U.S. economy does not satisfy the conditions for secular stagnation, as originally defined by Alvin Hansen (1939). Instead, the U.S. is experiencing a period of low productivity growth. I suggest that long intervals of sluggish productivity growth may be natural in an economy whose growth is driven by technological revolutions that are large, infrequent, and randomly-timed. If this is the case, then the best description of the recent experience of the U.S. economy is a technological lull. In this situation, traditional government aggregate demand stimulus policies are not the appropriate response. Instead policies that can increase the rate of innovation and its diffusion may be more appropriate.

Keywords: secular stagnation, productivity growth, technology, innovation

What is secular stagnation? From the article:

In December 1938, the U.S. economy was recovering from the 1937-38 recession. The unemployment rate had averaged 18.8 percent during the previous eight years and currently stood at 16.6 percent. In his American Economic Association Presidential address, “Economic Progress and Declining Population Growth,” Alvin Hansen (1939) argued that while the business cycle had been the problem of the nineteenth century, chronic underemployment was the main problem of the current time and he attributed it to what he called “secular stagnation.” Hansen explained that the essence of secular stagnation was “sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment.” (Hansen (1939), p.4). He argued that full employment could not be reached in a modern economy without robust investment expenditures adequate to fill the gap between consumption expenditures and that level of income which could be achieved were all the factors employed.

Hansen noted three historical drivers of the high rate of investment in the nineteenth century: (i) population growth, (ii) opening of new territory and discovery of new resources, and (iii) technical innovations. He saw little remaining role for the first two going forward from the 1930s. Population growth had slowed dramatically, from an annual growth rate of 2.7 percent during the 19th century, to 1.7 percent between 1900 and 1924, and only 0.9 percent from 1924 to 1938. The immigration laws enacted in 1924 severely curtailed immigration as a source of population growth and the economic hardships caused by the Great Depression had reduced fertility rates. Similarly, the era of developing new territories had ended and there were diminished prospects for the discovery of new resources on existing territories. He concluded: “Thus, the outlets for new investment are rapidly narrowing down to those created by the progress of technology.”

Technological lull? Again, from the article:

I suggest that the main factor behind the slow growth of GDP is a technological lull. As I argue below, two factors are contributing to slow growth in potential GDP: slow population growth and slow labor productivity growth. However, since what ultimately matters for growth in standards of living is the growth of real GDP per capita, slower population growth does not necessarily imply a decrease in the standard of living. The key factor affecting the growth in standards of living is slow productivity growth.