Alvin Hansen’s timing could hardly have been worse. In early 1939, almost a decade after the Wall Street crash and six months before Hitler invaded Poland, he said America’s best years were behind it. An ageing population, fewer migrants and the exhaustion of existing technologies meant there would never be complete recovery from the Great Depression. Instead, the US was stuck in what Hansen called secular stagnation, in which secular means persistent or long term.
The second world war meant the idea of secular stagnation was a five-minute wonder. Demand soared as the US government geared up to fight on two fronts, and strong growth persisted for a quarter of a century after the war ended. Many of the technological innovations of the late 19th and early 20th century – the car, for example – only came into their own in the US post-1945 when family incomes rose and the interstate highway network was built.
Hansen’s secular stagnation thesis had something of a revival in the middle years of this decade when it was popularised by the Harvard economist Larry Summers. The lesson from the financial crisis of 2008-09, Summers said, was that underlying growth rates had fallen and that even ultra-low interest rates could not deliver full employment. What massive amounts of monetary stimulus could do, however, was encourage excessive speculative activity and hence the risk of another financial meltdown.
The recovery in the global economy in 2017 and 2018 suggested that Summers had chosen the wrong moment to conjure up the ghost of Hansen. A broad-based pick-up in growth encouraged the belief that life was at last returning to normal. Central banks signalled they were preparing to raise interest rates and, in some cases, actually did so.
But the recovery started to lose momentum in the middle of 2018. The synchronised upswing turned into a synchronised downswing affecting almost every one of the globally significant economies. The IMF said 70% of the global economy would see weaker growth in 2019 than in 2018. Central banks shelved plans to raise interest rates. Hansen’s name is once again being bandied around, with the consultancy Oxford Economics noting last week: “We are now in an age where healthy growth can only be achieved when underpinned by strong and sustained external policy support.”
There is certainly enough evidence to ensure that the secular stagnation thesis is taken seriously. Unemployment in the US has not been lower since 1969, the year of the first moon landing; in Britain the jobless rate is back to levels of the mid-1970s, yet in neither country has there been anything approaching sustained wage inflation. Indeed, the latest set of UK employment data showed the annual rate of earnings growth going down rather than up.
All central banks have targets of 2% or thereabouts for annual consumer price inflation. Since 2013, research by Llewellyn Consulting shows, inflation has tended to undershoot these targets on a sustained basis in the US, the euro area, Sweden and Canada, while in Japan the trend set in earlier. In both the US and the eurozone, the CPI level is almost 5% below where it would have been had inflation targets been hit. Two episodes of currency depreciation – which generates higher inflation through dearer exports – meant the UK was the only major country where prices had overshot rather than undershot.
This is the backdrop to the current weakening of global growth, which is being exacerbated by the tit-for-tat protectionist battle between the US and China. Trade flows are as weak as they were during the winter of 2008-09, when the global recession was biting hardest.
Recovery a decade ago was prompted by colossal policy stimulus that cannot be repeated. There is limited scope for central banks to cut interest rates, the impact of Donald Trump’s stimulus package is waning, and China is much warier of credit-induced growth than it was during the Great Recession.
As a result, the financial markets now think central banks will be much more cautious about raising rates. The ECB, the Bank of Japan and the Swedish Riksbank are expected to keep their feet hard to the floor, while the US Federal Reserve is now thought more likely to cut rates during 2019 than raise them. Six months ago, the markets were predicting three quarter-point increases in the US this year.
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While there seems no immediate prospect of a recession, especially after the stronger than expected start to 2019, there has been a definite shift in mood. Confidence that the US will be in the vanguard of a worldwide increase in interest rates has evaporated. Instead, there is a concern that Japan is exporting its low growth, low interest rates and bouts of deflation to the rest of the world. The eurozone is already well on the way to turning Japanese.
All that said, in the past no sooner have the words “secular stagnation” been uttered than events have occurred to make the idea redundant. There are two reasons why Hansen may soon return to semi-obscurity. The first is that the secular stagnation hypothesis rests on the assumption that all the big productivity-enhancing innovations have already happened, and that’s a big call to make. Developments in artificial intelligence, nanotechnology and genomics look set to boost the supply potential of economies.
The second is that loose monetary policy is not the only way of responding to secular stagnation. Hansen, a disciple of Keynes, advocated higher state spending to boost demand once interest rates had reached rock-bottom levels and it was duly provided by Roosevelt and Churchill. If things turn really nasty, what worked in war time will be tried in peace time.