This Quick Guide provides a brief overview of the current debate about whether advanced economies are caught in a period of protracted slow growth or if there are grounds to be more optimistic.
What is ‘secular stagnation’?
Robert Solow has defined ‘secular stagnation’ as ‘a persistent tendency for a national economy (or group of them) not only to grow slowly but more particularly to find it difficult or impossible to use fully its productive potential’.
The notion of secular stagnation is not new: it can be traced back to American economist Alvin Hansen writing on the eve of World War II. Hansen argued the Great Depression was not a temporary downturn, rather ‘we are passing, so to speak, over a divide which separates the great era of growth and expansion of the nineteenth century’ from a new unknown era. His particular concern was that slower population growth, a shortage of new lands to settle and blockages to technical progress would mean investment would not be sufficient to achieve full employment of America’s resources. The risk was secular stagnation, the essence of which is ‘sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment’.
That things did not turn out as Hansen predicted does not necessarily debunk the idea of secular stagnation. World War II and the immediate post-war era provided enormous stimulus to the American economy, which Hansen could not have foreseen. Hansen’s underlying idea that secular ‘headwinds’ may be sufficiently strong at times to cause economies to experience a protracted period of slow growth remains a possibility.
Interest in secular stagnation was famously revived by Larry Summers at the International Monetary Fund’s research conference in November 2013. He posed the question of whether the idea of secular stagnation might not be ‘profoundly important in understanding Japan’s experience in the 1990s, and may not be without relevance to America’s experience today’.