As part of Post-Crash Economics Society’s blog takeover during Davos week, Dr Jo Michell explores the history of the ‘Secular Stagnation’ theory, what it means and its implications for President-elect Trump’s macroeconomic plans. Jo’s blog looks into the history of economic thought, something which is severely lacking on economic courses throughout the UK and beyond. It is therefore a delight to have Jo involved in the blog series.
- The dominant narrative of ‘Secular Stagnation’ omits Josef Steindl’s work
- Monopolisation tends to raise total saving and also lower investment
- The economics profession has a habit of reinventing the wheel by gradually absorbing ideas which were previously ignored or actively denied
- Trump’s corporate tax giveaway will hand yet more cash to corporations, enabling them to increase pay-outs to shareholders – a transfer of income from taxpayers to the wealthy which will suppress demand further, deepening the tendency towards stagnation
The elites gather at Davos facing the new reality of the shift from liberal globalisation to populism, but Davos technocrats must bear some responsibility for recent events. The Trump and Brexit votes were at least partly the result of weak economic recovery in the aftermath of the 2008 crisis, caused in turn by inappropriate macroeconomic policy. Faced with a consistently disappointing recovery – despite massive monetary stimulus – a new narrative has recently emerged: ‘Secular Stagnation’.
The story is usually told as follows: in the 1930s, American economist Alvin Hansen coined the term to capture his concerns about the potential negative effects of ageing on long-run growth trends. Ageing would lead to growing reliance on technological advances to maintain growth and employment. In 1939, he warned, ‘We are rapidly entering a world in which we must fall back upon a more rapid advance of technology than in the past if we are to find private investment opportunities adequate to maintain full employment’.
Hansen’s concerns appeared to be disproved by the onset of the Second World War followed by the New Deal, the baby boom, and technological innovations driven in large part by Cold War military spending. In the usual version of the story, Hansen’s ideas were then rediscovered in the aftermath of the 2008 financial crisis by Larry Summers, who re-framed the narrative in terms of a collapse in the ‘natural rate of interest’ – the desire to accumulate savings exceeds the amount of capital investment desired by corporations.
However, this story is incomplete – it omits an important line of economic thought on ‘secular stagnation’ in the period between Hansen and Summers. In particular, the work of Josef Steindl is missing from the narrative.
Steindl published his study, Maturity and Stagnation in American Capitalism in 1952. Like Hansen, Steindl’s timing was unfortunate. But as Hansen’s review of Maturity and Stagnation notes, ‘It is amazing how many economists have been able to close their eyes and blandly announce that events since 1940 have disproved the stagnation thesis!’
For Steindl, the key reason for excess saving and long-run deficiency of demand is the growth of monopolistic corporations. Since these firms face captive markets, they are not under pressure to invest in new capital and technology in order to maintain market share. Likewise, the ability of monopolistic firms to impose non-competitive prices and raise profit margins leads to a rising share of national income accruing to monopolistic firms at the expense of both smaller competitive firms and workers.
The effect is twofold. Since corporate profits are one of two main sources of ‘savings’ at the macroeconomic level – the other is household saving – monopolisation tends to raise total saving. But since monopoly firms face less pressure to invest, monopolisation also tends to lower investment. Steindl argues that the growth of large monopolistic corporations leads to a chronic tendency for saving to exceed investment. Stagnation can only be overcome by reliance on ‘external’ sources of demand: government deficits, trade surpluses or credit-financed spending in the household sector.
Steindl was largely ignored by the economics profession. Fifty years later, his predictions look prescient. In many advanced nations, corporate profits have increased relative to wages as a share of national income while investment has been declining for decades. US corporations are sitting on cash pools of over $1.7 trillion. Instead of spending on new investment, corporations have handed profits to shareholders as dividends or stock buybacks.
Although disregarded by most, Steindl’s ideas attracted a small following, notably Harry Magdoff and Paul Sweezy. As the post-war boom gave way to the stagflation of the 1970s, these authors revived Steindl’s ideas. With deregulation in the 1980s leading to weakened labour unions, growing inequality and an apparent return to growth, Magdoff and Sweezy – drawing also on the ideas of the better known Hyman Minsky – noted the increasing reliance on debt, and private debt in particular, to sustain economic growth. By the late 1980s – as the economics profession was congratulating itself on the Efficient Markets Hypothesis – Magdoff and Sweezy were warning of ‘the emergence of an unprecedentedly huge and fragile financial superstructure subject to stresses and strains that increasingly threaten the health of the economy as a whole’.
Despite an apparent unawareness of this strand of economic thought, the economics profession is belatedly rediscovering the ideas of Steindl and his followers. Joseph Stiglitz writes of ‘The new era of monopoly’: ‘Today’s markets are characterised by the persistence of high monopoly profits. The implications of this are profound’. Last year, Paul Krugman wrote the following:
In recent years many economists, including people like Larry Summers and yours truly, have come to the conclusion that growing monopoly power is a big problem for the U.S. economy – and not just because it raises profits at the expense of wages … lack of competition reduces the incentive to invest, [which] may contribute to persistent economic weakness.
You see, profits are at near-record highs, thanks to a substantial decline in the percentage of G.D.P. going to workers. … Suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power. In that case many corporations would be in the position … to milk their businesses for cash, but with little reason to spend money on expanding capacity or improving service. The result would be what we see: an economy with high profits but low investment, even in the face of very low interest rates and high stock prices.
So lack of competition can contribute to ‘secular stagnation’.
This is all but indistinguishable from the Steindl-Minsky account of the monopoly-stagnation-finance nexus. It is also an example of a broader trend: the economics profession reinventing the wheel by gradually absorbing ideas which were previously ignored or – more often – actively denied.
Another example is the relationship between income inequality and poor macroeconomic performance: economists inspired by Steindl’s analysis were arguing well in advance of the 2008 crisis that rising inequality contributed to stagnationary tendencies and that these were, in turn, disguised by growing household debt and global financial imbalances. These warnings were ignored.
What do the insights of Steindl and his followers tell us about Trump’s macroeconomic plans – will slashing corporate taxes lead to an investment boom?
There is little reason for optimism. Stock markets have soared since Trump’s election – but it is hard to believe this signals a new era of high corporate spending. Stock owners are interested in dividends, not investment. Trump’s corporate tax giveaway will hand yet more cash to corporations, enabling them to increase pay-outs to shareholders – a straightforward transfer of income from taxpayers to the wealthy. If anything, this redistribution of income towards the already rich will suppress demand further, deepening the tendency towards stagnation.