Are We Bound for Secular Stagnation?

Between the recovery from the bursting of the dotcom bubble (2000) and the global financial crisis of 2007, macroeconomics were dominated by a theoretical “new consensus”, around the Taylor-rule based monetary policy regulating the interest rate to ensure growth with mild fluctuations in the business cycle, and low inflation. The atmosphere was one of general optimism around the idea of having reached a "Great Moderation", with high growth and low inflation, until the global finanical crisis of 2007.  From that date, it was clear to most of the actors of the sector that this was not “another regular krach”, but a major meltdown, comparable only to 1929 “black Tuesday”. The slow recovery since then made it clear that it was not a regular business cycle ending in a bust. Almost ten years since the beginning of the crisis, growth is not back to its pre-crisis trends, particularly in Europe. Therefore, macroeconomists became much more pessimistic: since 2014 they are debating the notion of a secular stagnation. Is the economy on a long-term stagnation trend, if so, for what reasons, and how to address this situation? This paper offers a critical review of the debates around the notion of "secular stagnation". Then it intends at offering a synthesis, centered on the minskian notion of debt super-cycles. The experience of Japan, a developed economy which never fully recovered from a financial crisis which happened in 1990, and where inflation and GDP growth are close to 0 since 1994, is a case which enables us to draw some lessons.

The paper reviews supply-side explanations of "secular stagnation": innovation slowing, human capital depreciating. It also underlines that the zero-lower bound view, though explaining why we are not getting out of the crisis, does not offer an explanation of why it happened in the first place. Contrastingly, what can be labelled a "private debt super-cycle view" is evoked by economists from various theoretical backgrounds: orthodox (Kenneth Rogoff, Lawrence Summers), Austrian, and post-Keynesian. Richard Koo, advocate of "yin and yang macroeconomics" (supply-side in the boom phase of super-cycles, keynesian demand-centered in depression phases) has developed the notion of balance sheet recession which explains how de-leveraging (from both public and private sectors) durably prevents demand from returning to pre-crisis levels.

The paper concludes that what appeared as a "great moderation" was actually a credit-fuelled unsustainable boom. Therefore, if the world is bound for secular stagnation, it is for reasons of macroeconomic policies which ultimately had destructive consequences: bottom-up redistribution, both at the expense of labor share of GDP and in terms of increasing wage inequality (depressing consumption and fuelling asset bubbles), real estate boom (both cause and consequence of levels of private borrowing which became unsustainable), monetary policy centered on reigning in inflation instead of ensuring financial stability, public sector de-leveraging. 

Consequently, governments have the power to avoid secular stagnation, by subsidizing those who consume and invest, and cancelling unsustainable debts. Which means that the prospect of secular stagnation is a matter of politics: there is nothing unavoidable about it.

See more of: Austerity and Macroeconomic Policies: Issues and Perspectives
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