ABA Banking Journal - May/June 2015 - (Page 16)
At a Standstill? The Debate
over 'Secular Stagnation'
BY CARL TANNENBAUM, SVP AND CHIEF ECONOMIST, NORTHERN TRUST
CORPORATION, AND MEMBER, ABA ECONOMIC ADVISORY COMMITTEE
DURING ONE PARTICULARLY stormy day this winter, I asked my daughter to
unearth herself from the couch and help me clear the snow from the driveway.
Unfortunately, the prospective reward of industry was no competition for the
television remote, and I was left to fend for myself.
Before braving the accumulating
squalls, I warned her that prolonged
inactivity could doom her to secular
stagnation. She rolled her eyes at the
econo-speak and turned her attention
back to The Walking Dead marathon.
I found irony in her choice of
programming as I shoveled. Some in
my profession have suggested that
developed economies are heading for a
zombie-like state, with little growth and
frightening consequences for those left
alive. Dark-siders suggest that measures
aimed at animating things have become
increasingly extreme and have done
little to slow the advancing danger.
Growth has been re-established
in some places but not in others,
requiring significant amounts of
performance-enhancing policy to keep
things from getting worse.
It is this combination of circumstances
that led some observers back to
the secular stagnation argument.
Former U.S. Treasury Secretary Larry
Summers has been the most vocal
adherent, but economists from around
the world have joined him.
Robert Gordon of Northwestern
University has highlighted troublesome
trends on the supply-side of the
ABA BANKING JOURNAL | MAY/JUNE 2015
economy. Potential growth is often
described as the sum of labor
force expansion and increases in
productivity. On both of these fronts,
many world economies are struggling.
The demographic challenge faced
by many developed countries is
well-documented. Increased living
standards and the entry of women
into the workforce have both served
to depress birth rates. Sizeable postwar generations are gradually moving
into retirement, reducing labor force
participation. Projections from the
International Monetary Fund suggest
that the size of the workforce in many
nations may struggle to show any
growth over the next 20 years.
Further, older populations are more riskaverse and less innovative. This may be
contributing to the clear downward trend
in the rate of productivity growth, which
had averaged around 2 percent annually
in the United States and double that
level in Europe over the decades prior to
the Great Financial Crisis. More recently,
productivity has been advancing
modestly. Soft productivity growth makes
labor less valuable and increases the
challenge of reaching full employment.
Gordon points to advancing income
inequality as another factor limiting
global consumption. The propensity to
spend declines with earnings levels,
so in his view, bolstering incomes
among society's lower quintiles could
add importantly to demand.
Strong aggregate demand is always
helpful. But the best policy for the
moment on this front might be
patience. The balance sheet repair
necessitated by the Great Financial
Crisis is gradually becoming less of a
limiting factor and should continue to
improve in the years ahead.
If secular stagnation is truly upon us,
the consequences could be severe.
Standards of living and asset values
might regress. Limited economic
mobility would add fuel to political
uncertainty. Debtors could struggle to
meet their obligations.
But we've heard these jeremiads many
times in history, and they've yet to
come true. Populations tend to find a
way to be resourceful, and there is no
reason to think they won't continue to
operate this way.
My daughter redeemed herself when
I returned from my battle against the
elements. Much to my surprise, she
had looked up secular stagnation on
the Internet, and she had formulated
a proposal to deal with the issue. "Buy
a snow blower," she said. "Investment
in technology is the key to boosting
potential output." For a moment, I was
a very proud papa.
Table of Contents for the Digital Edition of ABA Banking Journal - May/June 2015
CELEBRATING A TRADITION OF INNOVATION
SOUND RISK CULTURE
AN INTERVIEW WITH FDIC’s MARTIN GRUENBERG
NEW RESPA/TILA MORTGAGE DISCLOSURES
BANK DOMAIN ROLLOUT
ABA COMPLIANCE CENTER INBOX
FROM THE STATES
BANKER RECOMMENDED READING
INNOVATIONS IN SOCIAL RESPONSIBILITY
INDEX OF ADVERTISERS
ABA Banking Journal - May/June 2015