For the second day, I am praising a short article by Business Insider, which in this case contains this gem of a graphic from Citi (click for larger image):
From Citi’s commentary:
The most profound implications stem from demand-led secular stagnation. In particular, that the zero bound is a problem in delivering actual stimulus while bubbles may help deliver demand (and so may be part of the toolkit and landscape for long horizons) but their ultimate collapse further entrenches the core yield declines.
Which ties up with my chart from yesterday, highlighting the structural decline in interest rates. Business Insider describes the phenomenon this way:
In other words, secular stagnation puts forward the idea that interest rates at 0% might not be low enough to sufficiently stimulate an economy facing a demand shortage as stark as what some economists think we’ve been grappling with since the crisis.
Nonetheless, while Citi has produced a great infographic, there are a couple of glaring omissions–and both come on the supply side. First, they omit the hypothesis that technology-driven productivity growth is suffering from diminishing returns. This is the thesis of the growth economist Bob Gordon, which I have blogged about frequently, including here and here.
Second, biophysical constraints are nowhere to be seen. Biophysical constraints come in a variety of forms from the very concrete, like resource depletion, to the more complex like biodiversity loss and the spending of carbon budgets. I will put the latter to one side as it is not at all clear that they are a significant cause of the current phase of secular stagnation (although they most certainly will be causing secular stagnation, or even worse, as the century progresses).
Resource constraints do, however, provide a smoking gun for the Great Recession since all manner of energy and raw material prices were spiking before the credit crisis hit.
But doesn’t the current slump in oil, copper and iron prices remove raw materials from the secular argument? Only if the slump in prices continues and economic growth is restored. This would allow us to disentangle the supply and demand side. In short, low current prices could be a reflection of anaemic demand, which fits into the top half of the Citi chart above.
Alternatively, what we could be seeing is a ratcheting up in raw material prices over an extended period of time. Natural resource depletion leads to higher prices, which in turn leads to a spur to innovation (think fracking). However, prices do not return to their former, inflation-adjusted levels. Depletion then continues to the point that it overwhelms the current technology gains, leading to another jump in prices. This then prompts new innovation, but again only sufficient to cause a temporary retreat in prices not a permanent lowering.
So the ratchet does have short downward phases, but these are purely punctuation marks within the long-term upward trend. Is this what we are seeing? We just don’t know, but this hypothesis is consistent with the pattern of prices since the 1990s.
Going back to the central concern, secular stagnation is a wider threat to our socio-political systems, which are entirely premised on economic growth. Our democratic institutions are founded on a two hundred year phase of rising living standards based on cheap energy and technological innovation. If living standards stop rising and innovation slows, then a lot of other things will change as well.