The term “secular stagnation”, coined by economists in the 1930s and recently popularized by Larry Summers, has become a catch-all description for long-term economic pessimism. But it’s gotten confused with a very different idea—the technological stagnation hypothesis, proposed by economist Robert Gordon (and by Bloomberg View’s Tyler Cowen). These are two very different ideas. Both would lead to slow growth in the long term, but they imply different causes and different remedies.
Summers’ secular stagnation is all about aggregate demand. Normally, economists think of demand as something that falls temporarily in a recession and then bounces back. But the failure of many economies to return to previous trends after big slowdowns has made some economists worry if demand shortfalls could be persistent.
Demand gaps usually emerge when everyone tries to save money at the same time. This could happen because people become more pessimistic about the future, for example, or because they suddenly decide they need more liquid assets. But when everyone tries to hold on to cash, they don’t spend, and so companies don’t produce things. Companies that don’t produce things lay off workers, and pretty soon there’s a recession.
Usually this process ends naturally. But under certain conditions, in some models, it’s possible for an economy to trap itself, so that low demand and slow growth become a self-reinforcing, self-perpetuating cycle.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.