Home > Uncategorized > The simple political economy of secular stagnation

The simple political economy of secular stagnation

Yes, after 2008 we did entered an era of secular stagnation – i.e. depressed demand. Why do I think this? Macro demand consists of household consumption, government consumption, investments and exports. About this:

A) During the last decades, the labor share has declined (graph 1). Source. This leads to lower household consumption. Here more about this. Lowering the share of labor has been official government policy, by the way.

Graph 1. the secular decline of the wage share.


B) During these same decades, the rate of fixed investment has declined, too. In some countries (the Nordics, Germany, the Netherlands) this decline is visible since 1970. See for the Netherlands and Germany graph 2 (source: link above which also contains graphs for the other countries mentioned). In Spain and the USA, which had a lower rate of investment to begin with, the decline is very recent (Spain, USA).

Graph 2. The secular decline of the rate of investment to somewhere between 15 and 20% of GDP.


But in these cases it was masked by credit fuelled housing booms. Countries like Italy, France and the UK are somewhere in the middle. Anyway, partly because of the end of post war reconstruction and partly because of other reasons we have moved to a western world with a lower ‘structural’ rate of investment. No exceptions (and companies use the money to buy back shares).

Less consumption and less investments have after about 1970 been compensated by higher government consumption. And in Germany and the Netherlands by higher net exports. But net exports can only be a solution for a limited number of individual countries. And many governments are, at the moment, not too eager to expand expenditure even more. I.e.: household and government consumption are stagnating, the secular rate of investment has declined. And higher net exports are no solution.

Secular stagnation: it is that simple.

Just like the solution: higher (total) wages. Surely in a world where companies indulge in buying back shares.

  1. Peretz
    January 11, 2016 at 3:06 pm

    Perfectly right. But not higher total wages, because of back shares. That is why I said higher wages only for low class people. I mean that you need confidence for growing investments, of course on the long time. That is what I said in my book : “fordisme ciblé” or fordism-target.

  2. January 11, 2016 at 3:17 pm

    Yes. Higher Productivity –> Higher wages. But then, the focus must perhaps be on increase in level of aggregate demand?

  3. Larry Motuz
    January 11, 2016 at 7:08 pm

    Excellent article.

    With declining ‘earned’ income shares, individuals and households must reduce their expenditures for consumer ‘goods’, reducing the range and the diversity of what they purchase :: usually, forced to choose between what they ‘must have’ versus what they’d like to have. Thus, the consumer goods sector and markets erode towards least cost, generally lower quality cost goods. Private investment necessarily falls when this occurs.

    Public sector spending can offset some of this imbalance, but it fails to address the root problem which is that traditional consumer ‘markets’ have thinned out due to the decline in the average consumer’s spending power.

  4. January 11, 2016 at 7:09 pm

    You may have nailed the “political economy” of “secular stagnation,” but you don’t even get near the anthropology of this stagnation. Stagnation is primarily an anthropological topic, with anthropological roots. The central question: why do “companies” (an anthropological category par excellence’) “choose” to buy back shares rather than increase total wages? And why and how did shareholders become elevated in status, prestige, and power above workers who make products and services. After all, shareholders really don’t work at all. So the case can be made, anthropologically that they should be compensated last, if compensated at all. All this focus on a non-working group is worrisome for the health of the economic socio-technical inventions called companies and corporations, but even more so for the collective called society.

  5. Rhonda Kovac
    January 12, 2016 at 6:47 pm

    This comment does not address the analysis of the causes of stagnation broached in the article. It deals, rather, with the automatic presumption underlying it that ‘growth’ is the solution to ‘stagnation’.

    Because of climate change catastrophe (which is getting closer all the time) and progressive environmental destruction, continuing economic growth is simply not a viable option.

    True, under current circumstances, we are punished when the economy is not growing. But the ‘solution’, if we wish to survive, is not more growth. It’s rather to change economic process and structure so that prosperity ceases to be dependent on growth. This requires a dramatic change in our mentality and approach, but it must be done.

  6. January 13, 2016 at 4:21 am

    Fully agreed with Rhonda — Current capitalistic system requires growth to survive, but growth is not compatible with survival of humanity — thousands of other species have already been destroyed by this cancerous growth. We must make a radical transition to some other economic system based on simple standard of livings, contentment with what we have, a caring and sharing economy, as many have come to realize. The question is: what is the path to this outcome? the first step towards that goal?

    • merijnknibbe
      January 13, 2016 at 7:44 am

      Agree with this. But…. we will go to 12 billion people, all of whom need good housing, education, medical care, food,… Healthy, energy and water producing (net!) houses are very well possible. But concrete is (when it’s produced) one of the worst CO2 producers we know. Huge challenge.

  7. Sara Maioli
    January 14, 2016 at 10:33 am

    What I find worrying is that the lowering of labor share of GDP has been an official government policy for many years, but unitl now (apart from Germany’s wage moderation discussed in relation to the eurozone debt crisis) we are still not talking enough about this in economics fora.

    How did we reach this situation from an anthropological point of view (as one commentator was asking before)? In my opinion through the persistent increase in wage and wealth inequality by governments that actively acted to pursuit this inequality, or passively ignored its existence (even David Cameron has finally and candidly admitted a few days ago that inequality has risen under his government). When you see that listed companies in the US have an average ratio of CEOs salary to their workers’ salary of at least 300, compared to the same ratio in the 1970s being around 20 or 30, then you wonder why we have all been asleep until now. Yes the same shareholders vote for these CEOs salaries. Why? Because their increase has been constant and spread in all companies, so it becomes an accepted norm.

    The problem is that inequality creates more inequality, it suffers from hysteresis and it needs a strong government intervention to reverse it. But then we need to talk about the political economy of our democratic states, where probably democracy is increasingly a shaking concept, as strong economic interests of lobbying groups meddles with political decisions to keep austerity going. One example over all: why on earth are we still allowing big corporations to get away from paying their fair share of taxes by tolerating the existence of tax havens?
    We can’t break the vicious circle of stagnation when the pie is shared more and more inequally. Inequality is related to growth. And productivity growth is not sufficient any longer to guarantee growth, as salaries may drop even when productivity has increased.

    The solutions are simple, we probably all agree on them. It is the political will that is not there.

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