AThe moment chosen by Hansen could not be worse. In early 1939, nearly a decade after the Wall Street crash and six months before Hitler's invasion of Poland, he declared that America's best years were late. An aging population, fewer migrants and the exhaustion of existing technologies meant that it would never be possible to fully recover from the Great Depression. Instead, the United States was stuck in what Hansen called secular stagnation, in which the secular term meant persistent or long-term.
World War II meant that the idea of secular stagnation was a five-minute wonder. Demand soared as the US government prepared to fight on two fronts. Strong growth persisted for a quarter of a century after the end of the war. Many technological innovations of the late 19th century and early 20th century – the car, for example – were born only in the United States after 1945, when the revenues of the Family grew and the highway network was built.
Hansen's thesis on secular stagnation was somewhat revived in the middle of this decade, when it was popularized by Harvard economist Larry Summers. According to Summers, the 2008-09 financial crisis has yielded lessons: underlying growth rates have fallen and even extremely low interest rates can not ensure full employment. However, massive monetary stimulus could encourage excessive speculative activity and hence the risk of a new financial crisis.
The recovery of the global economy in 2017 and 2018 suggests that Summers chose the wrong moment to evoke Hansen's ghost. A general resumption of growth has led to the belief that life is finally returning to normal. Central banks have indicated that they are preparing to raise their interest rates and, in some cases, have actually done so.
However, the recovery began to slow down in the middle of 2018. The synchronized rise has turned into a synchronized recession affecting almost all economies of global significance. The IMF said that 70% of the global economy would experience lower growth in 2019 than in 2018. Central banks have set aside their plans to raise interest rates. Hansen's name is again cited, with the Oxford Economics consulting firm noting last week that "we are living in a time when healthy growth can only be achieved if it is based on strong and sustained external political support".
There is certainly enough evidence for the thesis of secular stagnation to be taken seriously. In the United States, unemployment has not decreased since 1969, the year of the first landing on the moon; in Great Britain, the unemployment rate returned to its mid-1970s level, but neither country experienced sustained wage inflation. Indeed, the latest series of data on employment in the United Kingdom showed that the annual rate of earnings growth decreased rather than increased.
All central banks have targets of around 2% or so for annual consumer price inflation. Since 2013, Llewellyn Consulting's research shows that inflation has tended to under-perform these objectives steadily in the United States, the Eurozone, Sweden and Canada, while in Japan the trend is is established earlier. In the United States and the euro area, the CPI level is nearly 5% lower than would have been achieved had the inflation targets been achieved. Two episodes of currency depreciation – which result in higher inflation due to more expensive exports – have made the United Kingdom the only country where prices have been exceeded and not lower.
This is the backdrop to the current weakening of global growth, exacerbated by the protectionist battle between the United States and China. Trade flows are as weak as they were in the winter of 2008-09, at the height of the global recession.
The recovery ten years ago was caused by a colossal political stimulus that can not be repeated. Central banks have little leeway to cut interest rates, the effect of Donald Trump's economic stimulus plan is fading, and China is much more wary of credit-led growth than it is was during the Great Recession.
As a result, the financial markets are now thinking that central banks will be much more cautious about raising rates. The ECB, the Bank of Japan and the Swedish Riksbank should remain on guard, while the US Federal Reserve is now more likely to lower rates in 2019 than to raise them. Six months ago, markets were predicting triple-digit increases in the United States this year.
Although there does not seem to be any immediate prospect of a recession, especially after a stronger start than expected until 2019, the mood has changed dramatically. The confidence that the United States will be at the forefront of a global increase in interest rates has evaporated. Instead, there is concern that Japan is exporting its growth, low interest rates and deflationary access to the rest of the world. The euro zone is already becoming Japanese.
That said, hardly have the words "secular stagnation" been uttered that events have occurred to render the idea superfluous. Hansen may soon return to semi-darkness. The first is that the age-old stagnation hypothesis is based on the assumption that all major productivity-enhancing innovations have already occurred and is an important call to make. Developments in the fields of artificial intelligence, nanotechnology and genomics are expected to boost the supply potential of economies.
Second, a loose monetary policy is not the only way to respond to secular stagnation. Hansen, a follower of Keynes, advocated for increased state spending to boost demand once interest rates hit record levels and that was duly provided by Roosevelt and Churchill. If things go wrong, what worked in wartime will be tried in peacetime.