Analysts hoping to rebut the purveyors of gloom who are arguing that America is in long-term decline were looking to Friday’s job report for comfort. They got none. Instead of continuing to create about 200,000 each month, the economy produced a mere 142,000 new payroll jobs, and only 134,000 in the private sector. To add a bit more gloom, it turns out that 28,000 fewer jobs were created in June and July than originally reported, and that the labor force participation rate remains stuck at historically low levels. Janet Yellen’s refusal to side with the hawks who want immediate increases in interest rates is vindicated. Economists, many of whom were forecasting 200,000+ new jobs, are scrambling to save face. They point out that the August figure is revised more often than any other.
That pattern of revision may well be repeated. But even if there are major upward revisions, more than a few of this country’s best economists will hold to their belief that monthly data—jobs, factory output, retail sales—are irrelevant to the problem that is ailing America—secular stagnation. Definitions vary, but its basic meaning is that the economy’s historic potential, its ability to produce goods, services and rising prosperity, can no longer be fully realized. We are in the midst of a new normal of slow growth, perhaps 1.4-to-2 percent per annum. And there is no consensus as to the cure for this debilitating malady. Unless real interest rates are driven below zero to stimulate spending and investments, or raised to prevent inflation; or governments spend more, or become more tight-wadish; or raise taxes, or lower them; or incomes are redistributed to lower earners with a higher propensity to spend, or to higher earners more willing to invest, or… add your preferred medicine to the long and at times conflicting prescriptions of important economists, whose views are set out in a valuable ebook published by the Centre for Economic Policy Research (CEPR).
The horrible thought that America might be entering a new era of secular stagnation was mooted last year by Larry Summers, former secretary of the treasury and chief economist to President Obama. This resurrection of a term that had not been heard since the post-WWII boom put paid to that fear, met with a dissenting “Not in your life” from Joel Mokyr and “U.S. hypochondria, European disease?” by Nicholas Crafts, economics professors at Northwestern and Warwick Universities, respectively. And with regret from Nobel Laureate Paul Krugman, the economist of choice for American liberals, because “I had been groping towards … the same idea” and missed making the “big splash” that Summers has made.
The worrying facts are, first, demographic. With the number of retirees growing, and the low birth rate in the 1990s and thereabouts, the labor force is unlikely to grow significantly. Exacerbating the situation, a recent fall-off in investment in productivity-enhancing technologies and equipment is driving output per worker down, meaning that each of the more or less stagnant number of workers will probably not be increasing his output as rapidly as in the past. Add up what is now forecast to be a mere 0.5 percent growth in the labor force and a 1.5 percent increase in output per worker, and you have an annual growth rate of 2 percent, far below the 3 percent that economists generally regard as the economy’s potential, reached and exceeded in seven of the ten years in each of the 1970s and 1980s, and six of the ten in the 1990s, but only in three of the ten years in the past decade, and not since 2005. This is no trivial matter: the long-run difference between a sluggish 2 percent growth economy and a closer-to-potential 3 percent growth economy is trillions of dollars and millions of jobs. Robert Gordon, another Northwestern University economics professor contributing to the CEPR debate, believes that we will have to live with a meager 1.4-to-1.6 percent growth rate, and concludes, “America is riding on a slow-moving turtle. There is little that politicians can do about it. …. Future generations of Americans who … become accustomed to turtle-like growth may marvel in retrospect that there was so much growth in the 200 years before 2007, especially in the core half century between 1920 and 1970 when the US created the modern age.”
The revival of economists’ fear of secular stagnation is accompanied by something even worse—an inchoate fear that is penetrating boardrooms and bar rooms, driven in part by:
· ISIS telegenic beheaders,
· a Russian president who warns our president not “to mess” with him as he adds parts of Ukraine to his conquest of Crimea, and