The Book on SecStag

Timothy Taylor writes,

Coen Teulings and Richard Baldwin, who have edited a useful e-book of 13 short essays with a variety of perspectives on Secular Stagnation: Facts, Causes and Cures. In the overview, they write: “Secular stagnation, we have learned, is an economist’s Rorschach Test. It means different things to different people.”

Read his whole post.

The interesting secular trends include low real interest rates, low productivity growth, and declining labor force participation among prime-age workers.

From a conventional AS-AD perspective, low real interest rates are a demand-side phenomenon. The other two are supply-side phenomena. I wish the secstag folks would get together and sort this out.

I think that the most important secular trends are:

1. The New Commanding Heights. That is, the shift in the economy toward a lower share of goods consumption and a higher share of consumption of education and health care services. The New Commanding Heights are sectors in which productivity is difficult to measure and government interference is rampant.

2. The Great Factor-price Equalization. That is, the ability of workers with a given level of skills in China and India to compete with workers of equivalent skills in the U.S. This benefits the median worker in China and India as well as high-skilled workers in all countries, but it threatens the median worker in the U.S.

3. Vickies and Thetes. Or what Charles Murray calls Belmont and Fishtwon. In the U.S., there is extreme cultural sorting going on. People with high intelligence and conscientiousness are moving in one direction, and people who are low in those traits are moving in the other direction.

I think that (1) explains the low productivity growth. It could be partly a measurement problem and partly a problem of government putting sand in the gears.

I think that (2) and (3) explain the labor force participation problem.

What about low real interest rates? This one has puzzled me for a decade. Is it possible that (1) is the explanation? That is, the New Commanding Heights are not nearly as capital-intensive as the old commanding heights of steel, electric power, and transportation. Also, investment may be deterred because of the way government affects these sectors.

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5 Responses to The Book on SecStag

  1. Jeff R. says:

    Yeah, I suspect investment in education and healthcare would be substantially higher were it not for Certificate of Need laws, which seem absolutely insane to me, and the high cost of obtaining FDA approval sidelining drug and device development for all but the most highly prevalent diseases. The credentialing cartel that is higher education in this country probably has the same effect for education.

    Environmental regulation has also strangled (some) investment in the energy industry, which is traditionally a capital intensive sector. New York, from what I hear, is sitting on some large natural gas reserves that have yet to really be tapped due to anxiety about fracking waste water, which seems more and more like one of those irrational public health panics every day that Pennsylvanians remain unpoisoned by the gas industry there.

  2. Bryan Willman says:

    Overly simple thought:
    1. Borrowed money and equity capital are interchangeable.
    2. Poor return on capital investment, be it physical or human capital, will cause relatively lower demand for capital funds to invest.
    3. Low demand = low price of capital = low interest rates.

    1. and 3. are kind of tautological. Arnold is arguing that some form of #2 is important, and suggesting that ill structured government policies are a cause of this. I think that is likely true, but wonder if other things might not also contribute – poor applicability of high gain technologies like software or electric motors to the commanding heights, high consumer resistence to change, high consumer demand for inappropriate or useless products in the segment, high consumer demand for “human touch” independent of the product. [People who like getting their hair cut because they like chatting with the barber… A very effective robot barber will fail at this…]

  3. George says:

    Why isn’t fed distortion of interest rates a cause of low interest rates?

    • Arnold Kling says:

      I find it implausible that the Fed can control long-term interest rates in a deep capital market

  4. F.F. Wiley says:

    IMO the secular decline in interest rates is the flip side to the secular increase in debt ratios (debt-to-GDP, debt-to-productive assets, debt-to-sales).

    Low rates entice the private sector (and public, but that’s another story) to add more debt, often as much as it can handle given the interest rate structure in place at a point in time. Any jump in rates is then self-extinguishing because it snuffs out loan demand, slows the economy and sometimes causes disinflation.

    In other words, changes in interest rates and debt ratios are mutually reinforcing in a way that cumulates over time.

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