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Almost three years ago, former US Treasury Secretary Larry Summers revived Alvin Hansen’s “secular stagnation” hypothesis, emphasizing demand-side constraints. By contrast, in Robert Gordon’s engaging and erudite book The Rise and Fall of American Growth, the focus is on long-term supply-side factors – in particular, the nature of innovation. Thomas Piketty, in his best-selling tome Capital in the Twenty-First Century, describes the rise of inequality that is resulting from low GDP growth. Joseph E. Stiglitz’s book Re-Writing the Rules of the American Economy: An Agenda for Growth and Shared Prosperity blames political choices for both slowing growth and rising inequality.
These accounts differ in emphasis, but they are not contradictory. On the contrary, while Summers, Gordon, Piketty, and Stiglitz each examines the issue from a different perspective, their ideas are complementary – and even mutually reinforcing.
Summers’s Keynesian argument is that the problem is a chronic aggregate-demand shortfall: Desired investment lags behind desired savings, even at near-zero nominal interest rates, resulting in a chronic liquidity trap. Today’s near-zero—even slightly negative—short-term policy interest rates do not mean that longer-term rates, which are more relevant to investment financing, have also hit zero. But the yield curve in the major advanced economies is very flat, with both real and nominal longer-term rates at historic lows.
There may be many reasons for this, but Gordon describes one possibility: The underlying pace of innovation has slowed, leading to lower expected returns on investment and thus forcing down interest rates. And it is the investment needed to translate new knowledge into actual innovation that links the supply and demand sides and generates growth.
Both of these theories can be connected with Piketty’s arguments about the dynamics of capital accumulation. Implicit in Piketty’s thesis is that capital can be substituted for labor relatively easily. When capital grows faster than labor and GDP, the rate of return will fall over time, but proportionately less than growth in the amount of capital. The result is a redistribution of income from labor to those who own capital.
Summers actually proposed a new form of the production function, whereby the progress of intelligent machines makes capital a perfect substitute for segments of the labor force. An increasing concentration of income at the top, combined with top earners’ high propensity to save, then leads to the chronic shortfall of aggregate demand that characterizes secular stagnation. Stiglitz makes the case that policy bias also contributes to income concentration.
Gordon’s thesis is more about a kind of “satiation” in rapid technological progress, which depresses expected returns and thus helps to explain the chronic lack of sufficient investment. But, at the end of his book, he makes median income the real indicator of economic performance. In Gordon’s 2015-2040 projection, annual growth in median income in the United States is only 0.4%, compared to average income growth of 0.8%, reflecting continuously rising inequality. (Compare this to 1.82% annual growth in median income from 1920 to 2014.)
There's plenty of national wealth to support the debt
Total retail sales fell by 0.3 percent in March, despite rising sales in nine of the thirteen broad categories for which sales are broken out. Exauto retail sales were up 0.2 percent while control retail sales, a direct input into the GDP data on consumer spending, were up 0.1 percent. While the headline numbers on the March report came in below expectations, there were upward revisions to prior estimates for sales in January and February. With the revisions, annualized growth in control
retail sales for Q1 as a whole came in faster than growth in Q4 2015.
Over time, we have come to attach increasingly less meaning to the retail sales data, at least the initial print for any given month. Those initial estimates are subject to large revision. But, no matter how one feels about the soundness of the data, they should be wary of drawing broad conclusions about overall consumer spending based on the retail sales data. As we have been noting for some time now, falling prices for gasoline and other goods have made the nominal retail sales numbers look misleadingly weak over the past several months. Additionally, control retail sales capture less than one-quarter of all consumer spending as reported in the GDP data while the retail sales data do not capture spending on services. As such, the monthly retail sales data give only a limited view on the overall state of U.S. consumers.
Still, growth in inflation-adjusted total consumer spending in Q1 will be slower than that seen in Q4 2015 and it is fair to ask whether something is amiss with U.S. consumers. We do not think this to be the case. Labor market conditions continue to improve, underpinning steady growth in disposable personal income. At the same time, household net worth hit a new record high in Q4 2015, fueled mainly by rising housing equity. What many fail to consider, however, is that household debt levels remain high relative to household income, as seen below. While low-interest rates make it easier for consumers to service debt, our view is high levels of debt mean consumers are hesitant to take on new debt. As seen below, growth in total household debt remains well below historical norms, and clearly consumers are not resorting to debt in order to finance consumption. While we are seeing some growth in discretionary consumer spending, we are also seeing consumers pare down debt and build up savings, neither of which should be seen as a bad thing. As such, we have a much more constructive view of consumer fundamentals than implied by the retail sales data