State of the United States Economy: Economic Growth, Job Stagnation - Joseph Stiglitz (1996)

Economic stagnation or economic immobilism, often called simply stagnation or immobilism, is a prolonged period of slow economic growth (traditionally measured in terms of the GDP growth), usually accompanied by high unemployment. Under some definitions, "slow" means significantly slower than potential growth as estimated by experts in macroeconomics. Under other definitions, growth less than 2-3% per year is a sign of stagnation. The term bears negative connotations, but slow economic growth is not always the fault of economic policymakers. For example, potential growth may be slowed down by catastrophic or demographic reasons. Economic stagnation theories originated during the Great Depression and came to be associated with early Keynesian economics and Harvard University economics professor Alvin Hansen. Economists have asked whether the low economic growth rate in the developed world leading up to and following the subprime mortgage crisis of 2007-2008 was due to secular stagnation. For example, economist Paul Krugman wrote in September 2013: "[T]here is a case for believing that the problem of maintaining adequate aggregate demand is going to be very persistent -- that we may face something like the "secular stagnation" many economists feared after World War II." Krugman wrote that fiscal policy stimulus and higher inflation (to achieve a negative real rate of interest necessary to achieve full employment) may be potential solutions.[7] Economist Larry Summers presented his view during November 2013 that secular (long-term) stagnation may be a reason that U.S. growth is insufficient to reach full employment: "Suppose then that the short term real interest rate that was consistent with full employment [i.e., the "natural rate"] had fallen to negative two or negative three percent. Even with artificial stimulus to demand you wouldn`t see any excess demand. Even with a resumption in normal credit conditions you would have a lot of difficulty getting back to full employment."[8][9] Economist Robert J. Gordon wrote in August 2012: "Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. A provocative "exercise in subtraction" suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades."[10] One hypothesis is that high levels of productivity greater than the economic growth rate are creating economic slack, in which fewer workers are required to meet the demand for goods and services. Firms have less incentive to invest and instead prefer to hold cash. Journalist Marco Nappolini wrote in November 2013: "If the expected return on investment over the short term is presumed to be lower than the cost of holding cash then even pushing interest rates to zero will have little effect. That is, if you cannot push real interest rates below the so-called short run natural rate [i.e., the rate of interest required to achieve the growth rate necessary to achieve full employment] you will struggle to bring forward future consumption, blunting the short run effectiveness of monetary policy...Moreover, if you fail to bring it below the long run natural rate there is a strong disincentive to increase fixed capital investment and a consequent preference to hold cash or cash-like instruments in an attempt to mitigate risk. This could cause longer-term hysteresis effects and reduce an economy`s potential output." http://en.wikipedia.org/wiki/Economic_stagnation