13 votes

You May Be Experiencing Secular Stagnation

17 comments

  1. [6]
    NaraVara
    Link
    I've been an advocate for the secular stagnation theory for a while now, I saw the signs of it in the financial crisis of 2008. My worry was that locking all the underwater debtors into debt or...

    I've been an advocate for the secular stagnation theory for a while now, I saw the signs of it in the financial crisis of 2008. My worry was that locking all the underwater debtors into debt or foreclosure forever was going to strangle long term investment and innovation as there would be no appetite for risk-taking from the bottom, the kind of force necessary for the forces of creative destruction to actually work for the benefit of the economy.

    Student loan crisis is another example of the same problem, just hitting a different age demographic. Economists have a hard time talking about this sort of thing because economics still doesn't have very good theory to model intangibles like innovation or invention. So they tend not to factor things like this.

    7 votes
    1. [5]
      thejumpingbulldog
      Link Parent
      Wait but if these factors become externalities that in turn affect the market negatively, then shouldn't they be talking about these more?

      Wait but if these factors become externalities that in turn affect the market negatively, then shouldn't they be talking about these more?

      1. [4]
        NaraVara
        Link Parent
        But we can't put a number on the benefits of solving it, but we CAN put a number on the costs. So guess what the accountants will say. . .

        But we can't put a number on the benefits of solving it, but we CAN put a number on the costs. So guess what the accountants will say. . .

        2 votes
        1. [3]
          thejumpingbulldog
          Link Parent
          I mean I guess? I mean I'm no economist, but if we can put a number on the costs then wouldn't getting rid of the problems also mean getting rid of the costs? And I thought economists could...

          I mean I guess? I mean I'm no economist, but if we can put a number on the costs then wouldn't getting rid of the problems also mean getting rid of the costs? And I thought economists could measure good and bad externalities?

          1 vote
          1. [2]
            NaraVara
            Link Parent
            Not really. As an analogy, paying for a gym membership is a measurable cost and the consequences of lacking physical fitness are not measurable (except through weird and clumsy proxies). So the...

            but if we can put a number on the costs then wouldn't getting rid of the problems also mean getting rid of the costs?

            Not really. As an analogy, paying for a gym membership is a measurable cost and the consequences of lacking physical fitness are not measurable (except through weird and clumsy proxies). So the benefit (being fit) is unpriced but the cost (the membership) is.

            2 votes
  2. [6]
    skybrian
    Link
    I've seen people answering questions on /r/AskEconomics using the Solow model. I don't fully understand it, but it seems to model capital as a single scalar variable (K) and says that more is...

    I've seen people answering questions on /r/AskEconomics using the Solow model. I don't fully understand it, but it seems to model capital as a single scalar variable (K) and says that more is better.

    I'm wondering if there are better models? I assume that's just the econ 101 version.

    2 votes
    1. [5]
      NaraVara
      Link Parent
      The more detailed explanations/iterations on the model aren't that different, they just gets a lot more granular about what counts as "capital." I wouldn't characterize it as saying more K is...

      The more detailed explanations/iterations on the model aren't that different, they just gets a lot more granular about what counts as "capital." I wouldn't characterize it as saying more K is always better though. It's a steady-state model that posits that labor and capital always put out a fixed amount of output based on how much of the inputs you put in. The key takeaway is that economic growth doesn't come from just adding more labor or capital, but is actually tied to a third thing called "factor productivity" that increases the effectiveness of L and K. This is usually just used to refer to technology and business processes, but it can be refined to talk about stuff like "culture" as well. Later refinements of the model have started to focus a lot on "human capital," which basically conceptualizes people's education and marketable skills as a form of "capital" that firms can use. It's. . . a weird and clumsy fit TBH.

      As far as economic production goes, increasing any factor or production (labor or capital) is always better, because the more you have the more you can make. But the real dividends come from increasing TFP, because that's about getting more out of whatever you have. These models do a bad job, however, of grappling with anything that isn't easily priced. This include costs, such as pollution or social dysfunction, but also benefits like cultural vibrancy or "innovation" and "inventiveness." The general economist response to this has been to try and make the world conform to the models by forcing prices onto things that aren't priced and then punishing people for trying to innovate ways out of paying them.

      2 votes
      1. [4]
        skybrian
        Link Parent
        Sticking with things that can be priced, I wonder how they account for maintenance costs and depreciation? More physical capital means more production capacity, but also more cost maintaining it,...

        Sticking with things that can be priced, I wonder how they account for maintenance costs and depreciation? More physical capital means more production capacity, but also more cost maintaining it, as well as the cost to rebuild at end of life. (The cost of overbuilt infrastructure is something the Strong Towns website often emphasizes, for example.)

        It seems like some areas of the world might have higher maintenance costs than others (in tropical areas, things deteriorate faster) and this should be measurable.

        I also wonder how they account for wasted investment. It's hard to tell in advance which bets will pay off, but it seems like after a company fails or writes off an investment, the waste should be measurable. I have a suspicion that "secular stagnation" may have to do with it being increasingly difficult to find investments that actually pay off.

        1. [3]
          NaraVara
          (edited )
          Link Parent
          Capital is assumed to depreciate at a fairly fixed rate over time. Most models have a depreciation rate factored in. For microeconomics it's a bigger deal and is subject to lots of contingent...

          I wonder how they account for maintenance costs and depreciation?

          Capital is assumed to depreciate at a fairly fixed rate over time. Most models have a depreciation rate factored in. For microeconomics it's a bigger deal and is subject to lots of contingent factors like geography and the specific industry, but at the macro level most of that stuff is assumed to average out to give you a good enough approximation.

          I also wonder how they account for wasted investment. It's hard to tell in advance which bets will pay off, but it seems like after a company fails or writes off an investment, the waste should be measurable.

          In a macro context, the assumption again is that it averages out. So you just think of all investment as a big pile with an expected return, which is the aggregated output of each individual investment. Some work out, some fail, some take off like a rocket and it all averages out to a certain figure over time.

          I have a suspicion that "secular stagnation" may have to do with it being increasingly difficult to find investments that actually pay off.

          Yeah that's basically what it is. The idea is that people have too much money to invest and no idea what to do with it that could be at all productive. The implication is that demand is too weak to sustain really innovative investments.

          Unfortunately any remedy you could have for this problem would be called "socialism." A jobs guarantee or massive public works projects could be the ticket, because you'd functionally just be taking all the money and putting it somewhere without expectation of financial return. But it might just end up making life prettier or more convenient in ways that aren't reflected on a balance sheet. Or you could just redistribute the gains and give people more time off. There's tons of options, but it's all a collective action problem to make them work. Somehow we have a scarcity mentality about public investment despite there being a giant glut of money to put towards things. But people only want to put money to things that make more money instead of any other social goal.

          If it truly has no financial return then it might still be “stagnation” but it would be less bad because people will have jobs and nicer public spaces; unlike the status quo where people have nothing to do and crappy/non-existent public spaces. But I strongly suspect there are lots of unpriced forms of social, cultural, aesthetic, etc. capital that we’ve been underinvesting in for decades and restoring some of that will see some revitalized economic returns as well.

          I think one of the shortcomings of the neoclassical model is this conceptualization of the economy as a fairly rigid "mechanism" with discrete moving parts. They think like mechanics rather than gardeners and it leads them to give short-shrift anything with subtle or difficult to measure impacts.

          3 votes
          1. [2]
            skybrian
            Link Parent
            With respect to macroeconomics, the part I worry about is assuming things average out rather than measuring them. Like, how do we know maintenance costs average out, rather than getting better or...

            With respect to macroeconomics, the part I worry about is assuming things average out rather than measuring them. Like, how do we know maintenance costs average out, rather than getting better or worse over time? If we don't measure, we won't notice. This seems as bad as assuming inflation is constant.

            Maybe "secular stagnation" would be less mysterious with the right measurements?

            1 vote
            1. NaraVara
              Link Parent
              They can get better or worse over time, but improvement over time would be part of total factor productivity. That’s technological progress/regression. All the determining factors can change over...

              They can get better or worse over time, but improvement over time would be part of total factor productivity. That’s technological progress/regression. All the determining factors can change over time, but on the macro scale they will tend towards a general equilibrium that’s based on the aggregates.

              1 vote
  3. [5]
    thejumpingbulldog
    Link
    I read the article, but I'm still a little confused, could someone explain secular stagnation to me? It seems that we are doing all that we can to encourage investment and growth by tax cuts and...

    I read the article, but I'm still a little confused, could someone explain secular stagnation to me? It seems that we are doing all that we can to encourage investment and growth by tax cuts and low interest rates, but noting is happening?

    2 votes
    1. [4]
      Loire
      Link Parent
      If understood it correctly: despite the encouragement of low interest rates nobody is spending and thus the economy is locked into low growth rates.

      If understood it correctly: despite the encouragement of low interest rates nobody is spending and thus the economy is locked into low growth rates.

      6 votes