Structural Stagnation Dilemma

Structural Stagnation Dilemma Post

Ever since 2007, the U.S. has been in a prolonged phase of slow growth and stagnation, which has been referred to as “Structural Stagnation” to differentiate it from the more frequently used “recession”. Both are characterised by periods of unemployment, low productivity and output but unlike economic recession, which is often of a more temporary nature and which can be reversed with some changes in economic policy, Structural stagnation is of a more lasting nature and cannot be reversed quickly. Economists hypothesize that this prolonged phase of slow economic recovery is tied to globalisation and structural issues caused by it (The Structural Stagnation Policy Dilemma) Structural stagnation is believed to arise from two causes: 1. long run- globalization, exchange rates, and the trade deficit 2. short run- as a result of the financial crises. Unlike, previous downturn periods, where following the reversal, unemployment reversed to pre-recession levels, this has not happened in the case of the “stagnation” and the slow economic recovery is not expected to recover unless there are major changes in the economy. Thus, Structural stagnation is NOT a typical business cycle. It would require both path breaking demand and supply side policies and structural changes to push back the economy to its growth.  The traits of structural stagnation are slow growth and recovery without major increase in jobs. Unlike the normal recession, in the structured stagnation phase, the rate of economic expansion which should have been higher than the trend rate to enable a bouncing back, has not happened. (The Structural Stagnation Policy Dilemma). Secular stagnation, unlike structural stagnation, refers to stagnation brought about by inefficient and less fruitful means of capital investment i.e.by excess of saving policies and concentration of money in the hands of a few, which would lead to low and negative interest rates and also brings down employment as people do not want to invest where there is a chance of loss. It was believed to be a reason for the Great Depression and some hypotheses that there would be an end to growth in countries such as the US as investment opportunities come to an end. Structural stagnation theories do not blame low investment, rather they emphasise that increased globalisation is responsible for creation of structural difficulties in the advanced countries such as the US. And they will continue to the suffer the aftereffects till required structural changes have been made, to combat.

The Structural Stagnation Dilemma poses a real challenge in different ways according to different economist thinkers. According to Robert Gordon, the current indications point towards a serious end to economic growth unless innovations must keep increasing and be more than what it is as of now, for growth to improve. At its current rate, growth is certain to be reduced by half. In addition, problems in the areas of demographics, education, debt and inequality are bound to reduce the growth further and this presents depressing prospects ahead. (Gordon) Economist Eric Brynjolfsson, on the other hand presents a more optimistic picture about the prolonged slow economy and emphasizes that innovation is at an all time high and there would be no end to innovation as each builds up on the other. He says productivity has gone up.  The problem he says is owing to the disconnect between the rapidly advancing technology development and people not able to stay up to its pace. He says that these lags are normal and have occurred during the times of previous industrial and technological changes, when innovation is often followed by a slow period where system reorganisation occurs. He defines the challenge imposed by structural stagnation and technological development as to enabling humans and machines function together.  (Brynjolfsson) The challenges which the dilemma poses for the employment and macropolicy would be:

1. redesigning of monetary and fiscal policies keeping in mind that the formerly expansionist policies are not working as used to be and this is owing to the impact of globalisation. In fact, such expansionist demand policies are creating conditions for a bubble, by increasing imports and demand for assets.

2.  If the domestic producers in the US cannot match the world prices, they won’t be able to sell goods, productivity and labour will drop. Output will drop as a result as factors such as wages, technology and external market forces as well as possessing of adequate infrastructure will make a difference. Trade deficit results.  Hence the government and industry has to work on policies which would ensure competitiveness in global economy.

3. Onus on the workers themselves to move with the times, be able to adapt to jobs commensurate with their skills, accept lower wages etc and this is a result of globalisation.

While globalisation has had positive effects on the economies of China and India, the effect of globalisation on the US has been to reduce its potential output.   What globalization has done in the US has been to affect the tradable sector in the market with subsequent impacts on the non-tradable sector. It has negatively impacted the spending power of workers in the tradable sector by reducing their wages as well as increasing the cost of living and this has lead to reduced demand in goods which cannot be traded. And this reduction in wages would spread to the other unaffected sectors of employment. In order to combat this and it will definitely take time, harsh structural changes may be needed such as decrease in the wages of the workers in the tradable and non-tradable sector of US job market as compared to that of workers in the emerging economies.

The US needs to make structural adjustments in its policies as well as reduce the trade deficit, and ensure that the producers are competitive on a world scale.  The demand has to be controlled. Structural adjusments would include adjustments to wages, technology, competitiveness, changes in people's attitudes as to work with what's available rather than wait for a non-existent opportunity.  It needs to adjust its exchange rate.

Works Cited:

Brynjolfsson, Erik. "The key to growth? Race with the machines." Ted.com, 2014. Web. 14 Apr 2014. <http://www.ted.com/talks/erik_brynjolfsson_the_key_to_growth_race_em_with_em_the_machines.html>.

Gordon, Robert J. The death of innovation. Digital video 2014. Web. 14 Apr 2014 <http://www.ted.com/talks/robert_gordon_the_death_of_innovation_the_end_of_growth.html>.

Unknown. "The Structural Stagnation Policy Dilemma." modernecon.org, 2012. Web. 14 Apr 2014. <http://modernecon.org/wp-content/uploads/2013/04/Structural-Stagnation-Policy-Dilemma-Colander-9e1.pdf>.

Unknown. "Structural Stagnation, Bubbles, and the Volcker Rule." Jared Bernstein | On the Economy, 2014. Web. 14 Apr 2014. <http://jaredbernsteinblog.com/structural-stagnation-bubbles-and-the-volcker-rule/>.