A Summary of the Structural Stagnation Hypothesis

Below is a brief summary of the structural stagnation argument. It’s a condensed argument meant for economists. In my textbook (Chapter 28 of Colander, Economics, 9th edition) I spell out the issues step-by-step in a way that students can understand organizing the discussion around a globally modified AS/AD model.

The story begins in the mid 1990s with the rise of large-scale globalization, which changed the operating features of the U.S. economy. Globalization wasn’t new; what was new is that the two new players on the scene—China and India—had a huge available pool of labor. Instead of a wave of globalization the U.S. economy experienced in the 1970s, it was  a tsunami.

The natural international adjustment to the massive globalization would have been for the value of the dollar to fall, which would have equalized comparative wages and prices. That didn’t happen anywhere near as much as was needed to bring about equilibrium because the United States was able to run trade deficits and the United States had a significant resource with comparative advantage—international traders—those involved in organizing and facilitating trade. Expanded globalization significantly increased the income of these international traders, changing the nature of our trade balance to one that focused on services and profits, not production.

This structure created the American version of the Dutch Disease, which benefited a small group (in this case international traders) while hurting those businesses and workers that lacked a comparative advantage in globally competitive activities (largely manufacturing). Combined with the trade deficit made possible by large international capital flows into the United States, pressure was put on lower wage jobs even as high-income individuals were prospering. In terms of jobs, the high exchange rate and trade deficits increased the natural rate of unemployment in globally competitive activities and constrained U.S. potential output. Put another way, just as China boomed because of export-led growth, the U. S. economy slowed because of import-led stagnation. That slowdown in growth of potential output started in the mid-1990s, but it was hidden by macro policies designed to hold the economy at a higher growth rate than was sustainable in the long run.

For more than a decade it worked. Expansionary monetary and fiscal policy achieved not only 3% annual growth, but even higher growth rates, and unemployment remained low because workers displaced in globally competitive activities found jobs in protected activities such as health care, education, and construction. The expansionary policy that held the economy above its sustainable long-run potential did not result in goods inflation because of the changed institutional structure: wages of U.S. workers in globally competitive activities could not rise, and the United States’ ability to run large trade deficits meant that the exchange rate did not have to adjust.

The downward pressure on tradable goods prices more than offset the increase in prices in those activities that were less globally competitive. So, the result was little to no goods inflation, even as the economy exceeded its potential. The result was two Americas—one with globally competitive sectors that were suffering and another with non-globally competitive sectors that were doing great. Unemployment remained low (at least lower than what it would have been) without causing goods inflation. But the two-Americas reflected a structurally imbalanced unemployment, which is unsustainable in the long run, especially since many of the non-globally competitive activities depended on government spending and expanding credit. But there was a limit to how much government spending could rise since the unwillingness of people to pay their full cost through taxes was leading to higher and higher deficits.

These structural problems—an unsustainably high exchange rate, high unemployment and lowering of potential output—were also hidden through the first decade and a half of the 2000s by loose monetary policy, which pushed up asset prices, creating a positive nominal wealth effect, even as sustainable real wealth did not rise. This wealth effect added to the feeling that the United States had reached a wonderful equilibrium. Unfortunately, as we now know, rising asset prices were creating a bubble that burst in 2008. The bursting of the bubble showed, with painful consequences, that the equilibrium was unsustainable— unemployment rose and growth fell as government attempted to retrench into a sustainable equilibrium not based upon an asset bubble. In the standard view, this was seen as a recession. In the structural stagnation view, this was seen as suppressed depression that would last much longer than the typical post war recession, and not be solved by demand side policies alone. Dealing with it would require difficult structural changes that made U.S production more globally competitive.

If the structural stagnation view is correct, policymakers face a dilemma—implement austerity measures that would allow the structural problems to unwind with its attendant pain or continue expansionary measures to keep those problems at bay as much as possible, putting the pain off to another day. If the root of today’s economic problems are structural, there is no easy answer. The real policy question is: When do we want to face the structural problems? Now or in the future?

No one wants austerity for austerity’s sake, which is often the way calls for spending restraint and less expansionary monetary policy are portrayed. Austerity is in many ways simply facing up to our structural problems. If structural stagnationists are right, at some point the United States is going to have to face up to the problems. Currently, on average, the U.S. cost structure at the current exchange rate is not globally competitive. This means that when global firms ask, “Should we expand production in the United States?” on average they answer, “No,” and funds for investment go abroad. Until these structural problems are met, the slower growth that the United States is currently experiencing is as good as it gets, and even a little bit better than is sustainable, because we still have nominal asset prices/nominal GDP above its long-run steady state ratio, and we are keeping the economy growing only with highly expansionary monetary and fiscal policy that maintains and increases the current asset price bubble. In the long run that is a policy that is  asking for another crash.

As I stated above, in the text I don’t take a position about whether the structural stagnation view is the correct view—that is not the job of a text. I present it because it raises precisely the type issues that I think we should be raising in the macro course, and which the former structure of texts did not allow us to do. This has meant moving international issues up earlier in the text—to give students an understanding of globalization and exchange rates, and changing the discussions of inflation to distinguish goods inflation from asset inflation to better allow a discussion of asset bubbles. But I think discussing the structural stagnation view allows precisely the type debate that we should be teaching our students to understand.

First Published : June 29, 2014

An App for Economic Data Releases

The government releases data nearly every day and agencies such as the Census Bureau provide that data on their websites. While each agency publishes a schedule of releases, it’s not easy to keep track. Luckily, the Census has a free app that reports the most recent values for 16 key economic indicators the day they are released. Students can view the data on their iOS and Android devices and you can talk about them in class that day. Look here for the app.

First Published : June 7, 2013


Considering Intellectual Property Rights: Revisions to GDP

Economists must make numerous choices to calculate market activities in an economy. The U.S. measure of GDP, for instance, does not include illegal drug sales or prostitution, both market activities. Periodically the Bureau of Economic Analysis, revises its measure of GDP to account for measurement errors and it did so in July 2013 when it will add a category of investment called “intellectual property products.” It summarizes this change in this release. The category will include such things as writing and recording music. On National Public Radio and reported by the Wall Street Journal, Wellesley economist Daniel Sichel explained that for example, the money Lady Gaga spend writing and recording her music will now be included in the BEA’s measure of GDP. According to estimates, the change will add 3 percent to GDP. You might think that this change is not controversial, but it is. Economists point out that by adding to GDP this change lowers the U.S. GDP-to-debt ratio.

First Published : June 4, 2013


The QWERTY Keyboard and Technological Lock-in

The QWERTY keyboard is an often-cited example of technological lock-in–when prior use of a technology makes the adoption of subsequent technologies difficult. What is interesting is that technological lock-in can lead to establishing inefficient  technology and even economic institutions.  The emergence of thumb-typing on smartphones and tablets may be giving rise to a new, more efficient keyboard. Will technological lock-in prevail? When reading Chapter 26 (9e) of my Principles of Economics textbook, students may enjoy listening to the episode of NPR’s Here and Now. A more in-depth discussion of QWERTY including the more efficient, replacement for thumb-typing called  KALQ can be found on the Smithsonian blog, Design Decoded.

First Published : June 4, 2013


Intro Economics Textbooks Are Changing

If you are interested in teaching economics an excellent resource is the teach-econ listserve. I encourage anyone interested in teaching it to follow it up.   Don Coffin, who is a regular contributor, recently made the following post on it referring to the following Krugman blog entry:

Don writes:

“It’s about a year old, but interesting (although not everyone, obviously, will agree with everything/most/much/any of what Krugman has to say.

I’ve long believed that much of what one reads in intro econ books (particularly in intro macro) reflects the macroeconomic issues that were facing people when they were in grad school.  So, for example, from my generation of grad students (the 1970s), I would have expected (and, I should note, got) a focus on inflation and stagnation and real shocks.  It’ll be interesting (if I’m still around and (capable of) paying attention) to see what intro macro looks like in, say, 2025…”

Here is my response to Don on the Teach-Econ Listserve.

“Actually, intro economics textbooks are already changing. Consider the most recent, and just published, 9th edition of my textbook. In it I have an entire chapter on the structural stagnation policy dilemma. The chapter discusses how the current economic situation differs from previous seemingly similar situations, and why many economists believe the slow growth will continue for years. I call it the structural stagnation view.

In that chapter (you can read here: Structural Stagnation Policy Dilemma Colander 9e)  I contrast that structural stagnation view with the standard Krugman shortage of aggregate demand view that was presented as Keynesian thinking, and also with the Classical self-correcting view that was presented as Classical thinking in what we learned. (Neither of those presentations was satisfactory; both Classicals and Keynesians were both more nuanced than what was presented, but that’s another story.)

The reality is that what students get in graduate school today is all too often simply a math bootcamp with little true discussion of policy. One student when I asked where their views of fiscal policy came from for my book, the Making of an Economist Redux, responded that it didn’t come from classes. He said that monetary policy might have been in one of the variables in the model, but it was lost in the equations. Since graduate students are never trained in discussion of policy that reflect the nuanced views of Keynesians and Classical economists, they find it difficult to teach those nuanced views. Instead, they rely on textbooks to define what they teach. After all they can’t teach what they haven’t learned. That’s sad.”

First Published : April 26, 2013

Federal Reserve Economic Data

A great place to get data to show in class or for your students to work with is FRED (Federal Reserve Economic Data), which has 61,000 series. FRED data can be imported into Excel with an add-in and then used to create graphs, change levels to percentage changes with a click of a mouse all within one Excel spreadsheet. You can find the data and the add-in here: http://research.stlouisfed.org/fred2

More recently the St. Louis Fed released a free FRED app for iOS and Android Devices. Look here for details. This is an invaluable tool for courses that explore the economy today.

First Published : April 23, 2013

Regulating Raisins

In the 1930s and 40s the Government began regulating a number of agricultural products, including raisins. They began as price stabilization programs, but have ended up being price support programs. Chapter 8W in Colander’s Economics and Microeconomics discusses the history of these programs. As the Economist reports (insert link) the Supreme Court is currently reviewing the raisin program. Raisins were regulated with the 1937 Marketing Agreement in  when domestic supply of raisins exceeded world demand. The program is a classic “buy up and store” option shown in Figure 8W-3, except that the government doesn’t buy the raisins. It confiscates them and disposes them by either giving them away in government food programs, through exports, or disposal. Essentially, the government establishes a minimum price. Depending on the elasticity of demand, that confiscation can actually make the raisin producers better off, which I suspect is why the program has lasted as long as it has.

First Published : April 23, 2013

Bride Prices

In the United States people bristle at the thought of paying for a bride. Not so in all countries. The practice in China gives us an explicit example of the effects of supply and demand on price.  It’s one-child policy is now affecting the number women compared to men of marrying age, along with an increase in income, is raising the price men must for a bride. The negotiations occur in a ritual called chuanmen. This NPR story provides an example for the classroom when teaching Chapters 4 and 5 in Colander’s Principles of Economics.

First Published : April 23, 2013


Wealth Distribution

In the past few years, income and wealth have become more unequally distributed in the United States, which has made them important topics in policy debates. But what are American’s perceptions of current wealth distribution and what do they believe is the ideal distribution?

Recently, a Harvard professor Michael Norton did just that. He polled 5,000 Americans and found that they perceived wealth to be distributed much more equally than is the case. For example, respondents believed that the top 20 percent held 60 percent of the wealth while, in fact, they held 80 percent. Norton also asked about the ideal distribution. Respondents believed that in an ideal world, the top 20 percent should hold 30 percent of the wealth. You might poll your students for their opinions.

You can show this Youtube video for visual presentation of Norton’s work. The Harvard Business Review also published an article about Norton’s work. Note that along with the data, the narrator of the Youtube video expresses strong normative views about wealth distribution. The data along with the normative discussion could be used to launch a class discussion about fairness.

First Published : March 24, 2013

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