Is the Recovery an Example of Secular Stagnation?

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Many are wondering if a lack of adequate private investment opportunities may be contributing to the sluggish U.S. recovery from the Great Recession. One standard measurement suggests yes, but a recent Economic Synopses essay suggests otherwise.

Alvin Hansen first used the term secular stagnation in 1938, arguing that firms likely wouldn’t invest in new capital goods due to slower population growth and technological advance in the wake of the Great Depression.¹ Hansen said: “It is my growing conviction that the combined effect of the decline in population growth, together with the failure of any really important innovations of a magnitude sufficient to absorb large capital outlays, weighs very heavily as an explanation for the failure of the recent recovery to reach full employment.”²

In an Economic Synopses essay, B. Ravikumar, vice president and deputy director of research with the St. Louis Fed, and co-authors³ asked: “How would a policymaker determine whether there are adequate private investment opportunities, an essential component of the secular stagnation hypothesis?”

Productive Capital

But is this the right way to measure investment opportunities? Or as the authors asked: “Aren’t the returns on productive capital more relevant for capital investment decisions than the returns on government debt?”

The authors cited their 2011 paper where they examined the real returns on productive capital using National Income and Product Accounts data.⁴ Using the same methodology, the authors found that the after-tax return on business capital is now more than 8 percent and the after-tax return on all capital is more than 6 percent. These are as high as they have been in the past three decades.

Conclusion

The authors concluded, “While many authors have documented the low and declining returns on government debt, these returns bear little resemblance to the returns on productive capital: The latter is a direct measure and a much better indicator of adequate private investment opportunities and has been rising for the past five years. … The takeaway here is that the current recovery is not an example of secular stagnation. The evidence on investment and returns on productive capital shatter the essential components of the secular stagnation hypothesis.”

Notes and References

¹ Bernanke, Ben. “Why Are Interest Rates So Low, Part 2: Secular Stagnation,” Ben Bernanke’s Blog, March 31, 2015.

² Hansen, Alvin. “Economic Progress and Declining Population Growth,” The American Economic Review, March 1939, Vol. 29, No. 1, pp. 1-15.

³ Paul Gomme, professor of economics at Concordia University, and Peter Rupert, professor of economics at the University of California, Santa Barbara.

⁴ Gomme, Paul; Ravikumar, B.; and Rupert, Peter. “The Return to Capital and the Business Cycle,” Review of Economic Dynamics, April 2011, Vol. 14, No. 2, pp. 262-78.

Additional Resources

• Economic Synopses: Secular Stagnation and Returns on Capital
• On the Economy: Oil Prices’ Effect on Employment Growth
• On the Economy: Career Switching Is Occurring Less Often, not More