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The Productivity Slowdown and the Secular Stagnation Hypothesis

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International Macroeconomics in the Wake of the Global Financial Crisis

Part of the book series: Financial and Monetary Policy Studies ((FMPS,volume 46))

Abstract

The recent dismal productivity growth in the U.S. and in the global economy has been seen as evidence of a potential return to a period of secular stagnation. Focusing on the U.S.—a proxy for the frontier economy—we consider a standard decomposition of the different sources of post-World War II growth of GDP per capita, and review existing projections. In the next 20–50 years, lower contributions of hours worked and education will negatively affect U.S. economic growth. However, total factor productivity—which some warn will also continue to stagnate—will be key. After showing that similar warnings have been issued after all deep recessions, we argue that such pessimistic predictions were consistently misguided—not because they were built on erroneous theories or data, nor because they failed to predict the discovery of new technologies, but because they underestimated the potential of the technologies that already existed. These findings suggest that we should not make the same mistake today by undervaluing the future effects of current information technology.

This is a revised and updated version of Pagano and Sbracia (2014). We thank Pietro Catte, Alberto Locarno and Roberto Piazza for comments. Any errors are ours alone. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Italy or the World Bank. E-mail: ppagano@worldbank.org, massimo.sbracia@bancaditalia.it.

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Notes

  1. 1.

    See, for example, Byrne et al. 2013, Cowen (2011), Gordon (2012, 2014), Lindsey (2013), and Vijg (2011).

  2. 2.

    These studies also argue that other countries, especially the less developed, may still have room for “catch up growth”, even in the case of a slowdown in the technology frontier.

  3. 3.

    Pagano and Sbracia (2014) also discuss the likelihood that the natural interest rate has declined to the levels suggested by Summers.

  4. 4.

    See, in particular, Kremer (1993), Jones (1995a, 2002), and Kortum (1997). In these models, a higher population growth (size effect) translates into a higher growth rate of potential inventors and, in turn, a higher growth of TFP.

  5. 5.

    Jones (1995b) gave the following example (suggested by David Weil, who, in turn, credits Lawrence Summers): an economist living in the year 1929, who fits a simple linear trend to the natural log of GDP per capita of the United States from 1880 to 1929 in an attempt to forecast current GDP per capita would make a remarkably precise prediction. At the end of the 1980s, the forecast would fall short by less than 5%.

  6. 6.

    The parameter \(\alpha \) is calibrated at 0.32. An estimate of \(\sigma \) is not needed, since the contribution of \(\sigma \dot{a}\)/\(\left( 1-\alpha \right) \) is obtained as a residual.

  7. 7.

    An alternative decomposition of output per capita considers capital per worker instead of the capital-output ratio (i.e. \( y_{t}=e_{t}\cdot A_{t}\cdot \left( K_{t}/L_{t}\right) ^{\alpha }\cdot h_{t}^{1-\alpha }\)). As capital per worker increased significantly between 1950 and 2007, while the capital-output ratio remained broadly constant, this alternative decomposition suggests a somewhat smaller role for TFP. Although any growth accounting exercise is arbitrary, we prefer the one reported in Eq. (3), because it focuses more closely on the sources of economic growth that, in these models, are supposed to be “autonomous”, i.e. TFP and human capital. In endogenous growth frameworks such as the AK-model, instead, physical capital is also an autonomous source of economic growth (see Sect. 3).

  8. 8.

    According to other studies, economic stagnation dates back at least to the end of the Roman Empire, as shown by the fact that the standard of living in ancient Rome was similar to that of Europe in the eighteenth century (Temin 2006).

  9. 9.

    Goldin and Katz (2008) report a U.S. high school graduation rate equal to \( 77\%\) in 1970, while Heckman and LaFontaine (2010) find a rate of \(81\%\). As noted by Murnane (2013), estimates of graduation rates are sensitive to the choice of the data source and to the treatment of recent immigrants, and General Educational Development (GED) certificates. The GED program, in particular, is a test designed to certify the possession of high-school-level education. It was started as a small-scale program for military veterans and has now become a substitute for high school graduation, especially among minorities, as it is generally accepted for college admissions.

  10. 10.

    A significant portion is also explained by the gender gap, which reflects the higher graduation rates of females common to most OECD countries.

  11. 11.

    The projections on human capital accumulation, based on the methodology of Jorgenson et al. (2005), were updated by Dale Jorgenson in 2012 and reported in Byrne et al. (2013) and Gordon (2014).

  12. 12.

    As argued by Gordon (2012), innovations such as running water and indoor plumbing were key determinants of this phenomenon. Before their diffusion, in fact, water for laundry, cooking and indoor chamber pots was hauled by housewives. For example, Strasser (1982) reports that in 1885 the average North Carolina housewife walked 148 miles per year carrying 35 tons of water. Running water and indoor plumbing spread into all American houses between 1890 and 1930. Further research, however, would be needed to explain why these inventions, which were already present in Mesopotamia and Egypt over 2,500 years BC and were extensively used in the Roman Empire, did not spread to North America until at the beginning of the early twentieth century. In other words, one cannot exclude a reverse causality issue: running water and indoor plumbing, which were introduced 4,000 years earlier, perhaps spread to North America in the twentieth century because only at that time were women ready to move into the labor force.

  13. 13.

    The estimate for the number of hours worked in 1890 refers to the manufacturing sector; this is a slightly higher figure than in other sectors, such as construction and railroads (www.eh.net).

  14. 14.

    Results from endogenous growth models, which explore the factors that can potentially explain long-run economic growth, are similarly unsatisfactory. These models identify several possible determinants of productivity growth, such as trade openness, government policies, the strength of property rights, competition and regulatory pressures. Permanent changes in these variables, which have frequently occurred throughout U.S. history, should lead to permanent changes in economic growth rates. The theoretical relevance of these changes, however, contrasts with the aforementioned empirical stability of long-run growth.

  15. 15.

    The increase in the share of researchers for the average of the five largest OECD economies (France, Germany, Japan, U.K. and U.S.) is equally striking: it rose from \(0.16\%\) in 1950 to \(0.95\%\) in 2007.

  16. 16.

    In Eq. (5), ideas arrive in a deterministic fashion. Kortum (1997) builds a general equilibrium model in which the flow of ideas is stochastic, which yields the same implication that a growing number of researchers generates a constant productivity growth.

  17. 17.

    We recall that \(74\%\) is the share of the contribution of TFP to the overall annual growth of GDP per capita (see Eq. (4)).

  18. 18.

    Since the parameter \(\sigma \) can be normalized to 1 and given that \(\dot{r}\) and \(\dot{l}\) are equal to, respectively, \(3.1\%\) and \(1.1\%\), it follows that \(\gamma \) is equal to 0.38.

  19. 19.

    This would bring the share of researchers to \(1.4\%\) in 2030, which seems a reasonable figure.

  20. 20.

    The natural continuation of Fig. 6 would be to look for the frequency of the searches of the term “secular stagnation” in Google, which is available from Google Trends. The results, not reported here, would show that the term had an essentially nil number of searches from 2009 to 2013 and then rose sharply until 2015, when it started to decline. Thus, even after the Great Recession, the “prominence” of the issue of secular stagnation has displayed a cyclical behavior similar to that observed in the aftermath of other deep recessions cum slower-than-expected recoveries.

  21. 21.

    Alvin Hansen (1887–1975), often referred to as “the American Keynes” (Nasar 2012), was a professor of economics at Harvard and an influential advisor to the government who helped create the Council of Economic Advisors and the Social Security System. He introduced Keynesian economics in the United States, clarifying its implications (Hansen 1936). He was the mentor of Paul Samuelson, who credited him for inspiring the formalization of the multiplier-accelerator model (Samuelson 1939).

  22. 22.

    Other factors that have often been identified as posing significant threats to economic growth are pollution and a possible depletion of natural resources (see, for example, the famous study by Meadows et al. 1972, and the criticism by Nordhaus 1992).

  23. 23.

    Hansen distinguished between capital deepening and capital widening, depending on whether physical capital grew at a rate, respectively, higher or equal to that of output.

  24. 24.

    Merton (1935), for example, showed that the number of patents issued for inventions related to the automobile and the radio industry had started to decline in the early 1920s; in the aeroplane industry, the decline had started even earlier, in 1918.

  25. 25.

    Following similar remarks by Keynes (1937), Hansen (1939) noted that U.S. residents had increased by 16 million during the 1920s (17 million according to the most recently revised data), while in the 1930s the rise was estimated to be in the order of 8 million (9 million using modern data).

  26. 26.

    Fifty years later, Samuelson formalized this argument in the Keynes-Hansen-Samuelson multiplier-accelerator model of secular stagnation (Samuelson 1988).

  27. 27.

    The commercialization of most home appliances—including refrigerators, washing machines, televisions, air conditioning, electric vacuum cleaners, electric toasters, etc.—started in the 1920 and 1930s (see Vijg 2011, for a list of inventions).

  28. 28.

    Crafts (2002) estimates that ICT has been responsible for \(30\%\) of the overall growth of GDP per capita in its first 15 years and \(55\%\) in the following 10 years. The contribution of electricity was broadly similar (\( 28\%\) in the first 30 years and \(47\%\) in the following 10 years), while that of steam was much smaller.

  29. 29.

    As Joel Mokyr (2013) put it, 50 years after its invention the steam engine was probably viewed as a machine that “made a lot of noise, emitted a lot of smoke and stench, and pumped some water out of few coal mines”. Similarly, as remarked by Paul David in 1990 (rephrasing Robert Solow’s famous quip), many observers living in 1900 might have asserted that electric dynamos were “everywhere but in the productivity statistics”.

  30. 30.

    Brynjolfsson and McAfee (2014) discuss several promising innovations, including recent developments in robotics, 3D-printers, self-driving cars, computer-aided diagnosis in medicine, possible offsprings from genome sequencing, etc. Gordon (2014) and Vijg (2011), however, question the economic impact of most of them.

  31. 31.

    A truncated Pareto distribution is still, in fact, a Pareto distribution. To understand why this matters, assume, for example, that the TFP evolves stochastically, following a Pareto distribution; namely, \(A_{t}\sim Pareto(1,\theta )\), where t is time (with \(A_{t}\) i.i.d.). Suppose, also, that technological progress is an increase in the level of TFP from a value of at least \(a^{\prime }\) to a value of at least \(a^{\prime \prime }>a^{\prime }\). Then, the probability that technological progress occurs is \( \Pr \left( A_{t+1}>a^{\prime \prime }|A_{t}>a^{\prime }\right) =\left( a^{\prime }/a^{\prime \prime }\right) ^{\theta }\). As a consequence, raising \(a^{\prime }\) and \(a^{\prime \prime }\) proportionally does not change the probability that technological progress will occur.

  32. 32.

    Finicelli et al. (2014) show, for both closed and open economies, that aggregate TFP is a specific moment (whose order depends on consumer preferences) of the distribution of TFP across firms.

  33. 33.

    See Lucas (1988). Studies focusing on the importance of social capital—defined as the expected collective benefit derived from the way in which individuals interact, cooperate, and trust one another—express a similar view.

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Authors and Affiliations

  1. Bank of Italy, Rome, Italy

    Patrizio Pagano & Massimo Sbracia

  2. World Bank, Washington DC, USA

    Patrizio Pagano

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  1. Patrizio Pagano
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  1. Directorate for International and European Relationships, Banque de France, Paris, France

    Laurent Ferrara

  2. Associate Directorate General International Affairs, Banco de España, Madrid, Spain

    Ignacio Hernando

  3. Directorate for International Relations and Economics, Banca d’Italia, Rome, Italy

    Daniela Marconi

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Pagano, P., Sbracia, M. (2018). The Productivity Slowdown and the Secular Stagnation Hypothesis. In: Ferrara, L., Hernando, I., Marconi, D. (eds) International Macroeconomics in the Wake of the Global Financial Crisis. Financial and Monetary Policy Studies, vol 46. Springer, Cham. https://doi.org/10.1007/978-3-319-79075-6_2

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