In December , one of the most eminent economists of the time, Alvin E. Hansen, delivered the Presidential Address, titled “Economic. Summers’ theory of “secular stagnation” (a term first used by the economist Alvin Hansen back in ) holds that, in the United States, the. Recently, Hansen’s secular stagnation hypothesis has gained renewed stagnation in the US in much the same way as suggested by Alvin Hansen in

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Thursday, December 12, Secular Stagnation: Back to Alvin Hansen. In Decemberone of the most eminent economists of the time, Alvin E. Looking at the economy of the late s, Hansen wrote: In this post, I’ll sketch out what Hansen actually said, give a sense of why the “secular stagnation” hypothesis was widely disregarded in recent decades, and suggest how I see the modern lessons. Hansen’s speech was published in the American Economic Review in March Hansen argued that an economy needed strong and healthy levels of investment if it was to maintain full employment.

Each of these in turn, severally and in combination, has opened investment outlets and caused a rapid growth of capital formation. 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.

Further, Hansen was skeptical about whether either monetary or fiscal policy could provide a long-lasting answer.

Alvin Hansen

He was skeptical that lower interest rates could encourage the large and vigorous investment levels that he felt were needed: Yet few there are who believe that in a period of investment stagnation an abundance of loanable funds at low rates of interest is alone adequate to produce a vigorous flow of real investment.

I am increasingly impressed with the analysis made by Wicksell who stressed the prospective rate of profit on new investment as the active, dominant, and controlling factor, and who viewed the rate of interest as a passive factor, lagging behind the profit rate.

This view is moreover in accord with competent business judgment. I venture to assert that the role of the rate of interest as a determinant of investment has occupied a place larger than it deserves in our thinking. If this be granted, we are forced to regard the factors which underlie economic progress as the dominant determinants of investment and employment. While he cautiously favored such steps, he also worried that continual rises in government debt were troublesome, too.


When we look back at Hansen’s speech of latewe see the issues of his time a little differently. Of course, Hansen does not have access to the luxuries of For example, Hansen discusses a slowdown in population growth, which was certainly a fair reading of the trends at that time, but completely missed that US fertility rates were about to take off less than a decade later at the start of what we call the “baby boom.

In retrospect, the notion that technological innovation stopped in the s seems clearly incorrect. Economic Growth, that the s experienced a great deal of technological growth. At a macro level, Field points out that essentially the same number of people were employed in as inusing what seems to be the same value of capital stock, and yet real output was one-third or more higher in than in implying substantial productivity growth even with the period of the Great Depression taken into account.

If one just looks from toreal U. Here’s an readable interview with Field laying out his views. In contrast, Hansen seemed to perceive the later s as nothing but the long aftermath of the the Great Depression. After a few years of fairly vigorous recovery, the Federal Reserve, chasing a premonition of a shadow of a ghost of possible inflation that no one else could see, decided to raise interest rates, triggering a severe recession starting in May that lasted through June Field and others have argued that the U.

Yet here we are in latemore than four years after the Great Recession technically ended in mid, but without a real resurgence of catch-up economic growth that has followed other recessions. We also have the disturbing example of Japan’s economy, which suffered a financial crisis and melt-down in real estate prices back in the early s, and has now been stuck in slow growth for more than two decades.

Hansen’s spirit would surely point out that a surge of population growth or an alvinn of territory are unlikely. Thus, much turns on investment spending. Investment often drops during recessions, and sometimes between recessions, but the investment drop during the Great Recession was especially severe, and the bounceback even to usual levels is not yet complete.

Moreover, the investment surge of the mids was largely in residential real estate, and whatever the other virtues of such investments, additional houses don’t do much to raise future rates of productivity growth. From Hansen’s secular stagnation point of view, the key problem of the U. This perspective doesn’t rule out hnsen monetary or fiscal policy to stimulate the economy in the short run, but neither does it see these as long-term answers.


Staghation would also be an economy where a large share of profits flowing to the financial sector would be troubling, because it suggests that nonfinancial firms are not perceiving profitable opportunities for real investments in plant, equipment and technology.

It’s an economy where we would think seriously about finding ways to ease the tax and regulatory burdens on investment.

Alvin H. Hansen

Here are some words from Hansen’s speech that ring true to me today: Of first-rate importance is the development of new industries. But there is equally no basis for the assumption that we can take for granted the rapid emergence of new industries wecular rich in investment opportunities as the railroad, or more recently the zecular, together with all the related developments, including the construction of public roads, to which it gave rise.

Nor is there any basis, either in history or in theory, for the assumption that the rise of new industries proceeds inevitably at a uniform pace. The growth of modern industry has not come in terms of millions of small increments of change giving rise to a smooth and even development.

Very often the change can best be described as discontinuous, lumpy, and jerky And when giant new industries have spent their force, it may take a long time before something stwgnation of equal magnitude emerges.

Some small recovery must indeed arise sooner or later merely because of the growing need for capital replacement.

But a full-fledged recovery calls for something more than the mere expenditure of depreciation allowances. It requires a large outlay on new investment, and this awaits the development of great new industries and new techniques.

But such new developments are not currently available in adequate stagnatioh I hear relatively little discussion focused directly on an agenda for creating a supportive environment for private domestic investment. Posted by Timothy Taylor at 6: Newer Post Older Post Home.