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Secular Stagnation

The term secular stagnation was first used in the context of the historical moment of the Great Depression. It was coined by Alvin Hansen in a speech at the American Economic Association in 1938.

Secular stagnation refers to a persistent and large period of sub-pair economic growth. One of the main factors for this ongoing low growth is the mismatch between the levels of investment (which become too low) and the levels of savings (which become too high).

The factors that seemed to be at play for economic progress – as explained by Hansen at the time – were i) inventions, ii) the discovery and development of new territory and new resources, and iii) the growth of the population.

Since this period, this concept has emerged again in light of the aftermath of the financial crisis of 2008/2009 by Larry Summers due to the lack of accelerated growth after the crisis resolution. The state of the world at that moment showed an increasingly ageing population (with exceptions in the African continent), a lack of discoveries of new territory and resources, which both, in turn, put a big emphasizes on inventions.

Tracking down the moments of great technological progress, Gordon 2011, mentions the Industrial Revolution from 1700-1830, that lead to the steam engine and the railroads. Then, from the 1870-1900 the advances in electricity, internal combustion engine and running water. And the latest progress starting from the 1960s that include computers, mobile phones and the internet. However, he argues that this latest technological progress is less relevant for economic growth. As had already been discussed by Hansen in the 1930s, “… it is possible that capital-saving inventions may cause capital formation in many industries to lag behind the increase in output.”. Which can simply translate to growth on information technology making capital investment more efficient and therefore reducing the need for other kinds of investment spending.

Manny, including Krugman 2012, have disregarded Gordons’ idea of ‘least important technological advances for growth’, stating that the new era of technological revolution is just about to start. However, it seems careless not to consider the implications of where the current technological progress is taking us. More automatization and a clear intent on the replacement of human labour can lead as discussed by Acemoglu 2017 to decreases on employment and wages.

This years’ NBER conference on the Economics of Artificial Intelligence, highlighted some of the potential implications of this new form of technology and its potential effect on economic growth. Artificial intelligence (A.I.) can be defined as “the capability of a machine to imitate intelligent human behaviour” or “an agent’s ability to achieve goals in a wide range of environments.

Artificial Intelligence, sometimes regarded as a more advanced form of automation can have monumental changes for economic growth. According to Aghion and Jones, Artificial Intelligence can be used in the production of goods and services with a potential effect on economic growth and income shares. At the same time, Artificial Intelligence may influence the process to create new ideas and technologies by helping to solve complex problem. The model predicts a decline in the share of GDP associated with manufacturing or agriculture once they are automated; however, this decline is balanced by the increasing fraction of the economy that is automated over time. Moreover, considering that Artificial Intelligence is increasingly replacing people in generating ideas, ongoing automation could prevent the role of population growth in exponential growth. Finally, authors state the model can generate a prolonged period with high capital share and relatively low aggregate economic growth while automation keeps pushing ahead. Depending on the way Artificial Intelligence is introduced, economic growth may increase, either temporarily or permanently.

Potential solutions for secular stagnation have been suggested overtime, still there is a debate on what are the most effective measures.

Central government may try to influence economic growth by implementing fiscal and monetary policy tools. An expansionary fiscal policy may reduce national savings, raising neutral real interest rates; by increasing substantially the levels of output through government expenditure, growth can be stimulated. Monetary policies are also tools to stimulate growth and can be either conventional or unconventional. Higher levels of inflation would be accompanied by lower interest rate which to stimulate the economy by achieving full employment. Lower interest rates makes borrowing cheaper encouraging spending and investments; aggregate demand increases pushing for economic growth. In this specific situation, given high unemployment rate and low materials prices, public investment programs may increase and restore pre-crisis levels of output. Conventional measures were not able to address financial crisis of 2008/2009 and governments implemented unconventional monetary such as quantitative easing; proofs on effectiveness to restore equilibrium are needed.

Following this reasoning, it seems that all these propositions are problematic to solve secular stagnations and might not even be at play. It would be therefore interesting to consider the role of Artificial Intelligence for growth. Given that traditional measures have been shown to be ineffective in specific situation such as economic stagnation, technological achievements might start to play a role in economic growth. Considering that the potential of Artificial Intelligence are still unknown, it is of interest to consider them as a potential measure to face challenging economic eras. Artificial Intelligence driven by technological innovation may be a potential solution to stimulus boost economic growth. In particular, traditional paradigms of growth might be challenged and adapted, as well as the way issues and policies in itself are resolved.

Edson Embana 27176

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Author: studentnovasbe

Master student in Nova Sbe

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