While the US economy has been in recovery mode for a solid seven years, incomes have yet to recover. The most salient explanation for the economic malaise that has infected virtually the entire developed world as witnessed by negative interest rates in Europe and Japan is the theory of secular stagnation put forth by Harvard economist Larry Summers. The idea, originally introduced by Alvin Hansen to explain the 1930s and related to Keyne’s notion of a preference for ready cash in hard times, is that economies can enter a period when people want to save dramatically more than they spend. If everyone saves rather than spends, economic activity declines as there is no demand for goods in the economy.
What is causing this propensity to save? In the modern global context, it is that in the developing world, people long used to saving have not yet learned to spend and their savings has poured into global markets. Another lingering factor is fear from the Crash. Fear leads to saving rather than spending. Its influence is evident in the Lost Decade–now really two decades–in Japan. In the US, while savings remain anemic, borrowing remains relatively low as credit standards remain tight. The problem is particularly acute for small business which historically has created the majority of new jobs. This time around small business has not hired the way they have in previous expansions. And the likely culprit is difficulty borrowing.
To compensate for this excess of savings over demand, the primary remedy proposed by Summers and already practiced to some extent, is meaningful government spending to replace absent private demand. Government spending on infrastructure is a win all around because it solves problems the private sector cannot solve on its own and gives the private sector and citizens support–while also creating jobs.
But ultimately, government compensating for a lack of anemic demand presents a cheerless future. Far more desirable would be for private demand to recover. Which raises the question how to stimulate private demand. Greater consumption in the developing world would help. So would successful efforts to reduce fear by encouraging optimism. But what if there is a third reason that private demand has languished in this recovery. What if part of the decline in demand is due to a lack of appetite to buy anything? This has happened before, for example, in the early 1970s after the technological advances of the 1960s came to a halt.
The stagnation of the 1970s actually held silver lining as it was during this period that the personal computer emerged helping to create the information technology revolution that powered the prosperity of the successive quarter century.
Following this example, a way to stimulate demand would be for private industry to create a new wave of products that people actually want. Since the crash, mobile phones, for example, have bucked the austerity trend with people lining up buy early versions of the iPhone in the midst of the Great Recessions However, a decade or so into the mobile revolution, mobile seems to have lost its sizzle. Apple’s stock is way off. Few new apps on the level of WhatsApp or Snapchat have taken off–with many venture capitalists arguing the app revolution has run its course. In this environment, what could be next.
Fortunately, there are technologies waiting in the wings that could power the next surge in global demand. It would be presumptuous to pick one to the exclusion of others but a number are on the horizon: self-driving cars, the Internet of things combined with GPS that will soon give virtually every thing in the world a point in Cartesian space, solar power, the block chain approach to distributing data and augmented reality as illustrated by the recent success of Pokemeon Go which leverages GPS.
The trick to turning ideas into demand is to create a common platform or set of tools that let as many people as possible participate in order to create the most attractive set of products–as witnessed by the successive waves of innovation around successive Internet protocols.
A number of new standards are in development that could extend this model to new technologies. And if so, the global economy may recover at least some of the demand it so dearly needs.
