Is It Secular Stagnation or Just A Lot of People Doing Their Own Thing?

In trying to explain our slow growth since the 2008-09 fiscal crisis, Larry Summers, among others, talks about “secular stagnation.”  The initial thought, after the 2008-09 crisis, was that

“[o]nce the banks were bailed out, the stimulus spent, and businesses had a few years to recover, the U.S. economy would return to its usual healthy growth.  Time, in other words, would heal the wounds of the subprime collapse and subsequent turbulence.”

It hasn’t worked out that way.  Growth has been slower than expected. Dr. Summers revived the concept of “secular stagnation” to describe what he said was “a kind of long term and sustained slow-down in economic growth.”  According to an article in Time magazine last year:

“As a diagnosis, secular stagnation is simple: It’s the idea that the economic problems the U.S. continues to face aren't a product of the ‘business cycle,’ the ebb and flow of boom times and recession (hence the ‘secular’ part), but may well be permanent drags on the modern economy. …

The phrase was originally coined in [1938] by economist Alvin Hansen ….  Grappling with the sluggish recovery that followed the Great Depression, Hansen predicted that slower population growth and a lower speed of technological progress would combine to thwart full employment, wage increases, and general economic expansion. … [W]ithout new people entering the work force and new inventions coming onto the market, there would be less investment in new goods, employees and services.  Without investment, fewer businesses would open or expand, growth would slow, and more workers would be unable to find jobs.”¹

Which sounds like today, at least to Dr. Summers.  But maybe it is something else.  I was talking to a guy who makes, sells, and installs draperies.  Before 2008-09, he had a good-sized business.  He specialized in putting drapes into model homes for construction companies.  You can probably guess what’s coming.  In 2008-09, his business collapsed.  He survived, but he is doing business differently now.  Before 2009-09, he had a place where his workers came and made the draperies.  In 2008-09, he moved his equipment to his workers’ homes.  They made the drapes there, and he collected them from their homes and installed them.

The financial crisis has passed, but he is still doing business this new way.  He’s not interested in expanding back to where he was.  He will stay a little smaller – and a little safer. 

In other words, the slow growth in the economy may not be a matter of slower population growth and/or slower technological progress.  It may be a result of a whole lot of people who got burned, or saw other people get burned, during the Great Recession and who decided to take it slower and take less risk.  Especially when the federal government kept piling on new regulations and more costs.

Maybe people decided that, if they had a good enough thing going, they wouldn’t risk it to try to get more.  If enough people thought that way, “secular stagnation,” or whatever you call it, is not all that surprising.
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¹ Obviously, World War II ended any secular stagnation we had at that time.