Shocked by the depth and duration of the economic hardship wrought by the Great Depression, economist Alvin Hansen, in his presidential address to the American Economic Association in 1938, grimly wondered whether the United States had entered a new economic era; one characterized by permanent depression and mass unemployment. He labeled this prediction “secular stagnation,” and with elegant rhetoric that academic economists rarely exhibit, he warned:
“This is the essence of secular stagnation – sick recoveries which die in their infancy and depressions which feed upon themselves and leave a hard and seemingly immovable core of unemployment.”
Specifically, Hansen worried that an aging population, a shortage of productive investment opportunities and a shortfall of demand would be the driving forces of future stagnation. Looking back now, Alvin Hansen may appear to be needlessly pessimistic. Mobilization for World War II, the largest federal spending program in U.S. economic history, led to massive investment in America’s productive capacity. The subsequent Baby Boom stemmed fears about an aging population. Together, these two shocks laid the foundation of the rapid growth in the 1950s and 1960s. There is no reason for Hansen to have predicted these two enormous, positive shocks to demand. More importantly, he deserves our praise for his willingness to direct his colleagues towards studying the causes of, and possible solutions to, prolonged depression and mass unemployment, which Hansen called the “most obstinate problems of our time.”
The Julis-Rabinowitz Center for Public Policy and Finance’s (JRCPPF) Fourth Annual Conference, like Alvin Hansen, sought to highlight recent research and inspire future discussions on one of the most obstinate problems of our time: inequality and its diverse effects on the economy. Held on Princeton’s campus in February, the conference focused on the topic of “Finance, Inequality and Long-Run Growth.” Presenters discussed the latest economic research on a variety of topics, ranging from the effects of globalization on employment and financial stability to mathematical models of financial bubbles. The discussions among academics, economists, and policymakers at the JRCPPF Fourth Annual Conference are just a small sample, but they demonstrate that, even though most economists were blindsided by the Great Recession and many ignored the importance of rising inequality during the 2000s, the field is beginning to internalize the lessons of the last decade. In particular, the conference shows that economists have begun to seriously study the causes and consequences of inequality, an issue that is rightfully important to progressives on campus.
The conference began with presentations on the trend of inequality and its causes in the United States. Since the 1970s, income and wealth inequality have skyrocketed. Much of what we know about this startling phenomenon is due to the empirical work conducted by the conference’s first presenter, Gabriel Zucman of the London School of Economics, and his colleagues, Thomas Piketty and Emmanuel Saez. Using extensive tax records, Zucman constructed a yearly snapshot of wealth inequality in the United States since 1913. He found that the share of wealth going to the top 0.1 percent was nearly 25 percent in 2012, its highest level since the eve of the Great Depression. The sharp increase in wealth inequality was driven in part by a rise in tax evasion on the part of the super-rich who utilized offshore tax havens. For example, Zucman noted that the taxable investment income of the top 0.1 percent doubled since the early 1990s, while at the same time, the proportion of these investments that are stashed abroad in tax havens such as Cayman Islands, Monaco and Switzerland increased from 2 percent to 10 percent. Taken together, this suggests that the amount of wealth that dodges taxation in foreign tax havens has skyrocketed over the last two decades. The conference proceede
d with a presentation by Princeton professor Benjamin Moll on a new working paper that attempts to provide an explanation for the sharp rise in inequality documented by Zucman and his colleagues. Moll argued that the rise in income inequality could be explained by the soaring wages of “superstars” such as financial managers and investment bankers. Moreover, the rise in wealth inequality could be explained by the high returns the super-wealthy earn on their investments. Moll went on to note that this could be due to extensive tax loopholes that the super-wealthy largely exploit.
Zucman and Moll’s opening presentations highlighted the newfound emphasis placed on the study of inequality by academic economists. The papers and presentations suggest that economists are willing to let go of old canons that ignore questions about the distribution of income and wealth. For example, many basic economics courses downplay studies of the distribution of income and wealth, as idealized free markets are pareto-efficient. This means that, because it is impossible to improve the welfare of one individual without hurting another, a society ought not to worry about how income and wealth are distributed amongst its citizens. But of course, ideal free markets exist only in textbooks. As a result, Thomas Piketty in Capital in the 21st Century criticized academic economists for neglecting the distribution of wealth for far too long and argued, “it is long since past the time when [economists] should put the question of inequality back at the center of economic analysis.” The vibrant discussion among Princeton economics professors, academics from other universities and policymakers at the conference suggests that economics has, to some degree, responded to these criticisms. Inequality is no longer off-limits within economics, and economists are now willing to tackle the questions about inequality that may prove to be important to more progressive agendas.
Later that day, the conference shifted back to Alvin Hansen and his secular stagnation hypothesis. Larry Summers, the conference’s keynote speaker, had revived secular stagnation in a speech at the International Monetary Fund in 2013. In that speech, he worried that Hansen’s secular stagnation “may be not without relevance to America’s experience” and is “profoundly important in understanding Japan’s experience [since the 1990s].” Summers continued his analysis of secular stagnation at the JRCPPF conference. Citing anemic growth even during the height of the housing bubble in the mid-2000s, he argued that it has been decades since the American economy has produced strong, yet financially sustainable growth. He said,
“If one asks the question, ‘How long has it been since the American economy enjoyed reasonable growth, from a reasonable unemployment rate, in a financially sustainable way?’ The answer is that it has been really quite a long time, certainly more than half a generation.”
Summers continued by explaining that it is possible that the United States, along with the Eurozone and Japan, have entered an extended period in which the natural rate of interest or the interest rate that is consistent with full employment is persistently negative. As a result, conventional monetary policy is unable to restore growth by itself. As a result, Summers concluded that, in the absence of major policy action, the United States may be facing an era of economic stagnation with no end in sight. While it is surprising that a prominent, public figure in the economics and policymaking community like Larry Summers is willing to make such unconventional predictions, it may not representative of any meaningful changes within the broader economics community. In particular, Summers escaped the cutthroat competition among young academics and is no longer operating under the imperative to “publish or perish.” As a result, he is freer to publicly contradict established orthodoxies. It would be more meaningful if younger academics were willing to entertain these ideas.
The JRCPPF conference provided a striking example of the newfound willingness of academic economists to engage with the unconventional ideas such as secular stagnation. Gauti Eggertsson, a professor at Brown University, presented a paper entitled, “A Model of Secular Stagnation,” that lays out a mathematical model of Alvin Hansen and Larry Summers’ formulation of secular stagnation. Eggertsson noted in his presentation that certain conventions of macroeconomics must be dropped in order to tell this story of an economy caught in a persistent depression with elevated unemployment. Specifically, he explained that standard models of recessions assume that the causes of depressions are temporary. If enough time passes, the models predict that economies would return to normal. He argued that standard macroeconomic models precluded the very idea of secular stagnation by “baking its assumptions into the cake,” so to speak. In the paper, Eggertsson departs from this conventional wisdom by altering his assumptions. He realistically assumes that individuals make different savings decisions as they age and with this small change, he is able to describe an economy that can get caught in a trap of secular stagnation. Most importantly, Eggertsson’s findings relate directly to the inequality. He argued that, in his model, a sharp rise in inequality – such as in the United States – could lead to mass unemployment and prolonged, anemic growth. As a result, Eggertsson’s work bolsters the progressive argument that inequality is a significant economic issue, even if one completely ignores arguments about fairness. The conference’s discussion of secular stagnation is another example in which academic economists pivoted away from traditional modes of economic analysis and found that inequality, an issue important to progressives, can have significant macroeconomic consequences.
The presentations at the Julis-Rabinowitz Center for Public Policy and Finance’s Fourth Annual Conference did not have rhetorical flourish and were not aimed to rally progressive activists. They were filled to the brim with academic jargon and PowerPoint slides containing charts, graphs and equations that hurt my eyes. However, after paring through it all, the research presented at the conference should be a source of optimism for progressives. Like Alvin Hansen, the JRCPPF conference urged economists to focus on the obstinate economic problems of our time, which are the interconnected challenges of inequality, anemic growth and underemployment. The research presentation at the conference were filled with data and proposed policy solutions that would be familiar to any progressive interested in economic policy. It is an admittedly small sample. But, even though economics is still stereotyped by images of Milton Friedman slamming liberal economic policies, if the JRCPPF conference is any indication, it may not be an accurate description of economic research for much longer.