The New Normal: Demand, Secular Stagnation and the Vanishing Middle-Class

63 Pages Posted: 29 Jun 2017

See all articles by Servaas Storm

Servaas Storm

Delft University of Technology - Department of Economics

Date Written: May 17, 2017


The U.S. economy is widely diagnosed with two ‘diseases’: a secular stagnation of potential U.S. growth, and rising income and job polarization. The two diseases have a common root in the demand shortfall, originating from the ‘unbalanced’ growth between technologically ‘dynamic’ and ‘stagnant’ sectors. To understand how the short-run demand shortfall carries over into the long run, this paper first deconstructs the notion of total-factor-productivity (TFP) growth, the main constituent of potential output growth and “the best available measure of the underlying pace of exogenous innovation and technological change”. The paper argues that there is no such thing as a Solow residual and demonstrates that TFP growth can only be meaningfully interpreted in terms of labor productivity growth. Because labor productivity growth, in turn, is influenced by demand factors, the causes of secular stagnation must lie in inadequate demand. Inadequate demand, in turn, is the result of a growing segmentation of the U.S. economy into a ‘dynamic’ sector which is shedding jobs, and a ‘stagnant’ and ‘survivalist’ sector which acts as an ‘employer of last resort’. The argument is illustrated with long-run growth-accounting data for the U.S. economy (1948-2015). The mechanics of dualistic growth are highlighted using a Baumol-inspired model of unbalanced growth. Using this model, it is shown that the ‘output gap’, the anchor of monetary policy, is itself a moving target. As long as this endogeneity of the policy target is not understood, monetary policymakers will continue to contribute to unbalanced growth and premature stagnation.

Keywords: unbalanced growth, secular stagnation, total factor productivity, labor productivity growth, Solow residual, dual economy

JEL Classification: E02; E12; E31; F02; F15

Suggested Citation

Storm, Servaas, The New Normal: Demand, Secular Stagnation and the Vanishing Middle-Class (May 17, 2017). Institute for New Economic Thinking Working Paper Series No. 55, Available at SSRN: or

Servaas Storm (Contact Author)

Delft University of Technology - Department of Economics ( email )

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