The Great Stagnation – Causes and Cures
56 Pages Posted:
Date Written: July 28, 2020
This paper addresses the fifty-year decline in growth for the U.S. and other advanced economies. The paper develops a growth model based upon an economy’s capital accounts and illustrates how customary growth factors such as labor and total factor productivity are embedded within investment ratios, permitting estimation of investment that largely determines growth as well as the natural rate of interest, which is the capital factor share of growth. The model explains declines of these measures and finds convergence among natural interest, total factor productivity, and labor growth.
The paper identifies two investment regimes which crossed paths in the U.S. in the early 1970’s, one based upon depreciation and the other determined by the capital factor share of the private market sector. Constrictions on the private market sector from growing government spending limit the potential for higher levels of private investment necessary to offset greater depreciation from rapid obsolescence of increasingly high-tech investments.
Present trends worsen stagnation, but lifting constriction of private investment would allow full realization of benefits from technology investment’s high productivity, boosting U.S. growth to over 7% annually, and would benefit other advanced economies as well.
Keywords: Growth model, economic growth, investment, interest rate, natural rate of interest
JEL Classification: E22, E43, E44, F43, O16, O41, O47
Suggested Citation: Suggested Citation