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

Abstract

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 article 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 article 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 that is shedding jobs and a "stagnant" and "survivalist" sector that acts as an "employer of last resort." The argument is illustrated with long-run growth-accounting data for the U.S. economy . 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 policy makers will continue to contribute to unbalanced growth and premature stagnation.

Transformational Strategies and Productivity Growth: A Transformational‐Activities Perspective on Stagnation in the New‐Normal Business Landscape

“…In particular, we observe a U‐shaped relationship for the technological gap – and a positive effect for both the leader’s TFP growth and human capital – when explaining future TFP growth. The results for human capital are in line with Storm’s () priors regarding the bifurcation of the US economy into dynamic sectors with high‐skilled labour where productivity increases are manifest, and into stagnant sectors with relatively low‐skilled labour where productivity increases are less manifest.…”

“…These prescriptions – grounded in the management scholarship on organizational decline and transformational activities – stand in addition to the policy prescriptions offered up by economists engaged in the new‐normal discourse (e.g., Summers, , ; Tuelings and Baldwin, ). There, economists have offered up a number of recommendations – i.e., improving education systems; investing in physical infrastructure; removing barriers to labour mobility; stimulating aggregate demand; enhanced application of anti‐monopoly laws, and permanent incomes (Adler et al, ; Tuelings and Baldwin, ; Storm, ) – to reverse the flagging pace of innovation and technological change in order to escape the new‐normal business landscape by stimulating productivity improvements. Yet the unique insights and perspective of management scholarship has until this point been missing in the new‐normal discourse.…”

Technological Progress, Globalization, and Secular Stagnation

“…More precisely we can talk about the reoccurrence of a dual economy in developed countries (Temin, 2015;Storm, 2017). One of them is the technologically advanced sector, characterized by high total factor and labour productivity and with a declining trend in the share of labour employed in it -currently about 30% in the USA, according to Temin (2015).…”

“…The remaining 70% of workers are employed at low level and stagnant productivity services. According to Storm (2017), the majority of workers in the USA had to find jobs in services-sector activities, mostly featuring below-average labour productivity growth: 18.9 million of workers are currently located in so-called EHS sector (education, health, and private social services), 16.2 million in PBS sector (professional and business services), 14.3 million in the so-called "other" sector (art, -entertainment, recreation, food services and other), 13.5 million in the public sector, and 5.7 million of worker in FIRE sector. Even when paid decently, jobs in the above sectors are often precarious or uncertain.…”

“…In that respect, apart from classical monetary and fiscal policy (see Summers, 2015), Storm (2017) proposes the introduction of a minimal wage and its growth rate or minimal wage growth path policy. In proposing this policy, the author is mainly motivated by a desire to solve the problems of the limited aggregate demand growth path and the long term discrepancy between aggregate demand and possible aggregate supply.…”