Stagnation: in the mind?

Is "secular stagnation" a state of the world or a state of our minds? I ask for two different - indeed, contradictory - reasons.

The first is inspired by papers (pdf) by Ulrike Malmenider and Stefan Nagel and by Henrik Cronqvist and colleagues. They both show that our attitudes to the economy - as measured by how we invest our money - are shaped by experiences in our impressionable years. People who experience recessions in their formative years tend to be more risk-averse than those who enjoyed better times. They invest less in equities and less in growth stocks than more favoured generations.

And here's the thing. A lot of the talk of stagnation comes from those of us aged between around 45-60. We were scarred by the collapse of the Golden Age of capitalism in 1973 and/or by the recessions of the early 80s. These experiences disposed many of us to be "glass half-empty" kind of people - or, as our younger colleagues say, miserable old gits. It might be, therefore, that we are pessimistic not just because of the facts, but because of the legacy of our early experiences.

This is not the only way in which early-life experiences shape economic attitudes. It has been argued that one reason why inflation stayed low during the full employment years of the 50s and 60s was that workers' memories of the mass unemployment of the 30s depressed wage militancy. As those workers retired, to be replaced by those who had known only good times, the fear of unemployment receded and wage militancy rose.

I could push this hypothesis further. It's 45-60 year-olds who dominate corporate boardrooms and hence investment decisions. It might therefore be that capital spending is low because it is decided by people scarred into pessimism.

This, though, might be a stretch; bosses are, in part, selected for overconfidence and this selection effect mitigates the cohort effect.  

There is, though, a second mechanism here. Why is investment so low? Standard explanations focus upon the dearth of (monetizable) investment opportunities due in part to slower technical change (pdf). But there might be something else at work. A few years ago William Nordhaus wrote:  

Only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers.

It might be that bosses have wised up to this - not so much because they've read Nordhaus but because they've learned from experience. If so, the problem isn't so much that technical progress has slowed, but that it never really paid in the first place and bosses have now learnt this and so cut investment. If so, stagnation is the result of rational learning.

My point here is a trivial one. Talk about stagnation - whether you're arguing for it or not - is talk not just about the world, but about our beliefs. And we should think about how these are shaped. 

Comments

[Luke]

Are 45-60 year old management also looking for returns on capital in nominal terms at rates that might have been suitable in the 80s but not now?

[chris]

Good Q. Hurdle rates are high now:
http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech581.pdf
But this could be because of pessimism/risk aversion rather than money illusion.

[Ralph Musgrave]

To judge from capacity utilisation figures, it looks like employers are quite right not to invest. That is, utilisation of existing investments is at a record low, at least in the US. See:

http://socialdemocracy21stcentury.blogspot.co.uk/2013/11/us-capacity-utilisation-is-historically.html#comment-form

[Andrew]

Producers captured a small fraction of the social reforms of technical advance. That does not mean that producers made no worthwhile return on investment.

[Andrew]

Sorry, returns of technical advance.

Interesting research about cohort effects, which perhaps might partly explain some longer term economic cycles as you suggest.

Could some of it be that energy and resources are just starting to cost more these days? Easy to come up with investments when you can run them on cheap gasoline.

[FromArseToElbow]

The 45-60 cohort is also the last one that foresaw technical progress in terms of Golden Age of SciFi hardware, i.e. jet-packs and HS2, and has been disappointed by the "trivia" of the Internet or the dullness of shipping containers.

The "problem isn't so much that technical progress has slowed, [or] that it never really paid in the first place", but that the unit costs of technology have plummeted at such a rate as to make it difficult to fully reinvest profits since the 90s.

Abundance and a deficiency in aggregate demand are essentially the same thing, but from opposite ends of the telescope.

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