Best of the Week
Most Popular
1. Crude Oil and Water: How Climate Change is Threatening our Two Most Precious Commodities - Richard_Mills
2.The Potential $54 Trillion Cost Of The Fed's Planned Interest Rate Increases - Dan_Amerman
3.Best Cash ISA Savings for Rising UK Interest Rates and High Inflation - March 2018 - Nadeem_Walayat
4.Fed Interest Hikes, US Dollar, and Gold - Zeal_LLC
5.What Happens Next after February’s Stock Market Selloff - Troy_Bombardia
6.The 'Beast from the East' UK Extreme Snow Weather - Sheffield Day 2 - N_Walayat
7.Currencies Will Be ‘Flushed Down the Toilet’ Triggering a ‘Mad Rush into Gold’ - MoneyMetals
8.Significant Decline In Stocks On The Cards! -Enda_Glynn
9.Land Rover Discovery Sport Extreme Driving "Beast from the East" Snow Weather Test - N_Walayat
10.SILVER Large Specualtors Net Short Position 15 Year Anniversary - Clive_Maund
Last 7 days
Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - 19th Mar 18
2018 Reversal Dates for Gold, Silver and Gold Stocks - 19th Mar 18
This Tech Breakthrough Could Save The Electric Car Market - 19th Mar 18
Stocks Set to Open Lower, Should You Buy? - 19th Mar 18
The Wealth Machine That Rising Interest Rates Create Conflict With The National Debt - 19th Mar 18
Affiliate Marketing Tips and Network Recommendations - 19th Mar 18
Do Stocks Bull Market Tops Need Breadth Divergences? - 19th Mar 18
Doritos Instant £500 Win! Why Super Market Shelves are Empty - 19th Mar 18
Bonds, Inflation & the Market Amigos - 19th Mar 18
US Housing Real Estate Market and Banking Pressures Are Building - 19th Mar 18
Stock Market Bulls Last Stand? - 18th Mar 18
Putin Flip-Flops Like A Drunken Whore On Bitcoin Cryptocurrency Legalization - 18th Mar 18
How to Legally Manipulate Interest Rates - 18th Mar 18
Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - 18th Mar 18
Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - 17th Mar 18
Strong Earnings Growth is Bullish for Stocks - 17th Mar 18
The War on the Post Office - 17th Mar 18
GDX Gold Mining Stocks Fundamentals - 16th Mar 18
Nationalism, Not the Russians, got Trump Elected - 16th Mar 18
Has Bitcoin Bought It? - 16th Mar 18
Crude Oil Price – Who Wants the Triangle? - 16th Mar 18
PayPal Cease Trading Crypto Currency Bitcoin Warning Email Sophisticated Fake Scam? - 16th Mar 18
EUR/USD – Something Old, Something New and… Something Blue - 16th Mar 18
DasCoin: A 5-Minute Guide to How It Works - 15th Mar 18
Stock Market Downward Pressure Mounting - 15th Mar 18
The Stock Market Trend is Your Friend ’til the Very End - 15th Mar 18
6 Easy Ways to Get What Women Want, for Less! - 15th Mar 18
This Isn’t Your Grandfather’s (1960s) Inflation Scare - 15th Mar 18
Eye Opening Stock Market Index, Volatility, Charts and Predictions - 15th Mar 18
Gold Cup At Cheltenham – Gold Is For Winners, Not For Gamblers - 15th Mar 18
Upcoming Turnaround in Gold - 14th Mar 18
Will the Stock Market Make Another Correction this Year? - 14th Mar 18
4 Ways To Writing An Interesting Education Research Paper - 14th Mar 18
China Toward Sustainable Economic Growth - 14th Mar 18
Stock Market Direction Is No Longer Important - 14th Mar 18
Trade Tariffs Defeat Globalists and Return Prosperity - 14th Mar 18
Stock Market Crash is Underway and Cannot be Stopped! - 14th Mar 18
Are Energy Sector Stocks Bottoming? - 14th Mar 18
Nasdaq Stocks Soars to New Record High After Strong Job Reports - 14th Mar 18
Bitcoin BTCUSD Elliott Wave View Calling for Rally toward $15,000 - 13th Mar 18
Hungary’s Gold Repatriation Adds To Growing Protest Against US Dollar Hegemony - 13th Mar 18
Record Low Volatility in Precious Metals and What it Means - 13th Mar 18
Tips for Writing and Assembling the Classification Essay - 13th Mar 18
Gerald Celente "If Rates go up too High, the Economy goes Down, End of Story" - 13th Mar 18
Stock Market Selloff Showed Gold Can Reduce Portfolio Risk  - 13th Mar 18
Silver Does it Again! Severe Consequences - 12th Mar 18
Has the Stock Market Rally Run Out of Steam? - 12th Mar 18
S&P 500 at 2,800 Again, Stock Market Breakout or Fakeout? - 12th Mar 18
The No.1 Energy Stock To Buy Right Now - 12th Mar 18
What Happens Next When Stock Market Investor Sentiment is Neutral - 12th Mar 18
Economic Pressures To Driving Gold and Silver Prices Higher Long-Term - 12th Mar 18
Labour Sheffield City Councils Secret Plan to Fell 50% of Street Trees Exposed! - 12th Mar 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

“Secular Stagnation” Is Nonsense… Here’s the Real Reason Behind the US Downturn

Economics / Stagflation Jun 28, 2017 - 06:13 PM GMT

By: John_Mauldin


My good friend Charles Gave recently wrote an instructive article titled “Tale of Two Countries.”

In the UK and France, structural growth rates have diverged since 1981. The rate has fallen by two-thirds in France, while in the UK it has risen.


Well, to begin with, in the UK, Margaret Thatcher was elected prime minister in 1979. She reduced the role of the bureaucracy in managing economic activity and dialed back government spending as a percentage of GDP.

Meanwhile, in France, François Mitterrand was elected president in 1981 on a platform that expressly aimed to expand the scope of government.

“The effects on growth were predictable,” says Charles.

Meanwhile in the US, when government spending as a percentage of GDP shot up from 33% to 39% during the Great Recession, our growth rate fell from 2.5% to less than 1%.

And that, says Charles, is the story on US stagnation.

Now, without further ado, I’ll let Charles unpack his intriguing narrative.

So We Are In Secular Stagnation...

By Charles Gave
June 19, 2017

…really?  I would advise readers to consider the chart below.

On first blush, its lower pane supports the stagnationist camp. After all, both the US and France have seen a slump in their “structural” GDP growth rate, as shown by the seven year moving average. Since 1977 this measure has fallen by a third in the US, and by two thirds in France. Yet, look at the chart’s top pane and it is clear that this growth slump has hardly been generalized. Since the late 1970s, Sweden, the UK and Switzerland have seen their growth rates rise structurally, and the same pattern can be found with Canada, Germany and Australia.

Cause and effect

So why have certain economies tumbled into relative decline, while others have not? A useful approach may be to compare France and the UK, which are similar in size, population and demographic profile. Both countries are European Union members with big banking sectors that in recent decades have had to manage profound de-industrialization.

Consider the chart below which shows a ratio of real GDP in France and the UK. No adjustment is made for currency movements as this will introduce unnecessary noise into the analysis. The obvious point  is that between 1955 and 1981, France’s economy massively outperformed the UK’s. Since 1981, the reverse has been true.

The trend change corresponded to a political shift in both countries as to the proper role of the state. Under Margaret Thatcher, the UK forged a new path by lessening the role of civil servants in managing economic activity. In France, François Mitterrand expressly aimed to expand the scope of government.

To be sure, the UK Labour Party got back into power in the late 1990s and spent the next decade running socialist policies that caused government spending as a share of output to rocket higher. Fortunately, sanity was restored after 2010 when a Conservative-led government dialed back UK public spending. In France, the picture is different as there have not been politically-inspired changes in the trend of government spending—the ratio has simply ground higher, irrespective of who was in power.

The next task is to explore potential cause-and-effect linkages between public spending and the divergence in the structural growth rates of France and the UK. As such, consider the chart below which reconciles growth and government spending in the two economies.

The chart above shows that in 1980 France started to spend more on government than the UK. By 1985, France’s structural growth rate slid below the UK rate and has not recovered. The logic behind this chart has been borne out in many economies: beyond a certain threshold (that varies by country) more state spending causes the structural growth rate  to fall. This relationship follows, as in a government-dominated economy “destruction” of inefficient activity is all but impossible, which in turn limits the scope for fresh “creation”. This insight was explained by Joseph Schumpeter in his 1942 book Capitalism, Socialism and Democracy.

What about the US?

In the US, a similarly straight forward picture emerges, with the big increase in government spending that took place after 2009 being the main cause of the subsequent decline in the US’s structural growth rate.

By way of contrast, consider the reverse case of Canada, which in the mid-1990s slashed government spending to good effect. In two years Canadian government spending was cut from 31% of GDP to about 25%. The ensuing 18 months saw predictable howls of protest from economists that a depression must follow. In fact, not only was a recession avoided but Canada’s structural growth rate quickly picked up and in the next two decades a record uninterrupted economic expansion was achieved.

As an aside, I would ask readers to cite one case in the post-1971 fiat money era when a big rise in government spending did not lead to a structural slowdown. Alternatively, if they could cite an episode when cuts to public spending resulted in the growth rate falling. I am always willing to learn and change my mind!

To conclude, “secular stagnation” is an idea of ivory towered economists.  Schumpeter showed how bloated government and unnecessary regulation crimps activity. The perhaps unfashionable answer remains to privatize state enterprises, deregulate markets and break up too-big-too-fail banks. In simple terms, some government is good; too much government is bad.

Get Varying Expert Opinions in One Publication with John Mauldin’s Outside the Box

Every week, celebrated economic commentator John Mauldin highlights a well-researched, controversial essay from a fellow economic expert. Whether you find them inspiring, upsetting, or outrageous… they’ll all make you think Outside the Box. Get the newsletter free in your inbox every Wednesday.

John Mauldin Archive

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules