The end of growth for global capitalism?

On our options to overcome the spectre of secular stagnation

Joachim Bischoff

is an economist and sociologist whose work has extensively focused on providing a critique of the political economy. He is also a publishing and magazine editor as well as co-editor of the monthly journal Sozialismus, which discusses questions of interest to the unions and the political left in Germany.

In an article published on 17 July 2016 in the German weekly Frankfurter Allgemeine Sonntagszeitung, Peter Bofinger, a member of the German Council of Economic Experts, argues that ‘a spectre is haunting the global economy – the spectre of secular stagnation’. As he writes, the phenomenon is based on a profound feeling of discomfort regarding the state of the global economy, which has been plagued by major dysfunctional issues for several years.

Following the last large-scale crisis a decade ago, the global economy went into a mode of restrained expansion. Since the 2007/2008 financial crash, we have gone through a series of diverse states. Between phases of escalating contradiction, we see financial markets once again return to a state of calm and the process of social reproduction recovers, albeit not to the same degree in all countries.

Debt reduction is a long-term process

Unlike the economic crises we have become accustomed to, the cause behind this structural crisis lay in drastic price corrections on property markets and, as a consequence, also in defaulting subprime mortgages that occurred simultaneously in a series of capitalist countries. In the wake of these developments, a global banking and later sovereign debt and credit crisis ensued. New regulations were only marginally successful: debt reduction remains a long-term process and history has demonstrated that it takes years to accomplish.

High rates of unemployment and the overall weaker position of unions have meant that low and medium income earners in particular did not benefit from positive profit trends. There is no evidence of a return to the accelerated capital accumulation of the past; rather, the low rates of accumulation indicate that a new financial crisis might be on the horizon.

Financial crises are manifestations of the fundamental instability of the capitalist economy. During the long phases of accelerated capital accumulation that are accompanied by economic growth, banks, corporations and consumers become less averse to risk and turn to ever more precarious forms of financing. This is because corporations, financial institutions and private individuals all become confident that asset prices will continue to rise. In most cases, an insignificant incident then eventually brings the party to an abrupt end. Besides having to ensure the efficient regulation of the financial sector, politicians face the challenge of stabilising economic growth. Within this context, the spectre of secular stagnation remains a persistent threat.

The concept of secular stagnation was put forth by US economist Alvin Hansen in 1939. Hansen used the term secular stagnation to describe long-term stagnation or a phase of stagnation that lasts for at least several years. Following the global economic boom in the wake of World War II, however, interest in the concept gradually dissipated. Hansen’s theory only returned to prominence after a talk by former US treasury secretary Lawrence Summers in November 2013.

A slight increase in global economic growth seems possible
Real change in %
blue = Global
yellow = Industrialised countries
green = Emerging market and developing economies
Source: IMF

Permanently low real gross domestic product growth rates are the single most important empirical indicator of secular stagnation. However, whether overall GDP growth rates have actually decreased in comparison to pre-crisis levels remains a contentious issue, because the available empirical data fails to provide a clear-cut picture. Other indicators for stagnation also exist, such as when an economy builds up savings over an extended period that are greater than that country’s net investment. Whereas savings represent capital supply, investments represent capital demand. Secular stagnation leads to a situation where capital supply becomes greater than capital demand. This excess supply leads the price of capital, i.e. interest rates, to drop. A tendency towards stagnation therefore reveals itself through a drop of nominal interest rates to close to zero. Secular stagnation implies an insufficient demand for all types of goods. This leads to falling prices and a tendency towards deflation.

The concept of secular stagnation as an interpretive tool

Beyond being merely a theoretical concept, secular stagnation is a potentially useful tool for highly developed industrialised nations to interpret diverse phenomena, such as decreases in the rate of accumulation, in capital investments and in productivity growth rates as well as insufficient renewal of capital stock, deflationary price trends and chronically low interest rates.

In the aftermath of the great economic and financial crisis, salaried employment in nearly all the capitalist core countries became increasingly precarious and the unequal distribution of income and wealth intensified. In spite of low rates of accumulation, employment rates in Germany, the eurozone and the US went up significantly and unemployment figures dropped. This did not, however, also imply a fair distribution of the gains reaped through economic success; lower and medium income groups in particular went empty-handed. Yet if, for an entire generation, the development of incomes for the lower third of earners effectively excludes them from having a share in the overall increase in wealth whilst exposing them to greater job insecurity and cuts to social security, this will entail economic consequences and lead to a loss of legitimacy for bourgeois society.

Income inequality curbs economic growth

Greater income inequality leads to an increase in the share of high-income households. These are generally characterised by above-average rates of saving. Growing savings, however, translate into a reduction in demand for goods. If increasing investments do not compensate for this drop in demand, overall demand also decreases. When businesses then adapt by cutting back on production, GDP also goes down. This is the same as saying that income inequality curbs economic growth.

As investments are capable of compensating for the drop in demand for consumer goods, high rates of saving are not a brake on growth per se. The accumulated capital stock of developed economies, however, means that there is only a limited need for investments and even small increases in productivity would require the spending of considerable sums. In a situation characterised by dropping consumer demand, a corresponding incentive for further investment is lacking, and this means that this decrease is then not compensated through the increased availability of financial resources.

A necessary prerequisite for overall high productivity within an economy is a sophisticated national infrastructure (e.g. transport network, electricity and energy grids, research and development institutions) as well as state education institutions (nursery, school and university education as well as vocational education and training). Faced with high public debt, states are forced to spend an ever-increasing share of revenue to service borrowing. What is more, an ageing population leads to higher expenditure for pensions, care and healthcare. Both of these developments mean that there are ever fewer funds available to invest in education and the national infrastructure. If governments do not correct the unequal distribution of income and wealth, this will impact the development of productivity and therefore also economic growth.

In sum: on the demand side, highly developed industrialised nations experience a decrease in investment. This drop in investment translates into a drop in the growth rates of the overall capital stock of the economy, which means stock is only being insufficiently modernised. On the supply side, this leads to a tendency towards stagnation.

GDP stagnation may then entail a number of negative consequences. Without growth, employment rates cannot rise and unemployment rates therefore no longer go down (or may actually increase). Even when technological progress is slow, a static GDP means the production of an equal amount of goods requires ever less labour, which in turn means that employment rates will decrease. A permanent glut of savings in relation to investments in a country leads to excess supply on capital markets and hence falling interest rates. This increases the danger of a credit bubble. Low interest rates also increase the incentive to invest savings in assets and speculate on rising prices. This heightens the risk of a new speculative bubble.

When production and employment grow, state revenue also increases. At the same time, the costs required to tackle unemployment decrease. State revenue cannot rise without economic growth, and in such cases, it thus becomes more difficult to consolidate the public budget.
The standard response to a phase of weak economic growth is to increase the money supply. The lower interest rates produced by such a policy provide businesses with an incentive to invest and are aimed at spurring economic growth. Such an approach to monetary policy, however, fails in the context of secular stagnation. This is because interest rates in countries threatened by stagnation are usually already close to zero, i.e. further cuts to interest rates usually provide no effect. Moreover, even near-zero interest rates will not convince companies with pessimistic market expectations to invest in their productive capacities when they fear that they will not be able to sell the additional products they produce.

The outcome? Widespread helplessness

Attempts to compensate dwindling national demand by increasing exports are ultimately also doomed to fail because of the increasingly severe economic problems import surplus countries face over time (increasing unemployment and foreign debt). This has led to a deadlock of ideas and models and widespread helplessness. Rates of inflation, growth (with regard to GDP) and levels of investment that are deemed to be too low, unemployment rates that are supposedly still too high, and banks’ ostensibly low capital spending – in sum, an alleged secular stagnation – has meant that even years after the banking and sovereign debt crisis, the aim remains to massively increase the money supply by keeping interest rates extremely low.

Central bank interventions have turned traditional economic and financial cycles into dangerous asset price cycles. Not only has this economic policy served as a veil to hide the stuttering of the economic engine, it has even exacerbated existing problems. Today’s expansive credit policy finances consumption and speculation. Everywhere debt has led to a significant increase in asset capital. The interest on these debts must, however, be serviced through income, which ultimately leads to a reduction in demand.

So, what might be the solution? There is an alternative to a crash that would sweep financially unstable businesses and banks from the market: with the support of their governments, central banks could return the economy to a path of growth. Monetary and fiscal policy could help provide temporary support to put households and companies back onto a stable basis, return banks to health and ensure the economy can once again sustain itself. Action by the state, whether by the central bank, regulatory authorities or the ministry of finance, could thus defuse an impending financial crisis and adjust current distortions in the economy.

In contrast, a shock cure that clears away worthless assets would not be a popular measure and securing future wealth would come at the price of a prolonged period of austerity and high unemployment. The alternative to adjustment programmes implemented with the help of states would be an exceptional package of reforms, a kind of New Deal consisting of monetary, fiscal and structural policy measures that would set key national economies, and thereby the global economy, firmly back on a developmental track. Loan capital at low interest rates is available and even a necessary increase in base rates would still lead to a situation where infrastructure investments would significantly improve the conditions for individuals and production.


  • Coen Teulings/Richard Baldwin, Secular Stagnation: Facts, Causes and Cures, CEPR, August 2014.
  • Jason Lu/Coen Teulings, Secular stagnation, bubbles, fiscal policy, and the introduction of the contraceptive pill, CEPR, October 2016.
  • Joachim Bischoff/Klaus Steinitz, Götterdämmerung des Kapitalismus, Hamburg 2016.
  • Joachim Bischoff/Fritz Fiehler/Stephan Krüger/Christoph Lieber, Vom Kapitel lernen. Die Aktualität von Marx’ Kritik der politischen Ökonomie, Hamburg 2017