Financial agility the best way to beat stagnation

Fears that Australia and other advanced countries are in the grip of a "secular stagnation"of slowing economic growth are misplaced.

The major economic development through these early stages of 2016 has been heightened volatility in share markets in East Asia, Europe and, more recently, the United States and Australia.

Financial agility the answer?
Financial agility the answer? 

There are certainly many factors which inform the running of the bulls, or in the case most recently, the bears, in equities, ranging from matters affecting certain sectors of an economy right through to wide-scale geopolitical concerns.

Interpreting share market trends is replete with complexity, but it seems new-found concerns about the economic performance of China, which is increasingly suffering under the weight of its own economic planning contradictions, is a key issue worrying investors.

For some economists, however, the run of negative sentiments overwhelming the values of corporate stocks reflects a much deeper concern about how the modern economy is faring.

There is little question that the growth forecasts of public treasuries and other government bodies have been found wanting in recent years, with Australia and other countries struggling to return to growth rates witnessed prior to the 2008-09 global financial crisis.


It is instructive, as an example, to track how the Reserve Bank of Australia has tended to revise its forecasts for real GDP growth in recent years.

In its February 2013 Statement on Monetary Policy, the RBA estimated that economic growth would range from 2.5 to 3.5 per cent, but which had subsequently been revised down until its November 2014 Statement.

In its November 2015 statement, the RBA estimated that economic growth for 2014-15 was 2.3 per cent. A generally similar pattern can also be discerned with regard to the bank's estimates for this financial year.

For figures such as Larry Summers, a former US Treasury Secretary and president of Harvard University, advanced economies, at the very least, are now suffering from a "secular stagnation" of persistently slowing economic growth, which might even be irreversible.

Summers provides a mainly pro-Keynesian account of the problem, mainly pointing the finger at a lack of investment opportunities within the private sector, as well as a glut of savings washing through the global financial system, as key drivers of the secular stagnation.

According to Summers, the only way out of the investment rut that is holding back growth is to maintain very low interest rates, in the hope of encouraging investors to put available savings to productive uses which, in turn, will help bring about new job opportunities for the unemployed and under-employed.

The notion that secular stagnation will be a "new normal" for economies has been picked up elsewhere, including by Thomas Piketty who speculates on low economic growth rates through the course of this century to illustrate how inequality might favour those people who happen to possess high-performance financial assets.

Other interpretations of secular stagnation theory are based upon worries about the economic implications of population ageing, or claims about a reduction in the underlying rate of innovation and technological change.

Although secular stagnation is something of a fashion in contemporary economic circles, it should be understood this is by no means a new idea – actually, one could think of secular stagnation as the old wine of argumentation stashed away in a new bottle brandishing economic pessimism.

In 1938, Alvin Hansen, an American intellectual disciple of John Maynard Keynes, presented an address in which he surmised growth to be in secular decline because of fewer investment opportunities in a mature economy, combined with a decline in population growth.

A few decades later, Paul Ehrlich and other theorists believed that the growth rate of economies will fall away in trend terms because of environmental degradations and severe limitations on natural resources.

The growth pessimism of Hansen, and Ehrlich, were swept aside by the realities of solid economic growth waves subsequent to World War II, and the "Great Moderation" through the 1990s and 2000s, respectively, and there are no firm grounds for believing that secular stagnation will take root now.

At its most fundamental level, it should be understood that economic growth and similar phenomena are intended to reflect an aggregate of a myriad of economic decisions that we as individuals actively make, on a daily basis.

In other words, economic growth trends are ultimately the result of human actions, and not something forced upon us beyond our control, and if we want to lift the growth trend there are certain actions we can take to help make a return to robust economic growth.

Entrepreneurs will attempt to discover lucrative sources of value in the service of the customer, even in trying economic conditions, but if we want more of them to discover higher-valued opportunities, best to ensure the institutional environment are accommodative of productive endeavours.

The prominent American economist John Taylor suggests that demand-side explanations for falling growth do not necessarily fit neatly with the facts.

In a paper presented to the American Economic Association in 2014, Taylor noted that "there is a clear empirical association between the poor economic performance in the past 10 years and the shift in economic policy toward more discretion, more intervention and away from predictable rule-like decision making".

The very regime uncertainty that regular fiscal and regulatory adjustments entail explains why some measures of public sector activity, such as the amount of legislation passed through legislatures during a given period of time, are not necessarily conducive to realising economic prosperity.

In this context the key question will be whether the political class can muster the will, particularly in a federal election year, to disentangle themselves from market-based economic activity by reducing our uncompetitive tax burdens, rationalising inefficient spending, and eliminating unwarranted red tape.

It is true that Australia will need a new wave of economic growth if its residents are to enjoy a sustained improvement in their material well-being, which more often than not serves as a crucial platform for better social outcomes.

Although growth in recent years has been uninspiring, to say the least, it is not inevitable that we are caught in the grip of a secular stagnation of declining growth that we cannot avert.

Every Australian has an interest in ensuring that the combination of entrepreneurial discoveries and creative disruption weeding out entrenched interests outpaces the roadblocks posed by anti-growth public policies.

But in any event, one should be casting a most critical eye over secular stagnation growth theories which, if embraced, risk causing more economic harm than good.

Mikayla Novak is an Adjunct Fellow with the Institute of Public Affairs (

Twitter: @NovakMikayla