We cannot be sure, but the answer matters even in the short term.

If you think you know what is happening to the economy, you have not been following it closely enough. Clearly the tenor of the economy is changing – I think – but who can be sure following the disruptions of the Covid pandemic. There is a price surge which seems to have largely arisen from overseas shocks although there is enough loose money in the economy to fuel it. The surge may become entrenched into inflation or it may not. (Serious observers of the international economy are divided too.) There is growing evidence that economic activity is slowing down, but it is not obvious that amounts to a conventional recession.

My caution arises because any serious analysis of business cycles requires a view of the  (underlying) secular trend of the economy. If the economic growth rate remains on its long-term trend in which per capita incomes double every 50 years or so, then we are probably going into a conventional recession. But what if we, I mean the affluent world, are going into a secular (long-term) stagnation?

In fact the norm in the history of humankind has been little per capita material growth. The last couple of centuries have been a growth miracle. Why should we think it an eternal one? There is a galaxy of eminent economists who have expected economic growth to stagnate – ranging from Thomas Malthus and David Ricardo, through Karl Marx and  John Stuart Mill to Maynard Keynes and Joseph Schumpter. Thus far they have been wrong, but they may not always be.

There is no agreement among contemporary economists; perhaps we shant be able to tell for yonks. To summarise the various reasons advanced why this may be happening in affluent economies:

1. The shift from the non-market economy to the market economy may be exhausted. New Zealand already has very high labour force participation by women – among the highest in the world. Can we squeeze any more blood out of the kitchen?

2. Second, insofar as economic growth has been dependent on consuming natural resources then we may be reaching the point where such exploitation is ending, especially if we stop using the air (greenhouse gases and smoke emissions), fresh (waste and runoff) and sea water (including plastic bags) as sumps for our pollution and waste.

3. There is a slowdown of new growth-promoting technologies compared to the last two centuries. The American economist Robert Gordon, who has done more research in the area than anyone else, argues that today’s innovations – like electricity and the internal combustion engine – are not comparable to those of a century ago.

4. Perhaps the Gordon argument can be revised to the possibility that there are new technologies but they do not give a commercial return.

5. There are increasingly severe difficulties measuring conventional economic growth as we shift from the product economy to the service economy.

6. The degree of monopolisation seems to be increasing in key sectors with the incumbents resisting new entrants. This may be because they are often ‘common carriers’ (natural monopolies) with the technologies favouring only one significant provider. (Examples are Facebook and Google.) That may slow down economic growth by stifling genuine innovation. 7. Secular stagnation is a rich-economy phenomenon because the rich countries offshore production to poorer economies. The underlying model suggests that the developing country shifts its labour out of its low-productivity farm sector into a medium-productivity manufacturing sector which exports to the rich. (I wrote about this in my Globalisation and the Wealth of Nations.)

8. A final theory is that a lot of economic growth is a kind of Ponzi scheme, especially that which depends upon the financial sector. Essentially, investors are benefiting today from trading worthless financial paper with others who expect similar returns in the future. One day they will not be delivered. Such arrangements need not be illegal but they are painful when they collapse. Much of the 2008 Global Financial Crisis can be explained this way. (If economic growth depends upon environmental depletion, that too is a kind of Ponzi scheme.)

International secular stagnation may have begun towards the end of the twentieth century. What might it mean for New Zealand?

Many of the above factors apply to New Zealand, especially insofar as we depend on the international economy for our growth. If international markets stagnate we will suffer. (Tackling environment depletion is in our own hands, of course.)

There is a caveat to the secular stagnation story. The above limiting factors apply more strongly to the most affluent economies. They apply less to the poorer economies, which can grow by adopting existing technologies and may remain more willing to exploit their environment. These new manufacturing countries will suffer a food deficit because their agricultural sectors will not be able to deliver sufficient food demanded by the more-affluent workers in the city. That has already been happening over the last forty-odd years because of industrialisation in East and South East Asia. Prices for our export foodstuffs have been rising as a result.

That is promising for the New Zealand economy. The foundation of New Zealand’s prosperity has been its resource base – especially, land, sun and water – which it has processed and exported.

However, New Zealand may be running out of the additional resources to reap further opportunities. Forecasts for the farm sector suggest a slowing down of its growth, even if it is not limited by our responses to climate change. Other opportunities are also limited. In my view it would be unwise to over-rely on international tourism, although that seems to be the implicit assumption. (We are not doing much explicit thinking.)

What secular stagnation may mean for the current state of the economy is that the ‘recession’ is really a part of adjusting to the slower underlying growth track – a bumpy adjustment. Short-term attempts to stimulate us out of a downturn will complicate the adjustment because there is less underlying capacity in the economy.

I am really cautioning us not to push the panic button yet. Caution is difficult for a government, given the public demand to ‘do something’. My guess is that careless actions may stimulate inflation which is already endangered by the public rhetoric which will lift and entrench inflationary expectations.

We will be a bit clearer about what is going on later in the year. I am fairly confident that different sectors are moving at different structural rates, but the overall pattern is unclear.

From a longer perspective, secular stagnation or slower material growth need not be a disaster, providing we appreciate that income and wellbeing are only loosely connected in affluent economies. There would remain the challenge of improving the lot of New Zealanders. Panicking about the state of the economy may damage it.