Stagnation

The fourth macroeconomic problem mentioned in this chapter is the problem of economic stagnation.

Stagnation: A stagnation is a period of many years of slow growth of gross domestic product, in which the growth is, on the average, slower than the potential growth in the economy.

We should stress that this is quite controversial. There are economists who do not believe that stagnation exists as a problem. The difficulty is with the idea that growth is "less than the potential growth in the economy." But what is the potential? Those who see a great potential will see stagnation where those who see less potential will not.

In any case, the idea of stagnation was first discussed in the 1930's. The Great Depression, a period in which the growth of national product was generally negative, was thought of "by some economists" as a symptom of "secular stagnation." The word "secular" in this context meant that the causes of the stagnation were beyond the control of the government. The closing of the frontier, slowing technological progress, and higher savings rates because of higher average incomes were mentioned as possible causes.

Some economists believe that the U. S. A. has suffered from a stagnation in recent decades. One reason for their thinking is expressed in the following table:

Growth of Real GDP by Decades, U.S.A.

decade	rate of growth
1960's	4.46%
1970's	3.24%
1980's	2.84%
1990-1995	1.81%

Remember that in this table we are looking at rates of growth, not the levels of RGDP. Real GDP was greater in the 1990's, but is rising at a slower rate than in the 1960's. Since the middle of the 1990's, we have had a period of fairly steady higher rates of economic growth, around 4%, so it may be that the period of stagnation is over.

It is clear that in 1970-1995, American economic growth slowed down. But is a growth slowdown a problem? It might not be a problem, depending on the reasons for the slowdown.

Causes of Stagnation