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Economic Stagnation and its Mastery

by Markus Marterbauer Thursday, Jun. 22, 2017 at 4:11 AM

Corporate profits explode while investments stagnate.Social housing declines with privatization. According to neoliberal theory, higher profits lead to grater investments and more jobs. In truth, higher profits lead to more use of tax havens and companies buying back their stock.


By Markus Marterbauer

[This article published on January 20, 2017, is translated from the German on the Internet,]

The economic output in Austria and the euro zone has stagnated since the beginning of the financial crisis in 2008. Economists from Paul Krugman and Richard Koo to Larry Summers offer important insights on the causes of secular stagnation (a state without economic growth).

Proposed solutions up for review include an impulse through public investments, privatizing the real economy through financial management, redistribution to lower income groups that emphasize consumption, technological and social innovations and a debate about the goals of economies.

In Austria, the economy is now reviving [1] which is reflected in the decline of the unemployed for two months. Despite this economic recovery, little suggests a traditional upswing with robust GDP growth rates.

On the contrary, economic output has remained far below its potential since the profound collapse in the 2008/09 recession. The under-utilization amounts to more than 20% in relation to a hypothetical continuation of the 1988-2008 growth trends.

The sources of an impulse that could trigger the expansive economic forces in one blow are not visible anywhere. This phenomenon observable in most industrial countries is increasingly seen by economists and discussed under the catchword secular stagnation.


In the 1998 Brookings Papers on Economic Activity, Paul Krugman focused on the continuing stagnation in Japan and described this as a Keynesian liquidity trap. He described the central characteristics of the international financial crisis at an early moment of the crisis. [2] Households, businesses, and financial investors hold back with their money instead of spending it in a demand-effective way. In this situation, the liquidity supply of the economy could be improved with a successful expansive fiscal policy. However, this cannot force a demand-impulse lifting the economy out of stagnation. Krugman recommended a continuing expansive monetary policy and an expansive fiscal policy to avoid long-term economic stagnation.

In the example of Japan [3], Richard Koo shows the disastrous effects of businesses, households and the state reducing their crisis-related indebtedness. This results in a balance-sheet recession that passes into a sustained underemployment equilibrium from which there is hardly a realistic way out. When businesses and households strive to reduce their indebtedness, the state must simultaneously increase its spending and debts to avoid slipping into a lasting stagnation. [4]

Larry Summers is regarded as the most prominent exponent of the age of secular stagnation today. [5] According to his interpretation, industrial countries are suffering from an imbalance between greater savings inclination and missing productive investment possibilities. In his neoclassical interpretation, the real interest rate, savings and investing are in such a strong negative balance that this cannot be reversed by monetary policy measures. His Keynesian conclusion is that the problem can only be solved through expansive fiscal policy, not through interest-reductions.


In his statements, Summers also hearkens back to the Keynesian concept of secular stagnation developed by Alvin Hansen in the 1930s. On one hand, Hansen saw the combination from unused savings and trifling investment possibilities impaired by weak population growth and missing technical progress and on the other hand as a cause of stagnation from which only credit-financed public demand can deliver us.

In "General Theory" and the essays [7] from the 1940s devoted to the long-term, John Maynard described the continuous under-employment balance that results from permanent savings projects. He emphasized the increased savings inclination for the higher incomes and the increased inequality. Therefore his conclusions for economic policy concentrated on expansive fiscal policy and redistribution of income and working hours.

In stagnation theory, there is also a Marxist tradition that was presented in an important 1973 essay by Paul Baran and Paul Sweezy "Monopoly Capital." [8] In this article, the political and economic role of multinational corporations was put in the center of stagnation explanation.

As a Kaleckian, the prominent Austrian economist Josef Stendl [9] joined Keynesian and Marxist approaches. In "Maturity and Stagnation in the US" (1952), he underlined the increasing concentration process that reduces capacity utilization and investment activity and triggers a long-term growth-weakness after a recession as the most important determinant of stagnation. [10]

But the secular stagnation expected by him for the postwar decades did not occur because of the growing share of the public sector, technological innovations, international cooperation and a favorable political and economic climate with expansive effects. This changed from the 1970s with the dismantling of international cooperation (through the end of the Bretton Woods system) and the transition to supply-side economic policy. [11] Steindl spoke of stagnation policy in 1979. [12] "This policy of stagnation is likely to continue since governments are preoccupied with inflation and the public debt."

John Maynard Keynes also wrote [13] about the long-term economic possibilities of his grandchildren with an advanced technological level, high incomes, and savings despite a basic stagnation tendency. The high level of productivity could then be used for a better life and not for accumulating more financial wealth. These Keynesian visions would also be compatible with the post-growth ideas of the ecology movement.


A series of political-economic recommendations results from the different facets of historical and present stagnation theories and the different experiences in the current financial crisis.

Impulse through public investments: Most economists support a robust impulse through sensible public investments that favored by a low-interest level could bring an urgently needed short-term demand-push for the economy and an improvement of the long-term supply-side production potential. Concrete proposals were recently presented for expanding the possibilities by public investments [14] in European fiscal rules. They were taken up by the Austrian chancellor Christian Keen and expanded with ideas [15] for a European fund for public investments.

Promoting real investments over financial investments: The public investment impulse aims at stimulating private investment activity and initiating a strong multiplier effect. This will not be enough to stimulate sensible real political-economic investments instead of the often harmful financial investments. A political limitation of the profits realized on financial investments through a general containment of financial activities by strict regulation and de-prioritizing dividend payouts over against real investments is needed. The tax system can set important points here.

Education, technology, innovation, research: Austrian Keynesians like Josef Steindl [16] and Teddy Prager [17] refer again and again to the necessity of a supply-side complement to expansive demand policy. These reflections were also powerful in the last two decades when the research- and development rate rose from 2% to 3% of the GDP. Austria has by far the highest state-financed R & D spending of all EU countries.

Social innovation: The potential of social innovations should not be forgotten amid the emphasis on technical innovations. Maintaining social institutions enabling social innovations is very important. Collective wage agreements with new ways of innovative reduction of working hours are one example (free time option [18]).

Just distribution of income and wealth: The extent to which the weak consumer demand characterizing economic stagnation involves the increasing inequality of the distribution of income and wealth is often ignored in the international debate. The short-term consumer propensity [19] of the lower income third of households is at 80%; the propensity of the upper third is only 40%. The redistribution of incomes through taxes and transfers and an egalitarian distribution of primary incomes would certainly help overcome the secular demand weakness. An active minimum wage policy would increase income in the lower sectors…

Spreading the goals of economic policy: With all necessity of overcoming demand-weaknesses, the Keynesian admonitions from the early 1930s on the human use of the great prosperity connected with technology may not die away unheard. The level of economic prosperity today in industrial countries on average is so high that its social use in stagnation phases and the ecological limits of material- and resource consumption and the pollution level must be debated much more. Productivity advances could be used for increasing free time and building social services in the framework of the social state. Taxing wealth holdings, transfers, polluting production and polluting consumption in favor of the fiscal relief of work incomes could be an element of a strategy enabling a good life for all people with less growth of the economy.


By Markus Marterbauer and Lukas Oberndorfer

[This article published on November 19, 2014, is translated from the German on the Internet,]

The political-economic model of the EU is based on three neoliberal pillars: the creation of an unlimited domestic market, particularly in the financial realm, an independent Central Bank for which price stability has priority over jobs and strict inflexible fiscal rules. This model has completely failed with the financial crisis since 2008: economically, ideologically and politically. A change of course to a social-ecological transformation should have top priority but is blocked by a radical de-democratization.


The economic breakdown of EU policy in the longest economic crisis since the 1930s is obvious. Economic output is hardly higher than 2007 and nearly an eighty lower than in "normal" economic recoveries. The rise of the number of unemployed to around 8 ½ million justifies speaking of mass unemployment. State debts have risen to 30% of the GDP. This is the result of a misguided economic policy on the basis of neoliberal theory:

The theoretical working model of free, efficient financial markets creating prosperity was converted into political-economic praxis – under the vehement pressure of finance capital – and is an essential reason for the deep 2008/09 economic- and financial crisis.

Then a rapid pivot to a harsh course of austerity in the public and social infrastructure occurred in which hope was based on the "theory of non-Keynesian effects" that this would have no negative effects on growth and employment. The result was the second recession of 2012/13.

Finally, "structural reforms" (code for neoliberal reforms) were carried out in the crisis countries by lowering wages and social services to create price competitiveness. The result is deflation that threatens to take down all of Europe.


This blatant economic failure of the EU model has led to a hegemony crisis of neoliberalism. Trust in the problem-solving competence of European institutions (including the national state systems) is gravely shaken. Who can assume after the experience of the last years that the costs of the crisis triggered by banks and financial markets will be borne by the causal agents? Who trusts European policy with developing instruments against mass unemployment? What wage-earner can still trust the promises of a reasonable pension through the financial markets? Who in the "South," "East" or even in "core Europe" still clings to the illusion that the economic gains of integration will be fairly shared?

Practical economic constraints are constructed to a dramatic extent in the EU so the economic prosperity gained by the broad mass of the population flows to a very small sector of the wealthy. The enormous success experienced by Thomas Piketty's work ""Capital in the 21st Century" is based on the widespread unease over the unjust distribution of wealth, income and life chances in Europe's rich societies and the turning away of the authors of the neoliberal model from the academic center of economics in favor of an empirical economy based on data that is ready to grapple with social problems.

More and more established intellectuals of all academic fields position themselves against neoliberalism in all its varieties. Jurgen Habermas sees a dangerous erosion of democracy in Europe through a free-floating executive independent of parliament, the resolution of the fiscal pact and the planned agreements on competitiveness. Wolfgang Streeck, once a speechwriter for Gerhard Schroeder, urges a return to Marx "without understanding the current development of modern societies" and the comeback of critical social theory in the US and Europe.


The crisis of neoliberalism is also reflected in the latest elections, even if it may not seem that way at first. In the European Parliament elections, the population "in the West" punished those government parties whom they blamed for the neoliberal crisis policy. Conservative crisis parties in Spain, Italy, and Greece dramatically lost votes; social-democratic parties became small fractions in France, the Netherlands, Ireland and Finland. In the "East," turnout at elections drastically declined sometimes in nearly all countries; participation was only 20% of those entitled to vote in Slovenia and Chechnya and only 13% in Slovakia. Where rightwing-extremist parties scored gains, they often did this by criticizing the neoliberal austerity course like the National Front in France and not only with anti-foreigner slogans.

In contrast, parties that focus on a coherent promising economic policy limited the growth of the extreme right and added large numbers of votes as in Spain and Greece.


The crisis of the neoliberal economic policy of the EU, the hegemony crisis of neoliberal ideology and the political failures of neoliberal parties open the field for alternative approaches. Essential elements of progressive economic policy could bring the economy out of recession, to democratize piece by piece, to successfully fight unemployment and precariousness, to come nearer the goal of a resource-sparing economy, to ensure the financing of the social state and to justly distribute the prosperity:

The rapid expansion of public investments in the social and ecological infrastructure could trigger the urgently necessary demand impulse, broadly distribute the social wealth and initiate a sustainable economic development.

Production of transparency on the distribution of wealth and income, closing tax havens and taxing wealth and inheritances to gain financial possibilities for social-, ecological- and jobs initiatives and creating a just society.

Regulation and shriveling of the financial sector to guarantee the successful control, transformation, and democratization of the economy.

Invigorating redistribution in favor of precarious working conditions and performance incomes from labor.

Further development of the "European social model" with the goal of giving everyone access to social welfare independent of their origin.

Reduction of working hours to create jobs and open spaces for the participation of everyone in political-social empowerment and time for leisure and not only in family-, care- and housework.


The change of course to a progressive economic policy may be prevented by anchoring neoliberal points in the European Constitution. A rigorous set of fiscal rules could prevent public investments as an instrument of economic impulses and social-ecological reconstruction. Advances in the taxation of multinational corporations, the wealthy and the financial sector are undermined by the unanimity principle. Market freedom may not be restricted. The possibilities of the Central Bank for financing public interests are blocked. These are all examples of the neoliberal points of the European constitution.

Since the crisis, we have experienced the increasing evasion of democratic norms through international law (the fiscal pact) and orders without a competence basis (New Economic Governance). This authoritarian constitutionalism should be continued. The demands of the new commission refer to agreements on competitiveness. The European Constitution does not currently earmark structural reforms as a countermove to financial incentives. Jurgen Habermas describes this process as the government "battening down the hatches" to secure "overbearing executive power built in the years of crisis in the way of undemocratic self-empowerment" against its questioning.

The change of course to a social and ecological transformation of the European economy will only succeed when these structures of a blockade in the interest of a few are broken up through the pressure of a broad social alliance setting the population in the center as the democratic protagonist. A mosaic that brings together critical science, social movements, unions and progressive parties into a coherent project could be the counter-weight to the neoliberal redistribution from the top protected by an authoritarian constitutionalism.


Marc Batko, Alternative Economics:Reversing Stagnation, Smashwords, 2016, coupon code PU68W (until July 4), .99

George Monbiot, Neoliberalism: The Ideology at the Root of all our Problems, The Guardian, April 2016,

Ann Pettifor, Be angry at banks, be angrier at economists, The Guardian, June 2012,

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