The idea that advanced American capitalism has entered a period of secular stagnation is gaining currency with both economists and public policy analysts.
This economic phenomenon occurs when structural changes in the economy - especially demographic changes because of an aging population - curb investment expectations for growth.
Harvard economist Larry Summers, in a recent speech to the International Monetary Fund, suggested a fundamental change in the economy may have occurred since interest rates are zero but businesses are willing to hoard cash rather than invest in job-generating equipment and factories. If Summers' analysis of secular stagnation as a permanent condition is correct, monetary policy will not fix ailing rich economies, and advanced economies will continue to inflate asset bubbles (think about the housing bubble of 2008 or the dotcom bubble of 2000) to keep growth up and unemployment down.
Nobel laureate Paul Krugman agrees with Summers' notion of secular stagnation's impact on America's economy.
He points out that between 1960 and 1985, when the U.S. economy achieved full employment without asset bubble inflation, the labor force grew an average of 2.1 percent annually because baby boomers and women entered the work force: "This growth made sustaining investment fairly easy - the business of providing Americans with new houses, new offices, and so on easily absorbed a fairly high fraction of GDP."
However, the Census projects that the age 18-64 population will only grow at an annual rate of 0.2 percent between 2015 and 2025. Hence, a causal relationship likely exists between lower labor force participation and lower investment demand.
If these economists are correct, we could have entered a period where the speculative excesses of the boom and bust business cycle are now the new economic norm.
Others, like former Federal Reserve Chair Alan Greenspan, also see structural problems as the cause for slow economic growth. One of these structural issues is the increasing inequality of incomes.
Rich households tend to save more than poorer families.
In an era of secular stagnation, saving actually hurts the economy and investment. Consequently, hiking the minimum wage, as President Obama wants, would stimulate the economy by encouraging short-term spending and long-term borrowing by low-wage workers.
Yet since 2008, banks have tightened their lending requirements for low-income workers. For the virtuous cycle of higher minimum wages and borrowing for new cars/homes to occur, bank lending and underwriting requirements must be loosened. This would likely precipitate subprime lending and another asset bubble - which is exactly what Summers and Krugman believe is the necessary tonic for a listless rich economy.
Much of the discussion on secular stagnation has focused on structural determinants like demographic shifts and income inequality. However, Harvard public policy professor Robert Putnam's ideas about social capital may more accurately explain America's slow economic growth.
Putnam argues that the lack of social capital, or trust, is a key determinant of economic success. While The Economist recently found America remains a high-trust society, it warns the country risks becoming a low-trust nation where "suspicion blights lives and hobbles economies."
After the financial meltdown, the sale of home safes to keep cash and valuables increased dramatically, since people had lost trust in financial institutions. Many economists now think some of this "mattress money" is finding its way into the stock market because of financial regulatory policies like Dodd-Frank and the Fed's successful handling of Quantitative Easing to stimulate the economy.
The Fed tapered QE3 last week because of improving economic health, and the stock market's 200-point rise the same day indicates greater public confidence in government's regulatory power to facilitate economic activity. More social capital in American financial institutions means more investments and economic growth.
Secular stagnation was a theory developed in the 1930s by Keynesian economist Alvin Hansen, who recognized the relationship between a slowing population and reduced investment opportunities.
Hansen's hypothesis was never tested because of the post-World War II baby boom. If trust is again established between investors and the nation's financial institutions, the speculative bubbles to stimulate growth framework advocated by Hansen's intellectual heirs won't be utilized.
As such, we will have dodged becoming a low-trust society a second time within a century.