Supply Side, Demand Side, or Innovation Side?

NEW YORK – It has become impossible to deny the so-called secular stagnation gripping the world’s most developed economies: Wealth is piling up, but real wages are barely rising and labor force participation has been on a downward trend. Worse yet, policymakers have no plausible idea about what can be done about it.

Behind this stagnation is the slowdown in productivity growth since 1970. The wellspring of such productivity gains – indigenous innovation – has been badly clogged since the late 1960s (mostly in established industries) and was even more so by 2005.

Ronald Reagan and Margaret Thatcher viewed the stagnation that was gripping economies by the 1970s from the supply side. They pushed through tax cuts on profits and wages to boost investment and growth, with debatable results.

But today, with tax rates much lower, cuts of that size would result in huge increases in fiscal deficits. And with debt levels already high and large deficits ahead, such supply-side measures would be reckless.