Profitability and Secular Stagnation: The Missing Link

In this article, we ascribe the pattern of sluggish real GDP growth rates that several mainstream economists characterized as secular stagnation in the post-1982 period to the depressing effect of low profit expectations on the business sector’s capital accumulation rate. We interpret profit expectations as forward projections of current and past profit trends. Despite major reductions in the wage share of about 80% of all workers, relatively constant profit shares failed to counteract the effect of a declining long-run output-capital trend on business profitability. Such falling trends reflected the structural pressures driving leading firms to expand capital-intensive, labor-saving technology as an effective weapon for waging competitive wars. While this type of technical change raises unit fixed costs, it also increases labor productivity and allows innovators to lower unit variable costs sufficiently to underprice competitors and gain market share at their expense. In our view the downward long-run net output-capital trend provides the structural component linking lower profitability trends with secular stagnation. While credit injections may power effective demand growth and sustain profit rate upturns for some time, debt repayment and defaults reverse the boom and pave the way to financial crisis.