Print Email Facebook Twitter The New Normal: Demand, Secular Stagnation, and the Vanishing Middle Class Title The New Normal: Demand, Secular Stagnation, and the Vanishing Middle Class Author Storm, S.T.H. (TU Delft Economics of Technology and Innovation) Date 2018 Abstract The U.S. economy is widely diagnosed with two “diseases”: a secular stagnation of potential U.S. growth and rising income and job polarization. The two diseases have a common root in the demand shortfall, originating from the “unbalanced” growth between technologically “dynamic” and “stagnant” sectors. To understand how the short-run demand shortfall carries over into the long run, this article first deconstructs the notion of total-factor-productivity (TFP) growth, the main constituent of potential output growth and “the best available measure of the underlying pace of exogenous innovation and technological change.” The article argues that there is no such thing as a Solow residual and demonstrates that TFP growth can only be meaningfully interpreted in terms of labor productivity growth. Because labor productivity growth, in turn, is influenced by demand factors, the causes of secular stagnation must lie in inadequate demand. Inadequate demand, in turn, is the result of a growing segmentation of the U.S. economy into a “dynamic” sector that is shedding jobs and a “stagnant” and “survivalist” sector that acts as an “employer of last resort.” The argument is illustrated with long-run growth-accounting data for the U.S. economy (1948–2015). The mechanics of dualistic growth are highlighted using a Baumol-inspired model of unbalanced growth. Using this model, it is shown that the “output gap,” the anchor of monetary policy, is itself a moving target. As long as this endogeneity of the policy target is not understood, monetary policy makers will continue to contribute to unbalanced growth and premature stagnation. Subject Baumol modeldemanddual economynew normalsecular stagnationvanishing middle class secular stagnationvanishing middle class To reference this document use: http://resolver.tudelft.nl/uuid:923d3c9e-b060-4d82-960e-c84e3653c86d DOI https://doi.org/10.1080/08911916.2017.1407742 Source International Journal of Political Economy, 46 (4), 169-210 Part of collection Institutional Repository Document type journal article Rights © 2018 S.T.H. Storm Files PDF The_New_Normal_Demand_Sec ... _Class.pdf 1.44 MB Close viewer /islandora/object/uuid:923d3c9e-b060-4d82-960e-c84e3653c86d/datastream/OBJ/view