The Political Economy of Secular Stagnation

Ben Ansell∗ Jane Gingrich† May 30, 2018

In recent years, several economists, most notably Lawrence Sum- mers, have suggested that the global economy may have entered a period of ‘secular stagnation’ marked by endemically low growth rates. This slowdown is presumed to have resulted from aging populations, a productivity slowdown and accordingly a lack of economic demand which has produced slow growth, low investment and a savings glut. Political scientists have been slow to consider the impact of this trend for social cleavages and policy preferences. In this article we develop a series of political implications from secular stagnation theory arguing that age and home-ownership should become particularly important determinants of political preferences. We further argue that the set of social investment policies currently adopted by the cross-national political consensus are both likely inadequate to respond to secular stagnation but also locked into place by dominant political coalitions. through an analysis of cross-national public opinion and election data.

Paper written for Anxieties of Democracy Workshop, Villa Vigoni, June 2018.

∗Nufﬁeld College & Department of Politics and International Relations, University of Oxford †Magdalen College & Department of Politics and International Relations, University of Oxford

1 1 Introduction

Political economists have vigorously responded to the economic crisis beginning in 2008 with a wide array of studies of examining how the economic shock of the crisis changed - or failed to change - the economic and political preferences of citizens and governments (Ansell 2014; ?). Indeed, the economic crisis has been viewed almost as a quasi-experiment where a negative economic shock provides an analyti- cally helpful (though substantively undesirable) breakpoint around which changes in attitudes and behaviour could be examined (Barnes and Hicks 2012). But what if we have collectively misunderstood the crisis as a deep but idiosyncratic shock and instead it reﬂects a downcycle of a much longer term systematic slow-down of advanced economies? Analyses that focus on the effects of economic shocks may provide an incomplete picture of the long-run pattern of political and economic change. Indeed, the rise for example of populist politicians in North America in Europe has occurred almost eight years after the start of the crisis and while most countries are in some form of economic recovery. Longer-term - ‘secular’ - forces may be at work in terms of the cleavages developing in society both before and after the crisis period. This paper provides a very preliminary political analyses of the effects of a long-run economic slowdown in the advanced industrial world, what Lawrence Summers has termed ‘secular stagnation’ (Summers 2013). This concept has two core components: lower rates of economic growth and low real rates of interest. Depending on differing perspectives among economists, secular stagnation has been viewed as reﬂecting systematically weak demand - low levels of planned consumption, investment and government spending - or supply-side constraints - low rates of productivity growth - or some combination of the two. In either case, there

2 is the result that there is a mismatch between abundant savings and weak investment. Low investment - along with low consumption and government spending - weakens growth and the mismatch between savings and investment produces low real interest rates. Indeed, according to Summers, because of low price inflation the real interest rate at which savings and investment clear would be a nominal interest rate of below zero. This ‘liquidity trap’ component of the secular stagnation hypothesis suggests that conventional monetary policy cannot jolt the economy back into life, but unlike standard Keynesian views of the liquidity trap, under secular stagnation this is not a temporary phenomenon at the bottom of a recession but a long-term market disequilibrium net of the business cycle. As Summers has noted, secular stagnation is a problem of the first moment of the economy - mean growth - whereas existing scholarship has focused on the magnitude of the second moment of the economy - the variance of the business cycle. For Summers, secular stagnation requires a host of policy innovations in response - large-scale public investment, transfers of income from savers to borrowers, and further extraordinary monetary measures beyond quantitative easing. What does a future (and present day!) of secular stagnation mean for the preferences of citizens and politicians over government policy? And how simple would Summers’ recommendations be to implement politically? The ability of governments to respond to secular stagnation in the manner preferred by both individual economists such as Summers and increasingly international institutions such as the IMF and OECD, may be highly constrained. Secular stagnation is reinforcing demographic and geographic divides in political life that cut across traditional class politics and hence are proving difficult for established parties to reckon with. Low birth rates, high dependency ratios, and asset bubbles are creating geographically concentrated areas of high discontent.

3 Indeed, as we argue in this paper the very demographic and economic forces that have produced secular stagnation may mitigate against the very policies that could resolve it, creating a political trap. After discussing the current economic consensus on the deﬁnition, causes, and consequences of secular stagnation, we turn to developing a political economy argument about its impacts on political preferences. We highlight the dilemma of a ’political trap’ by arguing that the political cleavages produced by secular stagnation are reinforcing a set of public policies that are unlikely to aid countries in escaping low growth, low investment outcomes. In the following sections we turn to some empirical tests of the political economy of secular stagnation. We begin by examining country-level indicators of secular stagnation, in particular the current birth rate to see how this conditions these attitudes. We follow this by examining survey data and election data from the UK and France and look at how attitudes towards economic prospects themselves appear to affect policy preferences.

2 The Economic Debate on Secular Stagnation

‘Secular stagnation’ shares much in common with recent academic analyses of the contemporary economy in that it draws on a series of concepts developed in the 1930s to explain the Great Depression. Unlike the resurgence of Keynesian thinking, however, secular stagnation draws from a distinct American tradition in the footsteps of Irving Fischer and Alvin Hansen. Indeed the latter coined the term ’secular stagnation’ when in 1935 who predicted, inaccurately as it turned out, that America would remain in a decades-long era of stagnation and low real interest rates. Hansen and Fischer had both emphasized the dangers of ’deleveraging’ - the process in which borrowers react to economic crises by prioritising paying back

4 loans outstanding. Doing so increases the rate of savings for a stable or reduced level of investment thereby reducing the real interest rate. However, if nominal interest rates are already low - as is typically the case in situations of economic slowdown - then the real interest rate may not be able to actually sink low enough to clear the savings and investment market without nominal rates dipping below the floor of zero. Negative nominal rates are extremely rare and difficult to implement, and hence the market-clearing real interest rate may not be reached, leaving investment and output systematically and permanently lower. Worse, the deleveraging cycle produced lower demand, setting forth a deflationary spiral in prices that made ever harder to lower interest rates effectively. Hansen’s doom-laden prediction turned out to be unfounded due to the enormous economic shock of World War Two which led to massive fiscal expansion, large enough to counteract the negative effects of the savings glut. On top of this, following the war a resultant baby boom kickstarted the rate of demographic growth providing a group of young borrowers who dramatically raised the demand for both loans and goods. And hence the theory of secular stagnation went into dormancy. However, scholars have recently rediscovered Hansen’s warning in a new era of debt deleveraging, population slowdown and weak fiscal intervention.

2.1 Secular Stagnation as an Outcome

The extremely slow growth recovery from the 2008 crisis despite the unprecedentedly low levels of interest rates operated by central banks worldwide have chal- lenged contemporary macroeconomic thinking, even that of Neokeynesian scholars whose theoretical leanings created an expectation of a sticky recession and the need for concerted ﬁscal and monetary stimulus. Low growth may have some

5 supply-side factors, detailed below, but for many of the contributors to the volume edited by Teulings and Baldwin (2014) it is closely related to low aggregate demand, itself a function of investment failing to meet the supply of savings at prevailing interest rates. We detail the proposed causes of this combination of low growth and low interest rates below but before doing so it is worth describing these key components of contemporary ‘secular stagnation.’ We begin by discussing the problem of long-run slow growth. As Summers (2014) notes, both the United States and the Eurozone have continually failed to meet the annual growth predictions of economists since 2008. Summers shows that from an estimated nominal GDP of $16 trillion in 2007 (all ﬁgures in $2013), estimates that year anticipated a potential nominal GDP of around $20 trillion by 2016. By 2010 those estimates had been downgraded by around one trillion and by 2014 a further trillion dollars still. Today the actual nominal GDP of $17 trillion is around one trillion dollars less than the current estimates of potential GDP. Thus actual nominal GDP continues to lag potential GDP and estimates of the latter have had to be conituunally downgraded over the past decade. The situation in the Eurozone is if anything worse, with potential GDP also downgraded by around two trillion (2005) Euros and actual GDP no higher than in 2008. This experience is worrying similar to that experience by Japan since the early 1990s in what now amounts to at least two ‘lost decades.’ Richard Koo has pop- ularized the idea of a ‘balance sheet recession’ in Japan, whereby businesses and consumers have engaged in continued deleveraging following a credit boom, keep- ing borrowing and resulting demand extremely low (Koo 2011, 2014a,b). Figure 1 taken from Summers (2014) shows the pattern of the contemporary Eurozone plot- ted against the Japanese experience from the early 1990s on. The parallels are stark and pessimism inducing.

6 efections on the ‘ew ecular tagnation ypothesis

Figure 2 Japan and the Eurozone, forecast vs reality

Japan and Euro Area, Forecast Versus Reality

150

14% Below Expectation Japan Actual 100 13% Below Expectation

(Log (Log Scale) Euro Actual (Japan) (Japan) and 2007(Euro Area) 100=1991

50 1983 1988 1993 1998 2003 2008 2013 2000 2005 2010 20 15

Sources: OECD 1992 “Long Term Prospects for the World Economy, IMF 2007 & 2014 WEO Database. Figure 1: GDP predictions and actuals in Japan and the Eurozone (Summers 2014) The experience of Japan in the 1990s and now that of Europe and the US suggests that

– for Accompanyingthe purpose of lowunderstanding growth rates and have combating been extremely important low fluctuations nominal interest– theories thatrates take which the average in turn level because of output of inﬂation and employment rates close toover zero a long have time meant period extremely as given arelow close real to interest useless. rates Unfortunately, and hence aalmost markedly all work low costin both of borrowingthe New Classical for those and with New Keynesiangood access traditions to credit has such focused as governments, on the second large moment corporations, (the variance) and consumer of output bor- and employment.rowers with This ample thinking collateral. presumes Low interest that, with rates or have without of course policy been intervention, at least in the workingspart a policy of the instrumentmarket will - independenteventually restore central full banks employment worldwide and coordinated eliminate output on gaps.reducing The only their questions ofﬁcial lending are about rates the to just volatility above of zero output during and 2009. employment Moreover, around the theirsame normal banks levels. have withWhat few hasexceptions happened keptin the rates last atfew that years extremely suggests low that level the since second momentthat date is second-order - the few attempts relative to raiseto the rates, first includingmoment – thethe ECBaverage in 2010 level and of theoutput Fed- and employmenteral Reserve through in 2015 time. have caused great consternation in the markets. Low nominal rates have been accompanied by bond-buying - the famous ‘quantitative easing’ - The ‘new secular stagnation hypothesis’ responds to recent experience and the to inject liquidity onto bank balance sheets and sustain investment demand. This manifest inadequacy of conventional formulations by raising the possibility that it has stimulated some lending but as noted below much has gone into asset markets may be impossible for an economy to achieve full employment, satisfactory growth, and financial stability simultaneously simply through the operation of conventional monetary policy. It thus provides a possible7 explanation for the dismal pace of recovery

29 rather than productive investment. Of further concern is the fact that low interest rates may not only be a policy output but may be a market equilibrium in that estimates of the ‘natural’ rate of interest as set by the market demand for and supply of loans have also pushed to near-zero levels. This can be seen in long-term lending rates not directly set by central banks, which once accounting for default and credit risk have also dipped to unprecedentedly low levels. Central bankers anxious about the weapon of interest rates being out of ammunition in a future recession have speculated about extra-extraordinary measures that might be employed, from helicopter money’, to negative interest rates, to the elimination of cash Haldane (2015). Figure 2 demonstrates the sheer magnitude of the long-run decline in interest rates across the OECD and the potential risks of incapacity faced by central bankers in future recessions. What is clear from the ﬁgure is that this decline has been decades in the making and is not simply a product of crisis-era policymaking. A second-order phenomenon associated with secular stagnation is the increased prevalence of asset bubbles. The argument, which borrows from early work by Ti- role (1985), is that when the real interest rate is especially low, even slow rates of economic growth can produce asset bubbles - the reason being that the return to capital r drops below the growth rate g. Presuming that people invest in them proportional to economic growth, assets in ﬁxed supply, from gold to real estate in constrained locations (the island of Manhattan, the M25 orbital, the San Francisco peninsula) can experience waves of speculative investment since the cost of borrowing to buy assets is lower than the growth rate. Hence ‘rational bubbles’ can emerge even when economic growth is anaemic by historical standards. The experience of the UK housing market is instructive - London property prices in 2016 were actually 49% higher in nominal terms than at their 2008 peak and 77% higher

8 Secular Stagnation: Facts, Causes, and Cures

The second is the degree to which real interest rates have increasingly moved together, as shown by the tight – indeed, increasingly tighter – interquartile range for individual country real interest rates in the figure. This suggests that one can, and actually must, think of a global interest rate, determined in a global market. The factors behind movements in the global real rate are the focus of this chapter.

Figure 1 Short- and long-term global real interest rates (% per year) 8 Interquartile range1 Global

0 1985 88 91 94 97 2000 03 06 09 12 Note: 1 The sample consists of: United States, United Kingdom, Austria, Belgium, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, Canada, Japan, Finland, Greece, Portugal, Spain, Australia, New Zealand. Global based on the FigureGDP-weighted 2: Real average. Interest Rates across 19 OECD Countries (Blanchard, Furceri and Source:Pescatori IMF (2014). 2014) Determinants of real rates

than their trough in 2009 (data taken from Hometrack). This enormous property To organise the discussion, a short (low-brow) theoretical detour may be useful. One boom, comparable to the housing boom a decade earlier that burst, has occurred at can think of the global real rate as being determined by four factors. The first three a time of stagnating economic growth of around one to two percent annually and determine the ‘natural’ or ‘Wicksellian’ rate, the real interest rate consistent with output with limited price inflation. Of course, much asset price inflation can be explained at potential, and stable inflation. The fourth, monetary policy, results in temporary by the emergence of quantitative easing as an extraordinary monetary policy but deviations from that rate. this too is related to secular stagnation in that it was employed as a way to try to Thepush first investment factor is theupwards supply to schedule meet the glut for loanableof savings. funds, namely global saving – assumingFigure output 3 demonstrates at potential. theShifts divergent in saving effects can be of induced low real by interest many factors, on residential including changescapital in versus current investment and expected capital. income, The changes figures in uses uncertainty lowess estimation that affect toprecautionary plot real saving,interest demographic rates at the changes, national financial level against innovations, house prices and shifts (as a ratioin public of rental saving. prices) and gross capital formation. On the left hand side we see that the pattern of rising

102and falling interest rates has been inversely connected to housing prices at least since 1990 and the secular decline in real interest rates. By contrast from 2000 on-

9 wards the negative relationship between real interest rates and gross capital formation has reversed - both indicators have been trending downwards since that time. In other words we now live in an era where interest rate declines only appear to feed into residential capital formation.

Figure 3: Real Interest Rates and Residential vs Gross Capital Formation 6 6 26 120 5 5 25 110 24 4 4 100 23 3 3 Real Interest Rate Real 90 22 2 2 21 1 1 80 1960 1980 2000 2020 1960 1980 2000 2020

House Price / Rent Real Interest GFGC Real Interest

2.2 The Causes of Secular Stagnation

If the recession was a catalyst but not the underlying cause of secular stagnation, what factors are important causally? Summers and other scholars in the literature emphasise four main factors. We discuss the most prominent formal model of secular stagnation (Eggertsson and Mehrotra 2014) below - it too demonstrates the impact of these four forces. Since secular stagnation encompasses both low

10 real interest rates and slow economic growth, the proposed causal factors break into those that push down the demand for credit or increase the supply of savings - both thereby lowering the interest rate - or focus on real factors pushing down trend growth net of the under-supply of investment created produced by the savings glut. As Teulings and Baldwin (2014) note there are some general dis- agreements among economists about whether secular stagnation is a demand-side phenomenon where the savings and investment market fails to clear or a supply- side problem where technological and institutional factors retard growth. We deal with each in turn. While we develop a simple political economy model below that focuses on only a few of these factors, a broader political economy account of secular stagnation should view all of the following factors as having political implications. In the next section we follow up on these.

Demand Side Factors

1. Demand Deleveraging and Credit Constraints

In common with most analyses of secular stagnation is a focus on the behaviour of indebted businesses and consumers post a financial crash. Eg- gertsson and Krugman (2012) have perhaps the best known contemporary model of deleveraging and they draw explicitly off the work of Irving Fis- cher and Richard Koo, as well as the Hyman Minsky, whose work on spec- ulation during financial booms has been an important rediscovery among economists in recent years. The problem of deleverage is that for individu- ally rational reasons, following a crash consumers and firms concentrate on paying off past debt rather than on accruing new debt. These reduces the demand for investment - since fewer people are seeking to borrow money to make investments, and increases the supply of savings. Both of these forces

11 should push down the real rate of interest consistent with market clearing. In a simple deleveraging model this produces problems if nominal interest rates are already low or if there is price deﬂation as the equilibrating real interest rate may not be reached and hence the economy may enter a liquidity trap. Things are even more problematic if there are credit constraints on younger borrowers since these limits on their borrowing may mean that the positive effect of real interest rates on planned consumption and investment fail to occur. Older savers continue to save but the young cannot absorb this excess saving by borrowing and output remains permanently low. For Koo (2014b) this pattern explains the failure of Japan to escape two decades of suboptimal growth - in essence the liquidity trap becomes permanent. The relative effect of deleveraging depends a good deal on government policies, in particular the degree to which credit becomes constrained for the young as a regulatory response to the crisis (for example, new restrictions on mortgage markets), along with other ﬁscal policies associated with austerity which may further constrain the consumption of younger citizens.

2. Demographic Slowdown

The problem of credit constrained younger borrowers not absorbing the savings of older citizens becomes even more pronounced when there are generational differences in population and income. Recent generations born since the late 1960s have been substantially smaller than the ‘baby boomers’ many of whom are currently entering retirement. The smaller size of this younger group and the ever-larger numbers of retired individuals have a number of consequences. Since borrowers tend to be younger and savers older, especially in countries where pensions tend to be from investments rather than

12 PAYG systems (Schwartz 2014), this amplifies the potential savings glut problem as the numebr of savers outweighs the number of borrowers. A second problem relates to the dependency ratio - if fewer citizens work in the private sector to support more people outside of employment this may reduce growth through its effects on aggregate employment. Of course if wages increased for younger people to mirror the scarcity of labour this might counteract this effect, provided it was accompanied with the necessary productivity growth. In reality neither has occurred - wages and productivity remain stagnant. A further problem, one perhaps more related to political economy concerns, is whether the balance of the fiscal burden is also becoming bi- ased toward older citizens - if demographic weight translates into political power, it should not surprise us that the tilt of government spending is towards older, better-off citizens whose rates of consumption are lower than the young. This has certainly been the pattern of spending in countries such as the United Kingdom, where pension benefits have been ’triple locked’ while public support for families with small children has declined.

3. Rising Inequality

Related in part to demographic changes, in that older already wealthier people have experience better income growth than younger people in the past decade, rising income inequality is also problematic in that it implies that wealthier citizens, whose propensity to save is high, are beneﬁting more from economic growth than poorer citizens, who consume more. A number of scholars have suggested that rising income inequality is reducing aggregate demand as the median citizen’s wages stagnate. ? and Kumhof and Ranciere (2010) have argued both informally and formally that rising economic in-

13 equality leads to credit bubbles as the supply of credit rises since wealthier citizens who save more are doing better and the demand for credit also rises as citizens with stagnating incomes struggle to keep up with ﬁxed bills and the rising costs of positional assets such as housing. This is particularly pronounced according to ? (for the US) and Ahlquist and Ansell (2017) (across the OECD more broadly) in countries with limited redistribution through the welfare state that might compensate poorer citizens for rising inequality. Following the credit crisis the supply of savings remains high because of inequality but the concomitant demand for credit has collapsed among the younger due to deleveraging and new institutional constraints on borrowing. Thus inequality has an independent effect on secular stagnation but deleveraging post the crisis worsens matters. Inequality may also, as we discuss below, amplify difﬁculties in developing policy responses to secular stagnation as it widens cleavages between old and young as well as rich and poor.

4. Low Cost Capital Goods

Finally, scholars have also pointed to the capital demands of major indus- tries, particualrly those in technology and the service sector more generally. Highly proﬁtable software companies, such as Facebook and Google, rely on network externalities for much of the value of their companies - that is their value is in the size of their user base, rather than produced by investing in capital goods to make new machinery. Such companies have fairly lower demand for new capital intensive investment and the capital goods they do buy, computer hardware, have been becoming systematically cheaper over the past few decades in part because as Moore’s Law indicates, superconduc-

14 tors are becoming ever smaller and more powerful while becoming cheaper. While this technological development may be good in terms of hedonic indicators of the quality of goods and services provided in pure numerical GDP terms it has a negative impact since the spending plans of these companies are lower.

Supply-Side Factors

1. General Productivity Slowdown In stark contrast to the demand-side consensus, some scholars, particularly Robert Gordon, have argued that secular stagnation, at least its growth effects, is a story of continued technological slowdown since 1970 (Gordon 2014a,b). As Gordon notes, his concern is with a slower long-term rate of potential growth itself, rather than Summers’ concern with the continued gap between actual and potential growth. Still like Summers, Gordon emphasises that demographic slowdown and rising inequality are both harmful for growth, albeit for supply-side reasons (reduced population growth crudely reduces national GDP, rising inequality prevents poorer citizens from realising their potential human capital) rather than because of their effect on the savings-investment nexus. For Gordon these are combined by reduced educational investment in many countries and the size of government debt, both of which lead to lower expected spending. Gordon argues that these issues were less dramatic during the early part of the technological slowdown, which he dates to 1970 but in their presence today the full negative effects of that continued technological slowdown are being felt ever more. Like the other secular stagnation scholars then he sees today’s malaise as long predating the credit crisis, though he argues it ultimately relates to the end of a century (1870-1970) of unrepeatable technological in-

15 novations.

2. Institutional Rigidities

Finally a number of economists, particularly based in Europe have argued that at least some of the causes of secular stagnation relate to rigidities in labour and product markets that create hysteresis in the labour market and reduce potential growth. Jimeno, Smets and Yiangou (2014) argue that along with demand-side problems identified above, Europe in particular requires reforms to financial market intermediation - in order to reduce the cost of capital - and to labor markets in order to lead to labor force reallocation (i.e. hiring and firing) that might better match workers to jobs. Finally, red-tape regulations for firms seeking to expand business or to enforce contracts are also highly constraining in some European product markets. These argu- ments are essentially a continuation of those made several decades earlier by Blanchard and Summers (1986) and Lindbeck, Snower et al. (1989) and may better reflect the conditions in Europe than elsewhere. Nonetheless they likely combine with some of the other causes identified above in ways that amplify these demand-side problems. They also have clear political economy connections related to institutional and partisan differences across the advanced industrial world.

3 The Political Economy of Secular Stagnation

What should political scientists take from the secular stagnation literature? How does thinking about the economy as going through this process alter what we be- lieve to be the most important cleavages. We argue that the secular stagnation hypothesis highlights a growing importance of demography and geography in

16 shaping political preferences and divides. Furthermore, in a world where political coalitions form around age and around place, it is not obvious that the types of policy solutions recommended by economists are likely to be politically viable. We begin with the demographic politics of secular stagnation. We noted above that many economists view the demographic slowdown of the past few decades, along with rising life expectancy, as a core cause of secular stagnation. This occurs due to the difference in savings rates - larger groups of older savers and smaller groups of younger borrowers has produced a mismatch in the savings-investment market. At first this imbalance lowered the natural real rate of interest but with interest rates already at nominal rates of zero (the lower bound) and with the presence of credit constraints on the young, in part imposed as a rational response to over-lending before the credit crisis - even low interest rates have not been suffi- cient to equilbrate this generational imbalance. This has produced a great deal of tension within both groups. From the perspective of the old, there has been great discontent about the low levels of return on their savings and a consequent panic about funding old age, which has produced greater demands for public support in terms of spending on pensions. Among the young, the inability to access credit and the low levels of demand in the economy, have meant the young have been excluded from booming housing markets (even with low interest rates), and face stagnating wages due to insufficient aggregate demand. What are the policy ramifications of this age-based divide? In many cases young and old have diametrically opposed preferences. Older citizens have de- manded higher expenditure on pensions to make up for low interest rates - younger citizens demand in-work and out-of-work benefits to make up for stagnating wages and low demand. In terms of the spending priorities of governments, the former appear largely to have won out, likely due to their demographic dominance in vot-

17 ing terms. In many countries, not least the US and UK, despite serious spending cuts since the financial crisis, old-age pensions and the healthcare of older citizens have escaped cuts - indeed in the UK have seen a substantial increase. Government cuts have fallen on benefits to working-age adults (cuts to tax credits in UK, future pensions rights in France, Medicare expansion in the US). Age is also becoming an ever-sharper dividing line in elections. The second political story is one of geography. Secular stagnation has produced a wave of asset bubbles as capital has surged into residential investment given the low returns to holding public debt or private investment capital. This has led to substantial housing booms that have been very asymmetrically distributed. Rather than house prices rising uniformly within countries, most OECD states have seen particular urban areas as the core beneficiaries of the boom, particularly that associated with quantitative easing since around 2012. This unevenness has driven the affordability of urban areas to new lows - creating windfall asset gains for for- tunate homeowners in those areas but creating substantial discontent among both urban renters and citizens who live outside such areas who have not benefited from these asset price surges. Growing resentment is thus occuring between rural and peripheral locations with low house prices, and often with high dependency ratios (due to both elderly citizens and their loss of working age adults to jobs in cities) and cities with high louse prices and low dependency ratios. Both phenomena are increasingly closely tied together as demographic differences correlate with geographical ones. What are the implications of these demographic and geographical splits for the policy environment, in particular for the types of policies that might aid an escape from secular stagnation? Recall that most economists concerned about secular stagnation recommend a major fiscal demand-side stimulus - targeted at public

18 investment and growth in the capital stock. However, both the demographic and geographical cleavages produced by secular stagnation may make this harder to achieve. On the demographic side, the cleavage between young and old, combined with the greater political power of the latter, pushes against this type of investment- driven fiscal expansion. Firstly, if generational splits cut across classic income divides, it is quite possible that a pro-expansionism coalition can fail to emerge, if for example, poorer old people are divided from poorer young people. Second, if older people are more dominantly politically, then the balance of what public spending there is will fall on benefits that acrrue to the elderly. In particular, this means spending on ‘social consumption’ such as transfers including pensions, and on healthcare spending. Little of this type of spending will have ‘investment’ benefits, not least because crudely the older members of the population are likely to live less long and hence fewer returns on investment will be accrued. Furthermore, the spending will go to a group of people who are on average net savers, potentially worsening the problems that underlie secular stagnation. On the geographic side, a similar dilemma to the cross-cutting problem of age emerges if geographic cleavages cut across income and class groups to prevent a spending coalition (in this case if poorer rural citizens cannot make common cause with poorer urban citizens). There are also some specifically geographic problems - for example, infrastructure spending is one obvious fiscal response to secular stagnation, yet infrastructure is almost always geographically limited and if geographic political splits are important it may fall afoul of inter-regional resentment. Of course one alternative would be to specifically target public investment at de- clining areas - yet this strategy may be anathema to higher tax revenue areas in the rising cities. Finally, residential asymmetries in house prices, driven by sec-

19 ular stagnation, may themselves prevent easy re-equilibration of the economy if workers from rural areas can no longer afford to move to cities where the jobs are. Attacking this problem however involves undermining the rents accrued by owners of expensive property, who will be incentivized to defend property values by maintaining stringent building and planning controls and opposing public housing. Once more, the winners under secular stagnation have little incentive to support policies that might beneﬁt the losers and push up aggregate demand. In sum, the politics of secular stagnation privilege new divides, particularly between young and old and between urban and rural areas. These cleavages cut across traditional classes and political parties. Moreover, the winners in these divides tend to oppose the types of policies that might end secular stagnation - hence a ‘political trap’ exists.

4 Secular Stagnation and Political Attitudes

4.1 Secular Stagnation at the National Level

We begin our empirical analysis by examining factors at the national level. As discussed above, secular stagnation is a broadly deﬁned concept produced by a number of different forces. Some of these forces are easier to measure than oth- ers and some are more or less variable across national contexts. For example, the global savings glut is a fairly consistent environment for most advanced industrial countries and hence does not provide helpful cross-national variation. Here we focus in particular on variation in fertility / birth rates where there are striking differences and where the connection to the prevalent demographic theories of secular stagnation is strongest. Lower birth rates should intensify secular stagnation as they reduce demand for credit and spending and increase the supply of savings

20 from older citizens. We also examine government spending and public debt, two commonly provided ‘supply-side’ stories for secular stagnation. Public debt levels provide at least one (imperfect) measure of the need for citizens and governments to engage in the kind of ‘debt deleveraging’ that prolongs secular stagnation. Our data comes from the the Comparative Study of Electoral Systems (CSES) Module IV (CSES 2015). The CSES is a consortium of national election study teams that collaborate on a common set of questions ﬁelded in national election studies. The fourth module includes elections in a number of countries from 2011 to 2015. In the CSES module, respondents are surveyed post-election, through a mail or telephone survey. To date, the CSES IV includes Australia, Austria, Taiwan, France, Germany, Greece, Iceland, Ireland, Japan, New Zealand Poland, Switzer- land and the United States (it also includes Thailand, Mexico, Serbia and Mon- tenegro, however, we have excluded these from our study). However, CSES questions were also used in additional election studies that have not yet been fully harmonised with the CSES. We harmonised the relevant variables from the following countries to match the CSES: the Netherlands 1, Norway 2, Canada 3 and the UK 4, giving us identical survey questions seventeen countries. Our core dependent variable is respondents’ subjective impressions of long-run economic prospects. The CSES asks respondents:

1Stichting Kiezersonderzoek Nederland SKON Centraal Bureau voor de Statistiek CBS Kolk (2012) 2”Norwegian Election Study, 2013”. The data are provided by Statistics Norway, and prepared and made available by the Norwegian Social Science Data Services (NSD). Neither Statistic Norway nor NSD are responsible for the analyses/interpretation of the data presented here. 3Fournier and 2011 (2011) 4Fieldhouse and Prosser (N.d.)

21 “Over the next ten years or so, how likely or unlikely is it that you will improve your standard of living? Very likely, somewhat likely, somewhat unlikely, or very unlikely?”

We dichotomise this measure, scoring as one those who see it is as very likely or somewhat likely that their standard of living will improve over the next ten years, and zero as those who think it is somewhat unlikely or very unlikely. While the above measure is egocentric rather than sociotropic, it has the advantage of mea- suring prospective economic beliefs over the long-run. While this may be problematic for older respondents, it the nonetheless captures beliefs about not only personal well being but the trajectory of the macro-economy. We also include as a control (not shown) a measure of personal assessments of respondents ﬁnancial situation over the coming year. In terms of individual level variables we focus in particular on age, education, and income. The CSES records household income by quintiles . We replicate this for the four additional studies, as well as the United States, which is missing income data in the CSES. 5 We also control for gender, having a university degree, and having not completed secondary school.6 Figure 4 presents country mean levels of economic optimism drawn as above from the CSES against the national fertility rate. A striking pattern - save for the

5We convert all original income data into raw amounts. Where family income is measured in categories, we use the mid-point of the threshold, scoring the bottom categories as 2/3 of the ﬂoor threshold and adding half the distance between the penultimate and top category to the top threshold. We then calculate the 20th, 40th, 60th and 80th percentiles using the weighted in-sample distribution of income. 6In some (unreported)speciﬁcations we also control for being unemployed, retired, or a student, as well as being a homeowner or stockowner.

22 Figure 4: Optimism and Fertility at the National Level

.7 USA Taiwan Iceland Norway .6 Ireland Australia Canada New Zealand

.5 UK

Netherlands Greece France .4 Switzerland Over 10 Over 10 Years Austria .3 Poland

Germany

.2 Japan % of Respondents % of Respondents Improvement Anticipating 1 1.5 2 2.5 Fertility Rate obvious outlier of Taiwan - is present: countries with higher birth-rates do appear to have higher levels of average optimism about future economic growth. Note that this figure does lack some of the most obvious candidates for slow birth rates, Italy, Spain and Portugal. Table 1 examines the determinants of individual economic optimism. We now a mixed effects model with random country intercepts ( we use a linear model in order to keep proper sample weights - results with a logit are similar). We add three country-level variables in turn : the birth rate, the national debt as a percentage of GDP and total government spending as a percentage of GDP. Model 1 only includes individual-level effects. Here we see that older people, women, poorer and secondary educated people are less positive about the economy over the coming ten years. Model 2 adds the national debt - here we find a negative effect of higher national debt, as anticipated by supply-side secular stagnation theory, but it is not statistically significant at conventional levels. Model 3 replaces the debt variable with government spending, which has a positive but insignificant effect. Model 4 replaces this with the birth rate which does have a statistically significant and positive effect on economic optimism. It is a large sub- stantive effect - a shift from the fertility rate of Japan to the USA ( 0.8 points) is associated with a move of around one between country standard deviation in economic optimism (0.16 points). Model 5 shows that this estimated impact of the fertility rate on individual economic optimism is robust to the addition of the other two national-level variables and national debt becomes more tightly measured with a negative relationship to economic optimism significant at the ten percent level. While this is a very cursory analysis of the connection between objective national indicators and subjective economic expectations it is at least supportive of the core conjecture argued above.

24 Table 1: Cross-National and Individual Determinants of Economic Optimism (1) (2) (3) (4) (5)

Age -0.011∗∗∗ -0.011∗∗∗ -0.011∗∗∗ -0.011∗∗∗ -0.011∗∗∗ (0.001) (0.001) (0.001) (0.001) (0.001)

Female -0.057∗∗∗ -0.057∗∗∗ -0.057∗∗∗ -0.057∗∗∗ -0.057∗∗∗ (0.010) (0.010) (0.010) (0.010) (0.010)

Primary Education 0.049 0.049 0.049 0.049 0.049 (0.038) (0.038) (0.038) (0.038) (0.038)

Degree 0.028∗∗ 0.028∗∗ 0.028∗∗ 0.027∗∗ 0.027∗∗ (0.014) (0.014) (0.014) (0.014) (0.014)

Income Quintile 0.022∗∗∗ 0.022∗∗∗ 0.022∗∗∗ 0.022∗∗∗ 0.022∗∗∗ (0.008) (0.008) (0.008) (0.008) (0.008)

National Debt -0.001 -0.001∗ (0.001) (0.000)

Government Spending 0.004 -0.000 (0.008) (0.008)

Birth Rate 0.207∗∗ 0.210∗∗ (0.090) (0.092)

Constant 0.980∗∗∗ 1.054∗∗∗ 0.895∗∗∗ 0.626∗∗∗ 0.702∗∗∗ (0.068) (0.060) (0.176) (0.176) (0.137)

Observations 26121 26121 26121 26121 26121 5 Secular Stagnation at the Subnational Level

5.1 Regional Patterns of Dependency and Political Attitudes

We begin our analysis of the subnational level by examining how the age distribution alters attitudes towards democracy and support for radical right parties (the latter being a measure of dissatisfaction with the status quo). We use the CSES as above but now turn to political dependent variables - in particular we examine two binary variables - a question asking whether the respondent is satisfied with the way democracy works in their country and a binary variable signaling whether they voted for a radical right party in the last election. Our independent variable of interest is a measure of the dependency ration at the NUTS2 regional level for countries in the CSES. This differs from the national fertility rate used in the analysis above. Fertility at the subnational level is not an especially useful indicator given that many people move across NUTS2 regions in the same country so economically booming areas may be taking in populations from areas with low economic growth but high fertility. Instead we use the measures of the regional dependency ratio - calculated as the proportion of the population out of working age (15-65) divided by the proportion of the population of working age. We anticipate the strains of contemporary democracy to be particularly large in regions with a high dependency ratio that lack a large working age population. We also use an indicator for the regional change in the dependency ratio over the past five years. We use both linear probability and logit specifications with country fixed effects (not shown) and standard errors clustered by region. The tables show some quite striking relationships. In Table 2 we examine satisfaction with democracy. Models 1 through 3 use a linear probability model and

26 Table 2: Satisfaction with Democracy and the Dependency Ratio (1) (2) (3) (4) (5) (6)

Female -0.008∗ -0.008∗ -0.008∗ -0.047∗ -0.046∗ -0.046∗ (0.005) (0.005) (0.005) (0.025) (0.025) (0.025)

Age 0.001∗∗ 0.001∗∗ 0.001∗∗∗ 0.003∗∗∗ 0.003∗∗∗ 0.003∗∗∗ (0.000) (0.000) (0.000) (0.001) (0.001) (0.001)

Degree 0.040∗∗∗ 0.042∗∗∗ 0.042∗∗∗ 0.248∗∗∗ 0.259∗∗∗ 0.258∗∗∗ (0.009) (0.008) (0.008) (0.056) (0.051) (0.051)

Secondary 0.038∗∗∗ 0.040∗∗∗ 0.040∗∗∗ 0.189∗∗∗ 0.201∗∗∗ 0.202∗∗∗ (0.008) (0.007) (0.007) (0.036) (0.035) (0.035)

Log GDP 0.014 0.045∗ 0.042 0.077 0.250∗ 0.247 (0.029) (0.025) (0.035) (0.139) (0.146) (0.192)

Dependency Ratio -0.340∗ -0.030 -1.882∗∗ -0.034 (0.178) (0.172) (0.824) (0.892)

Ch. Dependency Ratio -0.406∗∗ -0.393∗∗ -2.331∗∗∗ -2.315∗∗ (0.166) (0.180) (0.873) (1.051)

cons 0.651∗ 0.160 0.202 0.606 -2.147 -2.102 (0.371) (0.267) (0.438) (1.728) (1.575) (2.399)

N 50525 50525 50525 50525 50525 50525

Region clustered standard errors in parentheses ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01 Table 3: Right Populist Voting and the Dependency Ratio (1) (2) (3) (4) (5) (6)

Female -0.027∗∗∗ -0.028∗∗∗ -0.028∗∗∗ -0.397∗∗∗ -0.399∗∗∗ -0.399∗∗∗ (0.004) (0.004) (0.004) (0.037) (0.037) (0.037)

Age -0.000∗∗∗ -0.000∗∗∗ -0.001∗∗∗ -0.006∗∗∗ -0.006∗∗∗ -0.006∗∗∗ (0.000) (0.000) (0.000) (0.002) (0.002) (0.002)

Degree -0.064∗∗∗ -0.065∗∗∗ -0.065∗∗∗ -0.965∗∗∗ -0.987∗∗∗ -0.980∗∗∗ (0.007) (0.007) (0.007) (0.053) (0.056) (0.055)

Secondary -0.019∗∗∗ -0.020∗∗∗ -0.020∗∗∗ -0.315∗∗∗ -0.324∗∗∗ -0.324∗∗∗ (0.006) (0.006) (0.006) (0.058) (0.056) (0.056)

Log GDP 0.050∗∗∗ 0.013 0.027∗ 1.022∗∗∗ 0.375∗ 0.658∗∗∗ (0.015) (0.014) (0.015) (0.228) (0.203) (0.203)

Dependency Ratio 0.340∗∗∗ 0.167∗∗ 6.500∗∗∗ 3.061∗∗ (0.082) (0.082) (1.304) (1.408)

Ch. Dependency Ratio 0.263∗∗∗ 0.196∗∗∗ 4.958∗∗∗ 3.668∗∗∗ (0.064) (0.066) (1.282) (1.411)

cons -0.437∗∗ 0.118 -0.103 -14.546∗∗∗ -4.548∗∗ -9.020∗∗∗ (0.177) (0.157) (0.176) (2.839) (2.178) (2.554)

N 58857 58857 58857 43019 43019 43019

Region clustered standard errors in parentheses ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01 Models 4 through 6 use a logit model. In all cases men, older citizens, and more educated citizens are more satisfied with democracy. National income has an in- consistent effect, though positive where there are statistically significant relationships. The regional dependency ratio and in particular the change in the ratio are both negatively related to satisfaction with democracy. The latter variable is the only one to remain significant when both are included, suggesting recent changes matter more than do levels. In Table 3 we see that the regional dependency ratio also appears related to right-wing populist voting, albeit this case with a positive relationship. Regions that both have higher dependency ratios or whose ratios are increasing become more likely to support right wing populists. It is worth noting that not every country has these kinds of parties meaning that in the logit models 4 through 6 our sample is reduced, though the effect is still significant. Note that these analyses control for national levels of dependency and radical right support - it is regions within countries that we are examining. Putting these two tables together we see that regions with lower working age populations appear to be the ones less satisfied with democracy or the established parties on offer. If regions really are drifting apart for the demographic and geographic reasons outlined in the theory section, this implies further profound po- larisation across regions as secular stagnation takes hold.

5.2 Secular Stagnation and Voting

We argued above that secular stagnation is producing important new cleavages within countries - dividing cities that have been booming in part due to secular stagnation-induced housing bubbles from rural areas with older populations and stagnant housing markets. In the absence of sufﬁcient growth (or indeed private

29 or public capital investment), peripheral areas have sunk into quite profound economic decline, accompanied by growing political resentment. In this section we use data from the Brexit referendum and the French presidential election of 2017 to demonstrate the importance of these divides. We begin with the Brexit referendum of June 2017. Elsewhere Ansell (2017) shows that house prices are a core predictor of the Brexit vote. Here we expand to examine not only house prices but also a number of other demographic predictors that relate closely to secular stagnation - namely the dependency ratio, and changes in the industrial composition of different areas. Our dependent variable in these analyses is the relative support for Remain (which of course was the losing side 48-52 in the ﬁnal vote) at the level of the local authority district (LAD) - a subnational unit that covers most local government services in the United Kingdom. We only have data for England and Wales so omit Scotland and Northern Ireland from the analysis. This leaves us with 348 English and Welsh LADs which include London boroughs, county divisions, and a number of sizable towns and cities. The average electorate size of these LADs is 118,000 people with a standard deviation of 75,000. Our core independent variables relating to secular stagnation are housing prices, the dependency ration, and the structure of industrial employment at the LAD level. For the former we use Land Registry data from 2015 (i.e. the year before the Brexit vote) which provides ﬁgures for the median sold house price in that local authority in UK pounds. We take the log of house prices in order to avoid the skew otherwise induced by London house prices. For the dependency ratio we use the sum of under 15 and over 65 people over the working age population in the local authority. Here we focus on the dependency ratio not the fertility rate itself since people are quite mobile across local

30 authorities over their lifetime. Our concern is not with fertility rates per se but rather the splitting of populations into those actively in work and those outside of work, and the splits in political preferences induced by this at the regional level. For industrial structure, we are interested in whether the general decline of manufacturing associated with secular stagnation is correlated with antipathy towards Brexit - we use here the percentage of employment in the manufacturing sector in the local authority. Our expectations are that we should age, housing, and industrial structure as important cleavages in the Brexit vote, particularly to the degree that this vote in part reﬂected a referendum on the state of political and economic satisfaction with the British consensus of the post 2000s period, during which secular stagnation has deepened. To examine this we run a linear regression on support for Remain with the aforementioned variables as predictors, along with measures of unemployment ( proxied for by the Job Seekers Allowance uptake rate), income (proxied for by weekly pay), the change in the class structure of the area (proxied for by decadal changes in the proportion of working and middle class citizens), the size of the LAD’s electorate, the proportion of non-UK born residents, and the decadal change in that value. Finally we also include dummies for nine of England and Wales’ regions (leaving the East as the missing category), though we omit these from the table. Table 4 shows the results.

31 Table 4: Determinants of Voting Remain in the UK Brexit Referendum 2016

(1) (2) (3) (4) (5)

Log Median House Price 19.601∗∗∗ 17.758∗∗∗ 16.862∗∗∗ (1.295) (1.188) (3.386)

Dependency Ratio -38.696∗∗∗ -40.540∗∗∗ -29.612∗∗∗ (11.780) (6.144) (6.874)

Manufacturing -132.067∗∗∗ -48.244∗∗∗ -43.229∗∗∗ (18.955) (9.342) (5.525)

JSA Rate -1.455 (1.249)

Weekly Pay -0.004 (0.007)

Change in Working Class -14.618∗ (6.842)

Change in Middle Class -4.205 (3.130)

Electorate Population 0.165∗∗∗ (0.044)

% Non UK Born 6.827 (6.619)

Growth Non UK Born -1.030∗∗∗ (0.285)

Observations 348 348 348 348 338

Region-clustered standard errors in parentheses: ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01 Region Dummies included but not shown. All three of the secular stagnation related variables are strong predictors of the Brexit vote. House prices have a strong positive relationship with voting for Re- main: a log point change in house prices (for example from £150,000 to £400,000) is associated with a dramatic sixteen to twenty point increase in support for Re- main across local authorities. Put simply, people in cities, especially those in the South-East with their booming asset markets in the era of secular stagnation, were much more satisfied with the British consensus than those in stagnating areas that did not benefit from these asset bubbles. As for the dependency ratio, it has a strong negative relationship with support for Remain - where the working age population was relatively smaller, local authorities were stronger supporters of Brexit. A standard deviation shift upwards in the ratio (around ten points) is associated with a three to four percent decline in support for Remain (conversely increased support for Brexit). Finally, with regard to industrial structure, local authorities with high propor- tions of people in manufacturing were also more likely to support Brexit (less likely to support Remain). Here a standard deviation increase (four percent points) in the proportion of people working in manufacturing is associated with a 1.5 to 5 percent lower vote count for Remain. When we turn to the remaining variables what is quite striking is that the typ- ical types of income variables that we might think of as defining traditional class politics - income, unemployment, and class structure, do not appear strong predictors of the Brexit vote (with a borderline significant exception for change in working class population). The only other strong predictors are the population of the local authority’s electorate (itself strongly correlated with the urban/rural split we saw play out with house prices) and the recent change in migration in the district (suggestive of the types of group identity concerns highlighted in Kaufmann

33 (2016)). Recall also that we are controlling for regional dummies so none of these results are simply ‘London’ effects - these patterns are within-region. Figures 5 and 6 demonstrate the magnitude of the effects of house prices and the dependency ratio, net of the effects of the control variables (i.e. these are added variable plots).

Figure 5: Remain Vote and Log House Prices

Hackney HaringeyLambeth

Malvern Hills Brighton and Hove Cambridge St Albans Norwich SouthLewes Cambridgeshire 10 Lewisham RutlandWaverley WestRushcliffe OxfordshireBarrow-in-FurnessSouth Lakeland Islington LiverpoolSouthwarkNorthBlaenauRichmond Hertfordshire Gwent upon Thames HighBabergh StroudPeakOxfordWinchesterMelton SouthGwynedd NorfolkNorth Norfolk WarwickKnowsleySouth HamsWandsworthCamden Kensington and Chelsea WirralWest LancashireCaerphillyWolverhamptonRedditch Hammersmith and Fulham Vale of WhiteWest HorseIsle Dorset ofBristol, AngleseyChichester CityBoston of TraffordCorby HastingsEast CambridgeshireSouthRyedaleMendipCheltenhamSefton OxfordshireStratford-on-Avon Chiltern TunbridgeEast WellsSt HampshireKirklees EdmundsburyWokingBirminghamAllerdale DarlingtonBlackburnMid SuffolkLeicester BradfordwithBedfordWorcesterNorthumberlandGatesheadDerbyshire DarwenKingstonHorsham DalesElmbridge uponNorthSouthUttlesford Hull, East Tyneside City Lincolnshire of Suffolk CoastalBroadlandNottinghamHuntingdonshireCalderdaleWaveneyWestRother DevonSouth SomersetStockportWycombeCotswold Merthyr TydfilMidHambletonWalthamCherwell Herefordshire,DevonWorthing ForestAdur County of BathWokinghamMertonShropshireTestPowys Tewkesburyand ValleyForest HartNorthEalingWychavon Eastof ThanetDean SomersetSandwellMaldon Isle of MidHarrogateWightAmberWest SussexNorth Lindsey Valley LincolnshireMoleCheshire Valley WestDacorumBromsgrove and Chester BroxtoweYorkLincolnBarnetWyreWealdenHarborough ForestErewashHalton East HertfordshireCheshire East Westminster ReadingIpswichTauntonPendleWest EastleighDeaneBerkshireBrecklandEastTelfordNorth DevonSheffieldSouthend-on-Sea Tyneside andSouthWindsorChelmsford WrekinSolihull BrentKesteven and NewportMaidenhead GedlingCopelandScarboroughAylesburyFarehamNorthTeignbridgeNorth Dorset ValeNewGuildford West ForestWellingborough LeicestershireTandridge 0 EastbourneDerbyCountyKingstonBasingstokeOadbyNewark ChesterfieldDurhamNorth Eastupon andSouth Fyldeand StaffordshireSomersetWigstonThamesandSunderlandSelbySt. SherwoodDerbyshire Deane HelensTorridgeCardiffValeFlintshireEast ofThree Glamorgan Dorset Rivers South Bucks TowerPeterborough HamletsManchesterEnfieldNuneatonCanterburyNorthKettering Central andDevonWalsall BedworthMonmouthshireSurrey BedfordshireEpsom SevenoaksHeath andHertsmereWrexham Ewell RhonddaKing'sStaffordHyndburnRugbyDenbighshireColchester Cynon LynnMilton andEast Taf Keynes West NorthamptonshireStevenageRedcarBuryAshford NorfolkSwaleChorleyWatford andHavantSouthLeedsArun Cleveland Northamptonshire RichmondshireGreenwichBurnleyLancasterEastTendring RidingLichfieldCharnwoodPembrokeshire ofPurbeckSouth Yorkshire RibbleTorfaenDaventry NewcastleCarmarthenshirePrestonWeymouthReigate uponMiddlesbrough Stockton-on-TeesTyne and andBolton Banstead PortlandChristchurchAshfieldDudley CroydonGosportConwyDoverStaffordshireExeterGloucesterShepway MoorlandsRossendaleWarringtonRochdale Poole CoventryNeathGreatNewcastle-under-LymeLuton PortYarmouth CarlisleTalbotSouthSedgemoorPlymouthHinckley SouthGloucestershireBridgendMansfieldTonbridgeBraintree WiltshireStaffordshireandTamesideRotherham Bosworth and Malling SouthamptonStoke-on-TrentSwindonPortsmouthNorthEast KestevenLindseyOldhamTorbayBlackpoolNorthampton RedbridgeSwanseaBromleyMaidstoneWelwynHartlepool Hatfield Forest HeathFenlandBarnsleyBlabyHarrowBassetlaw BolsoverWyre BracknellCannockSalford Forest ChaseDoncasterSouthWigan Holland RushmoorWakefieldMedwayBournemouthBrentwood SloughNorth Warwickshire Harlow Epping Forest Remain vote (residual) Remain Gravesham Rochford -10 Sutton Crawley Broxbourne Basildon HounslowNewham TamworthRunnymedeSpelthorne Barking and Dagenham Dartford BexleyHillingdon Thurrock

Havering -20 -.5 0 .5 1 Log Median House Price (residual)

To demonstrate that these patterns are not solely a British phenomenon, we brieﬂy turn to the case of the French Presidential election of 2017. Here we show that the gap between the ﬁrst-round vote for Emmanuel Macron (the cosmopoli- tian reformist candidate) and Marine Le Pen (the radical right, anti-system candidate) also appears to have been related to housing prices, as was the case with Brexit. Figure 7 shows the percent point difference between votes for Macron and Le Pen, arrayed against house price changes at the departement level between 2007 and 2017. Again, we see an intriguing split across geographical regions. While the

34 Figure 6: Remain Vote and the Dependency Ratio

Lambeth HaringeyNorwich Brighton and HoveCambridge Hackney GwyneddLewisham High Peak Malvern Hills 10 Caerphilly OxfordLiverpool Lewes HastingsWest OxfordshireSouth CambridgeshireSouth Norfolk StroudRushcliffe HuntingdonshireWinchesterSouthwarkWarwickVale of WhiteBabergh Horse WorcesterBristol, CityNottingham of RyedaleBlaenauKnowsley Gwent Lincoln CheltenhamMeltonEastNorthMidMendip Barrow-in-FurnessCambridgeshireSuffolk HertfordshireSouthRutlandWirral Lakeland WandsworthRedditchWestIpswichMerthyr DevonRichmond TydfilTunbridgeSouth uponBroadland Hams Wells Thames SuffolkNorth Coastal Norfolk PowysHambletonMid DevonIslingtonReading Sefton Darlington Waltham ForestCherwellCamdenBedfordWestBlackburnSouth LancashireLeicesterCalderdale IsleOxfordshire with of AngleseyDarwenWest Dorset SouthamptonExeter KingstonBath and upon North Hull, EastEastleigh City SomersetShropshire StaffordofWokingYorkEastBostonMerton BroxtoweHampshirePendle Waverley AylesburyHerefordshire,RichmondshireKingstonLancaster Vale uponPeterborough MidCountySouth ThamesWestSussexNorthumberland Somerset DerbyshireofTestWorthing BerkshireCopelandGedlingKirklees ValleyGatesheadSt DalesAlbans Waveney CanterburyPreston ColchesterAmberFareham CountyValleyBarnetSt Durham EdmundsburyWokinghamIsleWolverhamptonTaunton Derbyof Wight BradfordDeane PortsmouthNewcastleStevenageEast upon TelfordStaffordshireUttlesford TyneErewashAllerdaleForest andManchester Wrekin Chesterfieldof DeanEalingHarrogateRhonddaHyndburnTewkesburyHartHorshamCorby Cynon Taf Chichester HammersmithSouth and Derbyshire FulhamBasingstokeSheffieldWestGosportHarboroughWyre BurnleyCroydonand LindseyWealden DeaneForestScarboroughStratford-on-Avon GloucesterChelmsfordGuildfordSunderlandSouthend-on-SeaSwindonNewarkNorthNorthSelby andTeignbridge StockportDorset LincolnshireGreenwich SherwoodHaltonAdurBrecklandTrafford EastbourneRother 0 EastNewcastle-under-LymeWeymouth HertfordshireCarlisleCharnwood andNorthMaldon Portland SouthEast Lincolnshire TynesideCoventryNorthWychavonMiltonWycombe Tyneside KeynesDenbighshireBirminghamRugbyTower Hamlets Central BedfordshireChorley NorthCotswold St.Devon HelensCarmarthenshireNorth SomersetOadby and Wigston SurreyPlymouth HeathMiddlesbroughCheshireDacorumCardiffReigateTorridge WestSwale andSouth and Banstead Chester KestevenNeath PortLutonDover TalbotThanet Tandridge StaffordshireNorthFlintshireNuneaton West Leicestershire MoorlandsAshford andLichfieldGreat BedworthKing'sStoke-on-TrentKettering BuryYarmouthMole Lynn Valley and WestEnfieldFylde NorfolkEast Devon Rushmoor Epsom andSouthRossendale EwellPembrokeshire RibbleBromsgroveFenlandWatfordNorthEast Kesteven RidingBrent Sandwellof Yorkshire Conwy SouthBraintree GloucestershireStockton-on-TeesMansfieldCheshireLeedsBoltonForest HavantEastEast HeathWalsall NorthamptonshireSolihullNew Forest Elmbridge CannockBracknell ChaseWelwynSouth ForestBassetlaw Hatfield StaffordshireThreeMaidstoneValeRochdaleBromley ofRiversMonmouthshire GlamorganSwanseaRedcarSedgemoorNewportBlabyWindsorWellingborough andPurbeckShepway Cleveland and Maidenhead Chiltern BlackpoolBolsoverAshfieldBarnsleyWarrington EastRedbridge Lindsey Bournemouth HinckleySuttonTamesideDaventryNorthamptonDudleyHertsmere TorfaenandSevenoaks BridgendBosworthOldhamTorbay Tendring Kensington andMedway ChelseaNorth WarwickshireWrexhamTonbridgeSouthSalford WiltshireNorthamptonshire and Malling WestminsterRotherhamHartlepoolHounslow Harrow Arun TamworthCrawley Poole WyreSlough BrentwoodWiganDoncasterWakefieldNewham East Dorset Runnymede Gravesham South Bucks

Remain vote (residual) Remain Bexley Harlow South Holland -10 DartfordSpelthorneRochford Hillingdon Barking and DagenhamChristchurch BroxbourneBasildon Epping Forest Havering Thurrock

-20 -.2 -.1 0 .1 .2 Dependency Ratio (residual)

role of Paris and its environs is important, the relationship, as was the case in the UK outside of London, also appears more broadly.

35 Figure 7: Macron vs Le Pen 1st Round Presidential Vote and House Price Changes

30 Paris

Hauts-de-Seine

Ille-et-VilaineYvelines Val-de-Marne Finistère Loire-Atlantique Pyrénées-Atlantiques Côtes d'Armor MorbihanLot Seine-Saint-DenisRhône 10 CorrèzeDeux-SèvresMaine-et-LoireMayenneAveyronPuy-de-DômeEssonneHaute-Garonne Haute-VienneVendéeCantal Val-d'Oise Gironde Hautes-PyrénéesLandes Vienne Indre-et-Loire Haute-Savoie CharenteMancheCalvadosGers LozèreCreuseIsère Charente-Maritime Allier Côte-d'OrSavoie Dordogne 0 LoiretHaute-LoireSeine-et-MarneHautes-AlpesTarn Loire Sarthe DoubsAriège Ardèche Saône-et-LoireNièvreOrneCherDrômeJura Ain Bas-Rhin Seine-MaritimeMeurthe-et-MoselleIndreEure-et-LoirLoir-et-CherLot-et-Garonne Alpes de Haute-ProvenceHérault Territoire-de-BelfortTarn-et-Garonne MoselleMarneHaut-Rhin Bouches-du-RhôneAude Haute-CorseNord YonneEureVosgesSommeAlpes-Maritimes -10 GardOise Corse-du-Sud Aube Pyrénées-OrientalesVaucluseHaute-Saône Macron - Le Pen Vote- Pen Le Macron Differential VarMeuse Ardennes Haute-MarnePas-de-Calais Aisne -20 .8 1 1.2 1.4 1.6 Ratio of House Prices (2017/2007) 6 Conclusion

This paper has provided a preliminary set of theoretical and empirical explorations of the political economy of secular stagnation. Clearly at this stage more questions and uncertainties prevail than answers! However, we think our initial foray into this question has unearthed some intriguing hypotheses that have met some support in cross-national survey data. In particular we have argued that secular stagnation - that is a period of lowered economic expectations that becomes self-fulﬁlling and produces a credit glut - should have implications for the economic and political attitudes of different individuals as divided by their ages and by where they live. We have seen that secular stagnation produces substantially less economic optimism at the national level, which likely feeds into greater political polarization as the pie fails to grow. At the subnational level we saw an increasing dissatisfaction with the political status quo deﬁned by age and geography. In particular in those regions, both across the CSES and in the Brexit vote, dominated by elderly and non-working age populations, satisfaction with democracy was lower and there was substantial support for populist right-wing parties and (in the case of Brexit) propositions. In the latter case, as well as in France, this geographic pattern was reinforced by house prices - with high house price areas ones of satisfaction with socially and economically liberal policies and low high house price areas more supportive of populism. While we do not provide direct evidence on this proposition in this piece, if these geographical and demographic patterns continue to hold, secular stagnation ought to be particularly tough for proponents of social investment spending such as education which tends to be least preferred by older citizens. Similarly in-

37 vestment in infrastructure is unlikely to be popular unless it is targeted outside of core urban regions. Yet If social and public investment really does produce higher growth, reductions in it may further prolong secular stagnation. So a political trap around social investment emerges - the type of spending best able to extract countries from secular stagnation may be the least likely to occur. Hence a micro-macro disjuncture between what individuals desire and what emerges as an equilibrium policy can lock in secular stagnation.

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