Stagnation Theory: Alvin Hansen

Alvin was born in 1887. He worked as professor of Economics at Harvard. He was a well read professor on matters of current economic issues. He had a great influence on the government of the day. That is how he was able to help in creating the Council of Economic Advisors as well as the popular Social Security System.

Alvin is credited for having introduced Keynesian economics to the US. This was in the 1930s. He was more determined than any other person to make popular the ideas of Keynes. He graduated for his economics degree in 1918 from University of Wisconsin. Immediately after his doctorate, he worked at Brown University. In 1923 he was became a professor at the University of Minnesota where he was an expert in matters of business cycle. Later in 1937, he became a professor of Political Economy at Harvard University in the United States.

In the beginning Hansen was very skeptical about Keynes’s works: The General Theory of Employment, Interest Rates and Money. This point of view changed drastically when in 1938 he embraced those ideas. As Keynes did, he also supports government intervention during times of economic recession. Many great economists were inspired by the works of Hansen. On the top of the list is Paul Samuelson as well as James Tobin. These two economists ended up winning Nobel Prices. The two had build on Keynesian economics.

The most powerful contribution to economics was the IS-LM model. Another name for that model is the Hicks-Hansen synthesis. This is a model that is used to illustrate on how monetary and fiscal policies can be used to make changes to the national income.

Stagnation Thesis

Hansen had a belief that secular stagnation had been reached and the American economy would never have a chance to grow fast as before. This was because he believed that all the ingredients of growth had been exhausted. America had reached its optimum in terms of population growth as well as technological innovations. This thesis became extremely controversial and attracted many critics. Hansen was therefore labeled a pessimist as well as a defeatist. He further proposed that the sole solution was huge deficit spending by the federal government on a regular basis.

In his efforts to defend his ideas, he said that secular stagnation thesis was just another name the underemployment equilibrium used by Keynes. After 1940 when America started experiencing growth, the stagnation thesis was discarded.

Hansen played a great role in shaping public policy. He played a central role more especially during the Truman and Roosevelt reign. He explained his economic principles as a member of various governmental commissions and being a consultant to the Federal Reserve Board, National Resource Planning Board as well as working with the United States Treasury.