of secular stagnation and focusing policy debates on the challenges it poses. For more information on our comment policy, see Well finally Mr. Summers is waking up to the fact that the world changed. The proper task of macroeconomists, it followed, was to use monetary and fiscal policy to manage demand well. Together with the current price of long-term bonds, this suggests that the kind of Japan-style stagnation that has plagued the industrial world in recent years may be with us for quite some time.Not all economists are sold on the secular stagnation hypothesis.

By stimulating growth and enabling an inflation increase that would permit a reduction in real capital costs, fiscal expansion now would crowd investment in rather than out. “There is increasing concern that we may be in an era of secular stagnation in which there is insufficient investment demand to absorb all the financial savings done by households and corporations, even with interest rates so low as to risk financial bubbles.”“Secular Stagnation? Yet long-term interest rates are still remarkably low, with ten-year government bond rates at around two percent in the United States, around 0.5 percent in Germany, and around 0.2 percent in Japan as of the beginning of 2016. Is there a basis for believing that equilibrium real interest rates have declined? If you go back to the Alvin Hansen [“We now have a kind of embarrassing overabundance of explanations for the decline in the neutral rate [the interest rate that will prevail when the economy is at full employment and price stability]. But both the timing and the scale of capital export from emerging markets make it unlikely that it is the principal reason for the major recent declines in neutral real interest rates.Krugman and some others have sought to explain recent events and make policy recommendations based on the old Keynesian concept of a Perhaps the most comforting alternative view is that secular stagnation may have indeed occurred in the past but is no longer operating in the present. Larry Summers is doubling down on his secular-stagnation hypothesis. The Harvard economist and former Treasury secretary first offered the bleak diagnosis in November 2013 at an International Monetary Fund conference. Sorry, your blog cannot share posts by email. Views expressed in the comments do not represent those of Reuters. Looser money, starting with near-zero capital costs, is likely to generate demand primarily through increases in competitiveness. The Harvard economist and former Treasury secretary first offered the bleak diagnosis in November 2013 at an International Monet… Gordon is likely right that over the next several years, the growth in the potential output of the American economy and in the real wages of American workers will be quite slow. Today, he is more convinced than ever that secular stagnation is the defining economic problem of our time—one that won’t be easily defeated as long as fiscal authorities are overly preoccupied with debt and central bankers are overly focused on keeping inflation at low levels.Here are edited excerpts of Mr. Summers’s observations from our exchange.“When I made my comments in 2013 at the IMF they were couched with very substantial doubts. You are now the old soviet union and will soon be the middle east, more like Iraq. These include (i) reduced investment demand, due to slower labor force growth and perhaps slower productivity growth; (ii) reduced consumption demand, due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital; (iii) on a global basis increased savings and increased risk aversion, as governments accumulate trillions in liquid reserves; (iv) the continuing effects of the financial crisis, including greater costs of financial intermediation, higher risk aversion, and continuing debt overhangs; (v) continuing declines in the cost of durable goods, especially those associated with information technology, meaning that the same level of saving purchases more capital every year; and (vi) the observation that any given real interest rate translates into a higher Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. It is tragic, therefore, that in the United States today, federal infrastructure investment, net of depreciation, is running close to zero, and net government investment is lower than at any time in nearly six decades.It is true that an expansionary fiscal policy would increase deficits, and many worry that running larger deficits would place larger burdens on later generations, who will already face the challenges of an aging society. Lawrence Summers.

It seems more logical to see the debt buildups decried by Rogoff as not simply exogenous events but rather the consequence of a growing excess of saving over investment and the easy monetary policies necessary to maintain full employment.Gordon, meanwhile, has argued for what might be called supply-side secular stagnation—a fundamental decline in the rate of productivity growth relative to its golden age, from 1870 to 1970. Before turning to policy, though, there are two central issues regarding the secular stagnation thesis that have to be addressed.Is not a growth acceleration in the works in the U.S. and beyond? Next Post » Larry Summers, Secular Stagnation, and the Great Investment Drought ... secular stagnation.