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Do you feel slow? Having trouble achieving and sustaining productivity growth? Does it feel like investing will never go up? You may be experiencing secular stagnation.
Symptoms include persistently low interest rates and weak inflation. Also mediocre economic growth, despite a diet with huge deficits and cheap credit.
It may be time to consult a former US Treasury Secretary.
In 2013, Larry Summers gave a speech at the International Monetary Fund with an explanation of how it seems like there is no end to the sluggishness of the economy. Summers, who is currently a professor at Harvard Kennedy School, has been the U.S. The Treasury Secretary, the president of Harvard, the head of the National Economic Council – and we could go on. Ever since this talk by the IMF, he has used his microphone to say that we are witnessing a period of "secular stagnation." It is a term coined by an economist, Alvin Hansen, in the 1930s. We talked to Summers about it. This question and answer is edited for clarity.
In 2013, you resurrected this rather insane and obscure term, secular stagnation, from the 1930s. Firstly, in clear words: what is secular stagnation?
Secular stagnation is a situation where the private sector in an economy tends to save a lot and a limited propensity to invest, so it is all this money that needs to be absorbed and trouble absorbing it . Interest rates fall to low levels. Growth tends to be slow and inflation tends to slow. And it is not a temporary business cycle. It is a secular or longer term, unless the policy intervenes greatly.
So, on important measures – and I mean we hear this all the time – the economy looks good. What are the specific aspects or measures of the economy that concern you?
Yes, the vehicle is moving reasonably well, but in order to make it move reasonably well, we must have the gas pedal on the floor, with epic low interest rates, extremely high levels of borrowing and inflated property prices and with very , very large – for peacetime, without unprecedented – levels of budget deficits that are only projected to increase. And it's not that the economy is stagnant, it's that in order to keep it moving, we must take extraordinary steps, and the extraordinary steps raise questions about what to do when the next recession comes. We don't really have room to reduce interest rates.
What do you think is the cause or causes of secular stagnation?
More inequality, longer retirement periods, more uncertainty, everything causes the household sector to save more. Investments are being reduced by slower growing labor, with much cheaper capital goods, by changes in technology and taste. For example, people want to live in apartments in cities instead of big houses in the suburbs. Law firms used to claim 1,300 square feet of space per attorney. Now they require 600 square feet of space per attorney because they no longer need filing cabinets. Shopping centers are no longer needed due to e-commerce. All this dampens investment even as savings increase – and the result is extreme pressure on interest rates.
We recently published a newsletter about secular stagnation, and it received quite a few answers. One commenter framed this trend in the form of "the end of growth." He wrote: "Maybe, just maybe, and hear me out here, an economy that relies on the extraction of physical materials from a physical system, is physically limited and cannot grow indefinitely." Is it wrong to believe that growth can continue forever?
I think the evidence is that it can, and perhaps the strongest evidence, is that commodity prices have, on average, trended downward. And if they were all exhausted and consumed, you would expect them to become scarcer and to trend upwards. But the result has been that better exploration, better recovery technologies, better ways to use goods efficiently, have done more to perpetuate supply than exhaustion has done to get the offer. And the best forecast going forward, I think suggests that those trends are likely to continue.
Back in 2013, when you first raised the spectrum of secular stagnation, I remember people saying, "Oh, this is just Larry Summers making excuses for the Obama administration's track record." We interviewed former Trump economic adviser Kevin Hassett and he basically said that the real problem is that there is all this agency on companies. And that was his argument for tax cuts and jobs. That if we lower the tax rate on companies, it will stimulate investment. But if you look at the data, investment has not come back roaring. Where do you see the debate now in macroeconomics?
Compared to what the consensus believed in 2013, we have far lower interest rates. It should have accelerated the economy more than people expected. We have much higher budget deficits. It should have accelerated the economy to what people expected then. We had far more so-called supply-side taxes than people expected then. It should have boosted the economy. And we've had three years of Donald Trump's deregulation. It should have boosted the economy by conventional wisdom. And anyway, whether you look at inflation or look at GDP growth, things have been much slower than people expected. So when you push all the pedals and pull all the levers harder than anyone expected and the vehicle goes slower than anyone expected, you know something is wrong. So I think the evidence of secular stagnation is far clearer today than it was in 2013.