Central Bankers Have Difficult Road to Walk, Says Summers

Jan.10 — Former U.S. Treasury Secretary Lawrence H. Summers and Roger Ferguson, TIAA president and chief executive officer, discuss the emergence of secular stagnation and the challenges that central bankers will face in a new decade. They speak with David Westin on “Bloomberg Wall Street Week.”

Secular Stagnation and the Future of Global Macroeconomic Policy

Lawrence H. Summers discusses “Secular Stagnation and the Future of Global Macroeconomic Policy” at the Peterson Institute for International Economics on April 15, 2019. Summers, the Charles W. Eliot University Professor and president emeritus at Harvard University, argues that events of the last five years confirm that secular stagnation is real and spreading, and that fiscal not monetary policy will play the major role in stabilization policy going forward. As a result, Summers contends that the industrialized world has passed peak central bank independence, and that secular stagnation is ironically a product of the information technology revolution—supply side progress has created demand side problems.
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The Myth of Secular Stagnation

Those responsible for managing the 2008 recovery found the idea of secular stagnation attractive, because it explained their failures to achieve a quick, robust recovery. So, as the economy languished, a concept born during the Great Depression of the 1930s was revived.

.. The fallout from the financial crisis was more severe, and massive redistribution of income and wealth toward the top had weakened aggregate demand. The economy was experiencing a transition from manufacturing to services, and market economies don’t manage such transitions well on their own.
.. but it did little to ensure that the banks actually do what they are supposed to do, focusing more, for example, on lending to small and medium-size enterprises.
.. it was clear that there was a risk that those who were so badly treated would turn to a demagogue.
.. A fiscal stimulus as large as that of December 2017 and January 2018 (and which the economy didn’t really need at the time) would have been all the more powerful a decade earlier when unemployment was so high.
.. the challenge was – and remains – political, not economic: there is nothing that inherently prevents our economy from being run in a way that ensures full employment and shared prosperity. Secular stagnation was just an excuse for flawed economic policies.

We’re in a Low-Growth World. How Did We Get Here?

In the United States, per-persongross domestic product rose by an average of 2.2 percent a year from 1947 through 2000 — but starting in 2001 has averaged only 0.9 percent.

.. 81 percent of the United States population is in an income bracket with flat or declining income over the last decade. That number was 97 percent in Italy, 70 percent in Britain, and 63 percent in France.

.. The underlying reality of low growth will haunt whoever wins the White House in November, as well as leaders in Europe and Japan. An entire way of thinking about the future — that children will inevitably live in a much richer country than their parents — is thrown into question the longer this lasts.

 .. In January 2005, as it does every year, the Congressional Budget Office released its forecast for the United States’ budget and economic outlook over the decade to come. If the C.B.O.’s projections had come true, the United States would have had $3.1 trillion more economic output in 2015 than it actually did — 17 percent more.
.. An analysis by the White House Council of Economic Advisers last year estimated that about half of the decline in labor force participation since 2009 was caused by aging of the population (which was anticipated in the projection), and about 14 percent from the economic cycle. About a third of the decline was a mysterious “residual”: younger people leaving the work force, perhaps because they saw little opportunity or viewed the potential wages they could earn as inadequate.
.. Mr. Summers, in an interview, frames it as an inversion of “Say’s Law,” the notion that supply creates its own demand: that economywide, people doing the work to create goods and services results in their having the income to then buy those goods and services.
In this case, rather, as he has often put it: “Lack of demand creates lack of supply.”