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.”

One Economic Sickness, Five Diagnoses

Over the last decade, the growth rate of real G.D.P. per person has averaged just 0.44 percent per year, compared with the historical norm of 2.0 percent. At a rate of 2.0 percent, incomes double every 35 years. At a rate of 0.44 percent, it takes about 160 years to double.

.. A statistical mirage

.. Think of how your smartphone now replaces your camera, GPS, music system and various other previously stand-alone devices. According to this theory, the problem is not in the economy but in the statistics.

.. A hangover from the crisis

.. Secular stagnation

.. reduced demand for capital to fund investment projects. He cites several reasons for the change, including lower population growth, lower prices for capital goods and the nature of recent innovations, like the replacement of brick-and-mortar stores with retail websites.

.. inability of the economy to generate sufficient demand to maintain full employment.

.. Slower innovation

.. This generation’s innovations, like the smartphone and social media, are just not as life-changing.

Robber Baron Recessions

You see, profits are at near-record highs, thanks to a substantial decline in the percentage of G.D.P. going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology (as opposed to mergers and acquisitions) hasn’t taken off, even though they can raise money, whether by issuing bonds or by selling stocks, more cheaply than ever before.

.. In that case many corporations would be in the position I just described: able to milk their businesses for cash, but with little reason to spend money on expanding capacity or improving service. The result would be what we see: an economy with high profits but low investment, even in the face of very low interest rates and high stock prices.

.. So lack of competition can contribute to “secular stagnation” — that awkwardly-named but serious condition in which an economy tends to be depressed much or even most of the time, feeling prosperous only when spending is boosted by unsustainable asset or credit bubbles. If that sounds to you like the story of the U.S. economy since the 1990s, join the club.


The IMF says Larry Summers is right—and Ben Bernanke is wrong—about economic stagnation

Summers has proposed “secular stagnation” (pdf) as the explanation for economic weakness since the 2008 recession: Private investment is falling because firms see slow population growth and innovation as a sign that future returns aren’t likely, creating a self-fulfilling prophecy of slow growth. His answer is more government investment—to jump-start demand, and the economy.

.. Bernanke, meanwhile, thinks recent slowdowns in private investment are merely a result of the recession’s economic hangover, and that the big, structural problem for advanced economies is a “global savings glut” that is forcing US interest rates lower than they otherwise would be—so in essence, blame Germany. In the former Fed chair’s view, better government policies on global capital flows and trade could solve this problem. Otherwise, efforts to keep interest rates low enough to maintain full employment will lead to more financial bubbles.
.. The reports conclude, first, that the reason for slower growth isn’t the lingering effects of the crisis but the pressure from slowing population growth and innovation; and second, that private investment is falling because companies don’t see enough demand from their customers, not because of diminished returns from low interest rates.