Summers’s Stagnation Draws Doubt From Hatzius: Cutting Research

Photographer: Andrew Harrer/Bloomberg

Former U.S. Treasury Secretary Lawrence Summers argued at a Nov. 8 International Monetary Fund conference the U.S. economy may be stuck in a rut because the interest rate consistent with full employment “has fallen significantly below zero” and central banks can’t cut rates much lower. Close

Former U.S. Treasury Secretary Lawrence Summers argued at a Nov. 8 International... Read More

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Photographer: Andrew Harrer/Bloomberg

Former U.S. Treasury Secretary Lawrence Summers argued at a Nov. 8 International Monetary Fund conference the U.S. economy may be stuck in a rut because the interest rate consistent with full employment “has fallen significantly below zero” and central banks can’t cut rates much lower.

Goldman Sachs Group Inc. Chief Economist Jan Hatzius and Bank of England Governor Mark Carney are among those challenging former U.S. Treasury Secretary Lawrence Summers’s warning about a “secular stagnation.”

One month after Summers highlighted the risk of economies suffering from a persistent lack of demand that would be hard to fix with monetary policy, Hatzius and colleague David Mericle wrote in a Dec. 6 research note the U.S. economy’s weaknesses are more “cyclical than secular.” They predict that growth will rebound next year to as much as 3.5 percent from the 2.25 percent average pace during the recovery so far.

Summers argued at a Nov. 8 International Monetary Fund conference the U.S. economy may be stuck in a rut because the interest rate consistent with full employment “has fallen significantly below zero” and central banks can’t cut rates much lower. His analysis drew plaudits from Nobel laureate Paul Krugman.

“We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activities, holding our economies back below their potential,” Summers said.

While acknowledging output and employment have proved lackluster in the U.S. and policy makers could have done more to spur demand, Hatzius and Mericle said the slow rate of recovery is still in line with the historical response to major financial crises, and maybe even better.

The reasons for the sluggishness include an excess supply of houses, pressure on consumers to pare debts, poor demand abroad and the need for fiscal retrenchment, they said.

The data now show such drags are starting to ease, said the Goldman Sachs economists. That still doesn’t mean output and hiring will normalize quickly; it will take the economy until 2017 or 2018 to regain its potential, leaving the Fed to keep its key rate near zero until 2016, they said.

Central bankers also have still to be persuaded by Summers’s gloom. Carney used a Dec. 9 speech in New York to say advanced economies could regain strength and that central banks can assist them to do so. While productivity has proved surprisingly weak, “it is hard to think of any reason why there should have been a persistent deterioration in the rate of potential growth in Britain,” he said.

In a speech the same day, European Central Bank Executive Board member Yves Mersch said Summers’s outlook was a “highly pessimistic, even fatalistic view.” Policy makers should step up structural reforms and encourage innovation, he said.

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The full liberalization of China’s financial markets over the next decade would be almost unrivaled for its “impact on the shape of the global financial system,” according to the Bank of England.

In a study published yesterday, central bank economist John Hooley estimated China’s international investment position -- as measured by the average of external assets and liabilities excluding central bank reserves -- could surge to about 30 percent of gross domestic product from 5 percent today if capital controls are reduced and the yuan traded more freely.

China’s markets remain relatively closed, with its overseas assets and liabilities accounting for just 3 percent of global holdings and the yuan still used for few transactions outside the country. That compares with the country’s status as the world’s second largest economy, accounting for 10 percent of global GDP and 9 percent of trade.

If the process of liberalization is “successful, it could lead to more balanced and sustainable growth in China and help to rebalance global demand,” said Hooley. “Integration of China in world financial markets could also lead to enhanced risk-sharing and liquidity.”

More open markets would require monitoring and cooperation from policy makers, he said. “Given that Chinese capital account liberalization could lead to dramatic changes in the global financial landscape, policy makers will be facing uncharted territory,” he said.

* * *

An “Age of Plutocracy” is taking hold as income inequality grows in the aftermath of the financial crisis and corporate profits approach historical highs, according to UBS AG.

Since the turmoil of 2008, nominal income growth has diverged, and within the top 10 percent of the income distribution the richest one percent have seen the most significant gains, London-based economist Paul Donovan wrote in a Dec. 6 report. At the same time, U.S. corporate profits are around their record at almost 13 percent of GDP.

“Economic outcomes, it appears, are becoming more unequal,” Donovan said.

Using Gini coefficients to measure income inequality, Donovan found those for the U.S., U.K., Japan, France and Canada have each risen since 2005. The U.S. index is approaching 0.48. A reading of zero represents perfect income equality, while one corresponds with perfect inequality.

The pretax income of the top one percent of Americans now amounts to about 20 percent of all U.S. income, which is comparable with levels in the early 20th century, Donovan said. Poorer earners have also suffered from inflation which has tended to be greater on the goods they typically buy.

The inequality will be exacerbated because the share of national income accounted for by profits is likely to remain high, said Donovan. He also notes that of all the tax categories, only those on corporate income have been cut more often than raised since 2010 among 20 advanced economies.

* * *

The U.S. economy needs to rely on homegrown demand if it is to get stronger.

That’s because even a one percentage point increase in economic growth in the euro area, China and Japan would have only a limited effect on U.S. activity, according to Wells Fargo Securities LLC.

The reason is exports account for just 13 percent of the U.S. economy, lower than the 25 percent average of GDP across all countries.

“In other words, the United States will essentially need to rely on its own means if it wants to realize stronger economic growth in the foreseeable future,” economists Jay H. Bryson, Azhar Iqbal and Mackenzie Miller wrote in a Dec. 9 report.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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