Ben Bernanke Just Started Blogging, and Already He's in a Great Blog Fight With Larry Summers
Well, that didn't take long.
On Monday, former Federal Reserve Chairman Ben Bernanke started a blog at the Brookings Institution, and it has taken him only two days to get into a proper argument.
When Bob Corker didn't rise to the bait on Monday, Bernanke turned his attention to former Treasury Secretary Larry Summers and his secular stagnation thesis.
Writing on Tuesday Bernanke said
The term “secular stagnation” was coined by Alvin Hansen in his 1938 American Economic Association presidential address, “Economic Progress and Declining Population Growth.” Writing in the latter stages of the Great Depression, Hansen argued that, because of apparent slowdowns in population growth and the pace of technological advance, firms were unlikely to see much reason to invest in new capital goods. ...
Hansen proved quite wrong, of course, failing to anticipate the postwar economic boom (including both strong population growth—the baby boom—and rapid technological progress). However, Summers thinks that Hansen’s prediction was not wrong, just premature.
He then goes on to explain why Larry is quite wrong in holding this opinion, arguing not only that the U.S. economy is not facing secular stagnation, but that even if it were, Larry's proposed solution—more fiscal spending—would be the wrong solution.
The former Federal Reserve chairman showed he is not against getting a nice blow in when an opportunity presents, saying:
As Larry’s uncle Paul Samuelson taught me in graduate school at MIT, if the real interest rate were expected to be negative indefinitely, almost any investment is profitable.
Summers was not going to take this lying down. He responded in a blog post published on Wednesday morning. Larry opens with faint praise, agreeing with Ben's assessment that the Federal Reserve is less powerful than it might assume:
I agree with much of what Ben writes and would highlight in particular his recognition that the Fed is in a sense a follower rather than a leader with respect to real interest rates
He then goes on to use the 'uncle' stick to hit back at Ben.
Ben suggests not-- citing my uncle Paul Samuelson’s famous observation that at a permanently zero or subzero real interest rate it would make sense to invest any amount to level a hill for the resulting saving in transportation costs. Ben grudgingly acknowledges that there are many theoretical mechanisms that could give rise to zero rates.
Larry then moves on to the meat of the argument.
But he expresses the concern that permanently expansionary fiscal policy may not be possible, given that the government cannot indefinitely expand its debt. This issue is worth further theoretical exploration, but I think Ben greatly understates the scope for feasible fiscal policy for reasons that Brad Delong and I have considered in our 2012 BPEA paper.
He finishes his post saying he hopes that he is wrong about secular stagnation, but he adds that the "vast majority" of revisions in growth forecasts have been downward for many years.
No shrinking violet, Ben went straight back into the fight with a new post on Wednesday morning. He immediately points out the shortcomings of Larry's theory.
A shortcoming of the secular stagnation hypothesis is that it focuses only on factors affecting domestic capital formation and domestic household spending. But US households and firms can also invest abroad, where many of the factors cited by secular stagnationists (such as slowing population growth) may be less relevant.
Ben then suggests that the problem is more likely to be a global savings glut—he provides data tables at the end of his post to back this—than secular stagnation.
As Summers has proposed, if secular stagnation is the reason for slow growth and low interest rates, expansionary fiscal policy could be helpful; and, in the longer run, the government could also take steps to improve the returns to capital investment, such as offering more favorable tax treatment and supporting research and development. If a global savings glut is the cause, then the right response is to try to reverse the various policies that generate the savings glut—for example, working to free up international capital flows and to reduce interventions in foreign exchange markets for the purpose of gaining trade advantage.
We await Larry's response.
So Ben Bernanke, the former central banker, sees monetary policy and structural reforms as the way forward. Larry Summers, the former Treasury Secretary, sees fiscal policy as the way forward. Quelle surprise, really.
It's a shame they can't agree on what the problem is.
Until they do, we all get to enjoy this (admittedly, slightly wonky) blog fight.