Growth Is Gangbusters, but Some Economists Are Still Warning about ‘Secular Stagnation’
When Harvard economist Larry Summers resurrected the Depression-era phrase “secular stagnation” in 2013, it caught on quickly because the world economy’s convalescence from the global financial crisis was still agonizingly slow. Things really did feel stagnant. (“Secular” to economists means long-term, as opposed to cyclical. It has nothing to do with irreligion.)
But here we are at the end of 2017, with a strong, synchronized upturn in global economic growth, and Summers is still talking up secular stagnation. He was a headliner at a conference in New York on Dec. 15 sponsored by the Secular Stagnation Project of the George Soros-supported Institute for New Economic Thinking. The conference also featured Adair Turner, former chairman of the United Kingdom’s Financial Services Authority, and a number of economists from such places as Brown University, Dartmouth College, Northwestern University, and London School of Economics.
The timing for a conference on secular stagnation feels a bit … off. The U.S. economy grew at a healthy annual rate of 3.3 percent in the third quarter. President Trump said on Dec. 16 that the U.S. economy “is going to start to rock” after Congress passes tax cuts. Other countries are doing well, too. On Dec. 18, International Monetary Fund economists blogged that “2017 is ending on a high note, with [gross domestic product] continuing to accelerate over much of the world in the broadest cyclical upswing since the start of the decade.”
Gauti Eggertsson of Brown, a frequent collaborator of Summers, acknowledged the inconsistency in the first presentation of the conference. “I guess it may seem like a strange time to be talking about secular stagnation,” he said.
In fact, though, Eggertsson said, “I would say it’s perfect timing for it.” Summers agreed, saying later that the predictions of secular stagnation “look to have proved out very well.”
The theory of secular stagnation, at least the flavor of it favored by Summers and Eggertsson, isn’t that the economy will always run slowly. It’s that the natural, sustainable growth rate of the economy is so low that central banks will frequently find themselves unable to cut interest rates enough to get out of recessions. Central banks can’t cut rates much below zero—the famous “zero lower bound”—because if deposit rates turn very far negative, people will pull their money out of the banking system.
When interest rates are already low even when growth is healthy, it means central banks can’t cut them very much in a crisis. In the U.S., the target range for the federal funds rate is still just 1.25 percent to 1.5 percent, and that’s high among the developed economies. In the euro zone, the European Central Bank’s main refinancing operations rate is precisely zero, and the deposit facility offers -0.4 percent a year, which is nearly as negative as you can go without provoking an exodus. The Bank of Japan’s policy-rate balance rate, as it’s called, is -0.1 percent.
As Eggertsson sees it, the underlying problem in the world is that the desired level of savings exceeds the desired level of investment. The two should be equal. The usual cure for an imbalance is for interest rates to fall, which simultaneously reduces the amount that people want to save while increasing the amount that people want to invest. But the interest rate that matches savings and investment, he says, is at risk of falling back below zero—no man’s land.
Eggertsson says that when he first started warning about the zero lower bound before the financial crisis, a common reaction was, “It did not happen. It will not happen. It cannot happen.” Similar voices are now saying secular stagnation is impossible, he says. “There is an element of wishful thinking that we can ignore this problem.”
Summers argues that the current U.S. growth boomlet is being fueled by euphoria in the financial markets, which can’t last. While it’s “debatable” whether markets are overvalued now, it’s pretty certain that prices can’t keep rising at the current clip for an additional three years, Summers says. And as soon as prices stop rising, the economy will lose one of its important props. Since the 1990s, he says, the U.S. has alternated between bubbles and busts.
“The economy is capable of growing rapidly and maintaining full employment, or being on a sustainable financial foundation,” Summers says, “but not both at once.”
“Is secular stagnation here to stay?” Eggertsson asks. “Who knows? Perhaps.” What is clear, he says, is that the world needs to be ready for the possibility of it.