Getting beyond the new normal and secular stagnation. Photographer: Sam Hodgson/Bloomberg

Confronting the U.S. Economic Slump

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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It really does matter whether the U.S. is exiting from an unusually prolonged phase of sluggish economic growth and job creation or, instead, stuck in that slump for a lot longer. It is consequential for American citizens, their children and, given the important international influence of the U.S., the rest of the world. And the implications extend well beyond economics and finance, encompassing political, social and national security dimensions.

So why not spend part of a long holiday weekend reading a thoughtful and detailed paper seeking to demonstrate why "a permanent slump is possible"? Written by Gauti Eggertsson and Neil Mehrotra, economists at Brown University, this is the latest serious academic contribution to a broadening debate on what was earlier called the new normal and now carries the label of secular stagnation.

The main motivation for such research is threefold. First, the stubborn persistence of sluggish growth and high unemployment in the U.S. , despite the valiant policy efforts of the Federal Reserve. Second, an insufficient understanding of what causes both maladies and, therefore, a noticeable lack of unanimity among policy makers and academics about how best to respond. Third, the disturbing example looming over all of this of two lost decades in Japan.

Most of the thinking about the cause of intractable economic slumps has tended to cite reasons that may be loosely characterized as: insufficient aggregate demand, poor supply responsiveness and damaging debt overhangs. Some observers (including me) have argued for an eclectic approach that combines elements from all three, but we have been unable to come up with analytically robust ways to attribute relative weights among these cyclical, secular and structural issues.

Eggertsson and Mehrotra take an important step forward in providing a formal model that taps into elements from several prior analyses. Drawing on the insights of Alvin Hansen, the distinguished American economist, they construct a New Keynesian model that illustrates why the economy's traditional self-correcting forces may be too weak to overcome a very persistent slump.

At the heart of this formal model is an oversupply of savings associated with a permanent deleveraging shock, slower population growth and an increase in inequality. Several permutations of these three factors are shown to deliver secular stagnation.

The model demonstrates why this "long slump is one in which unusual economic rules are stood on their heads." It warns about the effectiveness of forward guidance, or what is quickly emerging as the main weapon in the Fed's remaining policy arsenal. It also advocates the combination of higher permanent inflation and government spending.

Eggertsson and Mehrotra advance our understanding in insightful ways. Unfortunately, they don't provide -- just yet, at least -- the definitive explanation for which we all are yearning. This continued inability by the economics profession to reach analytical closure is particularly troubling given the extent to which an anemic American economy eats away at livelihoods, opportunities and social integrity.

This lack of a strong policy consensus among economists is regrettable. But it shouldn't preclude Congress from taking a more active role in advancing initiatives that are already grounded in viable prescriptions for attacking what continues to ail the U.S. economy. Partial as it may still be, there is now a large enough set of analyses for the country's unusual economic stagnation to provide important guidance on what to do -- if only our lawmakers were able to overcome their polarization and distractions in order to unite on such a critical issue as economic resurgence.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed Aly El-Erian at

To contact the editor on this story:
Timothy L O'Brien at