“What if the downturn is an effect of persistent economic stagnation?”: Former US Treasury Secretary Larry Summers © AP Photo/Michel Euler
Larry Summers, the former US Treasury Secretary, captured one of 2014’s big themes in two words—”secular stagnation”—in a speech to the International Monetary Fund in November. The idea isn’t new—its roots are in the 1930s—but his interjection, just as growth is picking up, provoked a storm of comment.
What if, Summers asked, it turns out that the downturn which followed the crisis of 2008 is an effect of persistent or “secular” economic stagnation? And what if the financial excesses that led to the crash in the first place were themselves a response to structural weaknesses in the developed economies? That might mean that the only way for central banks to boost demand was to create a succession of asset price bubbles (technology stocks in the late 1990s, housing in the middle of the last decade)?
Summers, and those who promptly sided with him, including the Nobel laureate Paul Krugman, were not denying signs of recovery. The US economy grew by 2.5 per cent in the second quarter of 2013, and 2.8 per cent between July and September; Britain achieved 0.7 per cent and 0.8 per cent in those periods. Yet if this is a recovery, it is weak. Britain’s growth between July and September is 2.5 percentage points below the pre-recession high of the first quarter of 2008.
Kenneth Rogoff, the Harvard economist and historian of banking crises, disagrees. He has argued that “the evidence… seems overwhelming that the drag on the global economy mainly reflects the aftermath of a deep systemic financial crisis.” If, as he suggests, this crisis resembles earlier ones, then the usual remedies of fiscal and monetary policy should start to have a decisive effect.
Summers, in contrast, insists that our problems did not all start with the post-crisis recession. The economist Gavyn Davies says: “Larry has stirred up a major debate with his comments. His suggestion that the global economy has been grappling with a problem of excess savings and under-confidence for well over a decade raises some very profound questions about monetary, fiscal and exchange rate policy in the US and the rest of the world. The next stage is to start to suggest some solutions, which may well focus on public infrastructure and education expenditure, rather than on monetary policy.”
Summers’s analysis—and vocabulary—were not original; he borrowed the term “secular stagnation” from Alvin Hansen, who coined it in the 1930s, in the wake of the Great Depression. They also echoed what the American economist Tyler Cowen has written about the “great stagnation” afflicting the US economy, which he attributes to a combination of stalled technological progress and faltering innovation. Cowen told Prospect: “In the US and UK we have seen plenty of signs of longer-term economic stagnation, most of all in wages and employment. But our demand-side problems [as described by Summers] are a symptom of these developments, not a cause of them.”
Robert Gordon, who teaches economics at Northwestern, has offered a similar account, arguing that US growth has been slowing down since the middle of the 20th century, and that this reflects a secular stagnation in technology and innovation. His thesis is controversial, of course, as are Cowen’s and Summers’s. But, as Rogoff has conceded, even if the “economic trauma of the last few years reflects, first and foremost, a financial meltdown… the way forward must simultaneously treat other obstacles to long-term growth.” Taking Summers and the others seriously will help policymakers to figure out what those obstacles might be.
Read more big ideas;
Rejectionist politicsThe politics of resentment will be a powerful, destabilising force in 2014
The new cold war US negotiations are stirring up tensions between two clusters of allies
Beginning of the end of QE When central banks stop pumping money into the world's economies, there's no telling how markets will react
Coalitions of the willing As more countries wield more power, bilateral deals and pacts between allies will become the norm
Growth leaves wages behind It's not the size of the economy that counts, it's what you do with it
Boom Cities Cities, rather than nation states, are proving increasingly adept at meeting the challenges of the 21st century
Personalised Medicine Genetic testing will make treating illnesses cheaper and more efficient
Cloud Scepticism Public concern about government surveillance will make users and regulators wary of remote data storage
The new news Online media brands have changed the way we consume and produce journalism, and that's no bad thing
Peer to peer living Disruptive marketplaces like Airbnb are shifting power away from hierarchies and towards networks of individuals
Pop up everything Temporary venues have altered urban lifestyles forever
