Secular Stagnation for Free

CAMBRIDGE – Something is definitely rotten in the state of capitalism. Despite unprecedentedly low interest rates, investment in most advanced countries is significantly below where it was in the years prior to the 2008 crisis, while employment rates remain stubbornly low. And even investment in the pre-crisis period was unimpressive, given low prevailing interest rates.

For some reason, achieving a level of investment that would generate full employment seems to require negative real (inflation-adjusted) interest rates, which is another way of saying that people have to be paid to invest. But in a world of low inflation and zero nominal interest rates, getting to the required negative real rate may be a challenge. This is the ailment that Larry Summers, recalling a 1938 paper by Alvin Hansen, has dubbed “secular stagnation.”

The policy consequences of this state of affairs remain open to debate (the issues are well summarized in an e-book edited by Coen Teulings and Richard Baldwin). For Keynesians, the answer is unconventional monetary policy (for example, quantitative easing), fiscal stimulus, and a higher target inflation rate. But, as Summers and others point out, lax monetary policies may trigger asset bubbles, and prolonged fiscal stimulus may end in a debt crisis.

Moreover, the Keynesians’ preferred policies address only the consequences of secular stagnation, not its causes – about which there is even less agreement. For some, the problem is a savings glut associated with slower demographic growth, rising life expectancy, and static retirement thresholds – a combination that forces people to save more for their old age. But, as Barry Eichengreen points out, the rise in savings appears to be too small to explain this.