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Secular Stagnation for Free

For some reason, achieving a level of investment that would generate full employment seems to require negative real interest rates, which is another way of saying that people have to be paid to invest. In fact, to harness the possibilities of new technology, we may need non-market forms of payment for valuable contributions.

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.

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