Former Federal Reserve Chair Ben Bernanke launched a blog this week. Instead of being the kind of boring affair you expect from a blogging dignitary he's swiftly launched into an old-school blog-war with none other than Lawrence Summers — the former Treasury Secretary who nearly succeeded Bernanke at the Fed.
It started when Bernanke criticized Summers' account of "secular stagnation" as a source of low interest rates. Then Summers fired back with a defense of his position and Bernanke countered with his views that a global savings glut is the real issue. Two of the biggest names in economic policy going at it in this way is a delight for wonks and nerds. But they're talking about critical issues with real implications for jobs and wages around the world.
What is secular stagnation?
For starters, it has nothing to do with secular versus religious. Instead, the term comes to us from a 1939 presentation given by Alvin Hansen titled "Economic Progress and Declining Population Growth." In these tailing days of the Great Depression, Hansen was trying to draw a contrast between a cyclical period of slow growth and a structural transformation of the economy. Hansen believed that the world was not experiencing a down period during an up-and-down series of fluctuations. Instead, he said, "we are passing, so to speak, over a divide which separates the great era of growth and expansion of the nineteenth century" from a new era of much slower growth.
The Depression, in other words, was not a passing phenomenon but rather something that might last indefinitely. Instead what happened is that Nazi Germany launched a war that ended up intersecting with an already-ongoing military conflict between Japan and China. This battle lasted for years and involved nearly the entire planet. During its course, global output surged — though production was mostly dedicated to killing people and blowing things up rather than increasing living standards. But after the war, the economies of Western Europe and North America boomed. Secular stagnation was largely forgotten. But with growth consistently disappointing in recent years, interest in Hansen's ideas has rebounded.
Importantly, although the rapid return of growth led to a collapse of interest in the secular stagnation hypothesis it didn't exactly debunk it. Hansen's argument was that the American economy lacked the kind of self-correcting forces that would restore an adequate level of demand and end the Depression. The outbreak of a giant world war is definitely not the same thing as an economy self-correcting — it was an enormous external source of stimulus.
Why are people talking about secular stagnation now?
The return of interest in the phrase is overwhelmingly due to the efforts of former Treasury Secretary and former National Economic Council director Lawrence Summers. Summers raised the specter of secular stagnation at an International Monetary Fund conference in 2013, saying rather elliptically that he wondered if such discarded ideas "may not be without relevance to America's experience" as being "profoundly important in understanding Japan's experience."
He has followed up with a number of op-eds and scholarly talks on the subject , which in turn have triggered a great deal of additional commentary. Recently Robert Shiller, a Nobel Prize winning economist, argued that the growing influence of Summers' revival of the term was responsible for the large stock market downturn that played out in early fall 2014.
Recently, Gauti Eggertsson and Neil Mehrotra, two economists at Brown University, presented a paper that represents the first attempt to build a complete formal model of secular stagnation, indicating that the idea is becoming a subject of respectable academic inquiry.
Lines of intellectual influence aside, however, it's clear that interest in secular stagnation is rising largely because economic growth in the wake of the financial collapse has been disappointing. The American economy has grown, but only slowly. We never got the kind of rapid "bounce-back" growth that historically characterized recoveries from recessions. Even today, the unemployment rate remains on the high side even as the Federal Reserve has held interest rates near zero for much longer than anyone initially thought possible. This confluence of events has made a variety of slow growth theories more popular, and even though people sometimes lump them together secular stagnation is really only one theory among several.
What are the other growth slowdown theories?
The most prominent alternative to secular stagnation is probably the technological slowdown hypothesis. This view, best represented in academia by Northwestern University economist Robert Gordon, in the business world by investor Peter Thiel, and in the popular press by Tyler Cowen, posits that slow growth is a structural phenomenon due primarily to a slowdown in the rate of technological progress. Cowen's book the Great Stagnation is a good treatment of these ideas.
Another idea you sometimes hear about is the Limits to Growth hypothesis which dates back to a 1972 book by Donella Meadows, Dennis Meadows, Jørgen Randers, and William W. Behrens. This is the view that there are fundamental ecological limits to the expansion of human economic activity, and that only a slowdown or cessation of growth can make continued human existence sustainable.
These ideas distinguish themselves from secular stagnation in that they are primarily ideas about the supply side of the economy. In other words, they say the economy is growing slowly because we are running out of new inventions or natural resources. The secular stagnation hypothesis, by contrast, is the view that the economy can no longer be trusted to maintain an adequate level of demand. One way to dramatize the difference is to specifically focus on unemployment. The technological slowdown hypothesis is primarily the belief that we won't get much richer over the next few years, even if people do manage to get jobs. The secular stagnation hypothesis is the opposite view — the view that we may get a bunch of shiny new gadgets, but unemployment will stay high.
How do you cure secular stagnation?
This is an area in which Summers' formulation of the problem differs somewhat from the Eggertsson/Mehrotra paper. The paper essentially defines secular stagnation as a period in which unemployment stays high unless inflation-adjusted interest rates stay below zero. In this model, "an increase in the inflation target" — in other words, if the Federal Reserve were to say that in the long run it thinks inflation should run around four percent per year (as it did in the 1980s) rather than the two percent target it currently uses — helps boost the economy by reducing the inflation-adjusted interest rate.
Summers, by contrast, is skeptical of low interest rates. He thinks low rate policies contributed to full employment in the mid-aughts and late-'90s only by encouraging speculative bubbles in first the stock market and then the housing market. For Summers, the question is not what's happened for the past five years but rather "can we identify any sustained stretch during which the economy grew satisfactorily with conditions that were financially sustainable" in the last 15 years. In this view, government spending — especially on infrastructure — is the only real cure.
The Eggertsson/Mehrotra paper also supports the view that government spending can cure the stagnation but is not as unequivocal that this is the best approach.
Didn't Hansen's paper have population growth in the title?
Yes. It is not a major point of emphasis in the current iteration of the secular stagnation debate, but essentially all variants of hypothesis agree that faster population growth would cure the problem. When the population is growing rapidly, there is lots of demand for new houses and other buildings and this avoids stagnation. Population growth is also a boost to the supply side of a national economy, since more workers lead to more potential output.
Given that there are about 138 million people who say they'd like to move to the United States, letting more working age immigrants into the country could be a potent cure for these problems.
Is the secular stagnation hypothesis right?
On the pro side, the broad empirical facts appear to fit. Not only has the growth rate been persistently disappointing for years, but inflation has been low. You would expect an economy being hemmed in by supply-side problems to feature high inflation (like in the 1970s), not the low inflation that's prevailed since 2008.
On the other hand, the claim that demand could fall short not just for a long time but literally forever is a little hard to model in formal terms without invoking some slightly odd ideas about storage costs.
More to the point, as the secular stagnation conversation has intensified its empirical motivation appears to have waned. In the 10 months since Summers' initial secular stagnation talk, the unemployment rate has fallen from 7 percent to 5.9 percent. The number of job openings has steadily risen as well. In other words, while nobody is exactly thrilled with the state of the American labor market, the situation does seem to be improving. It may be, in other words, that we have suffered through a prolonged and painful period of excessively low demand that is slowly but surely ending, rather than an endless depression. These days, that counts as good news.