An agonising way to abolish boom and bust

Secular stagnation might once have sounded like a dose of anguish for agnostics, perhaps following unemployment for unbelievers and hard times for heathens. But the thesis that the world is approaching a lasting period of low growth has decisively moved into the mainstream conversation about economics.

Last week saw a heavyweight clash on the subject between Ben Bernanke, former Federal Reserve chairman, and Lawrence Summers, veteran policy maker and serial holder of strong opinions. This week, the International Monetary Fund added to the gloom, with estimates of weak potential growth.


As often happens when a technical discussion turns general, different uses of the term “secular stagnation” mean that it confuses as much as elucidates. In some ways, though, the policy implications should command more consensus than the theories that underlie them.

Mr Summers uses secular stagnation to mean the difficulty of getting the economy to run at full capacity when factors such as weak investment demand have pushed down the equilibrium real interest rate — that needed to keep output at full steam. The response should be to reduce the actual real rate of interest by loosening monetary policy further or, better, to boost demand by increasing public investment.

By contrast, a variety of technology pessimists use the term to mean that the supply capacity of the economy is growing more slowly because, after inventing the internet (or maybe just before) the human race ran out of good ideas. (Slower technological progress can play a walk-on role in Mr Summers’ thesis, but his analysis is mainly about demand, not supply.) As for Mr Bernanke, he doubts secular stagnation is a big issue at all, arguing the slow recovery of the US economy can be explained by temporary headwinds including a battered financial system and weakness in the housing market. The implication is that America is recovering, aided by the Fed’s monetary stimulus, and that normal service will soon be resumed.

This debate has also underlined an unfortunate truth: economics has always struggled to analyse the causes of long-term expansion. The great economist Robert Solow won the economics Nobel partly for working out that increases in employment and the capital stock explained only just over a tenth of long-term growth. The rest was technological innovation, generally presumed to arrive in the same way that the Israelites were provisioned with manna and quail. A branch of a subject where you can reach the apogee of professional recognition by saying “dunno” with arithmetical precision is not one overburdened with definitive explanations.

Even when economics addressed the question of trend growth, and whether it was exogenous (appearing from nowhere) or endogenous (affected by government policy), it failed to produce consensus or to spark intelligent public discourse. In 1994 Gordon Brown, three years before becoming UK chancellor of the exchequer, was widely ridiculed for referring to “endogenous growth theory” in a speech to an audience of academic economists who would have known precisely what he was on about.

Judging competing explanations for the current growth funk is not easy, and there is a danger of overinterpreting short-term problems. Arguments about cyclicality tend to have a cyclicality of their own. The first few years after a recession ends are traditionally accompanied by hand-wringing about a “jobless recovery” in which changing technology or the loss of skills has supposedly permanently altered the labour market. Then jobs start appearing, everyone remembers employment tends to lag output, hands are unwrung and the structural stories go back in the cupboard till next time.

In advanced economies, at least the US and UK, supportive monetary and (sometimes) fiscal policy has created enough growth at least to be consistent with Mr Bernanke’s thesis that this is a short-term problem. However, since both economies could also do with upgrading infrastructure — as Mr Summers points out, no one enjoys going through JFK airport, and the UK is crying out for a major housebuilding programme — it would be useful to ramp up public investment as well.

The IMF, transformed from an agent of neoliberalism to a Gosplan-style advocate of public works, also supports a government investment push. If such an expansion in demand creates inflation, policy makers will know they have come up against a capacity constraint and can adjust policy accordingly.

In the face of uncertainty about the true state of the world, policy makers need to design a response to minimise harm. A substantial programme of public investment would seem appropriate. That means adding to already high sovereign debt burdens. But with long-term interest rates so low, the balance of risk and reward strongly favours more infrastructure. If secular stagnation is a false alarm, not much harm will have been done. If not, public investment may help save the world economy from a persistent and damaging blight.


Alan Beattie


Fonte: FT