Larry Summers Says His ‘Secular Stagnation’ Thesis Is Catching On
(Bloomberg) -- Larry Summers is a confident man. The Harvard economist says he believes that more and more people are buying into his “secular stagnation” thesis—even though economic growth has dramatically strengthened and interest rates have risen since 2013, when he first sounded the alarm.
Summers, 63, is a past president of Harvard University and a high-ranking official in the presidential administrations of Bill Clinton and Barack Obama. He contends that the “natural” rate of interest—the one consistent with stable growth and inflation—has fallen so low in industrialized nations that zero will often be too high: “a chronic and systemic inhibitor of economic activity, holding our economies back below their potential,” as he put it in a speech at an International Monetary Fund research conference in November 2013.
I spoke with Summers on May 16 after he presented his case on secular stagnation to the Economic Club of New York, an organization for some of New York’s best-known financiers. One sign of changing attitudes, he told me after the talk, is that “there is more awareness of the zero lower bound”—namely, the problem that, in the next recession, central banks won’t be able to cut interest rates deeply enough to revive growth because the rate can’t be pushed much below zero.
“I think there are many more people expressing ideas that are consistent with the theory of secular stagnation,” even if they aren’t embracing the phrase, Summers said.
Economist Alvin Hansen coined the term secular stagnation in the Great Depression of the 1930s. In Summers’s formulation, it boils down to the idea that interest rates are affected by the supply and demand for money; they tend to be very low these days because of an increase in the appetite for savings and a simultaneous decrease in the demand for investment. Savings become more important as society ages. Meanwhile, there’s less need for investment to soak up those savings—a case in point being Apple Inc., which has mountains of cash left over, even after fully funding all its construction, research, and development.
In his speech on May 16, Summers argued that nothing about the current run of growth contradicts the thesis. Today’s growth in the U.S. gross domestic product, around 2.5 percent a year, depends on a stimulative federal budget deficit, generous tax treatment of capital spending, short-term interest rates that are low after being adjusted for inflation, and a continuing increase in borrowing, he said. “Where would we be if we had normal policy settings?” he asked.
In the future, Summers told the New York crowd, “to achieve real growth will require policy settings that are unsound, as judged by traditional metrics.” For one thing, he said, there’s a “compelling” case for a big increase in federal spending on infrastructure, even if that causes the federal budget deficit to grow.
Managers of endowments and pension funds are in for a rude awakening because returns will be lower in the future than they have been in recent years, Summers said.
It was hard to gauge the crowd’s reaction to Summers’s speech. People took the time to show up for an 8 a.m. breakfast to hear him talk, which indicates a certain receptivity. Summers, one of the world’s best-known Democratic-leaning economists, served as Clinton’s Secretary of the Treasury and Obama’s National Economic Council director.
On the other hand, Summers’s argument isn’t as easy to make now—with the U.S. unemployment rate at 3.9 percent and people worrying about it overheating—as it was in November 2013, when the most recently reported jobless rate was 7.2 percent. What’s more, Summers’s relaxed attitude about federal budget deficits isn’t easily absorbed by wealthy Wall Street types who are accustomed to admonishing the government to live within its means. Summers hinted at this when he said that the “preoccupation” with deficits during the years of slow growth after the recession of 2007-09 “was an important mistake” because it kept the economy slow and unemployment unnecessarily high. “It represents,” he said, “a failure of elites.”
Nonetheless, Summers told me he thinks his ideas are breaking through. He cited five reasons for believing so. First, More experts are worried about the “zero lower bound.” Second, there’s “much more robust debate” about the possibility that the natural rate of interest may be much lower than people once believed. Third, the Federal Reserve is considering new “policy frameworks” for setting interest rates, some of which would allow inflation to drift higher than 2 percent. Fourth, more people are embracing the virtues of infrastructure spending. And fifth, more experts are conceding that “headwinds” from the last recession can’t fully account for why interest rates have remained so low for so long.
If indeed there’s been a sea change in opinion, a separate question is how responsible Summers is for it. That’s impossible to say, of course. Even if people were influenced by him, directly or indirectly, they may not fully realize it.
One attendee at the Economic Club of New York breakfast who does agree strongly with Summers is Carl Weinberg, chief economist and managing director of High Frequency Economics. Weinberg describes the past decade of sluggish growth as a “depression.” Weinberg said it’s hard to get investment firms to buy into his pessimistic perspective because “it’s easier to sell securities when markets are rising.” Added Weinberg: “I view it as a mission.”
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