Secular stagnation is an abnormal situation in which structural changes make it impossible for the natural forces of the economy to generate enough demand for goods and services to create jobs for those who want to work and to give businesses the incentive to make investments that add to productive capacity. In normal times the growth of the population together with advances in technology and the spreading of education and skills that make the workforce more productive, lead to increases in production, employment and incomes that in turn make consumers able and willing to buy more, and businesses ready and willing to add production capacity, i.e. to invest in the new plants, machinery and software systems needed to increase production, grow the economy and fully employ the workforce. With all systems functioning normally, the economy has a natural built-in potential to grow at a certain speed, say 3% or 4% per year. If something gets out of whack, the economy may only be able to grow at 1% or 2%, which means that some people who want to work are unable to find jobs, and many businesses find that there is insufficient demand for their product to operate at full capacity, and hence less incentive to invest in expanding their businesses or starting new ones.
In 1938 as it became obvious that the economy had still not recovered completely from the low point of the Great Depression six years earlier, economist Alvin Hansen, often referred to as the American Keynes, introduced the concept of “secular stagnation”. In addressing the annual meeting of the American Economic Association as its newly elected President, Hansen presented a paper arguing that changes brought about by the Depression had altered the structure of the economy in such a way that made it impossible for it to reach its previous potential. He attributed the situation mainly to a decline in the birth rate, and a higher rate of saving that left the economy chronically short of sufficient demand to reach and sustain full employment. Shortly afterwards war began in Europe and the U.S. government sharply increased spending on military equipment and supplies to aid the Allies, leading to a burst of economic activity that continued undiminished to the war’s end. Hansen’s work on “secular stagnation” was quickly forgotten and left to gather dust on library shelves until recently rediscovered and then brought to prominence by the forceful remarks of Larry Summers at the IMF Economic Forum last November.
The “secular stagnation” debate among economists is couched in esoteric terms such as “the natural rate of interest” and “liquidity trap”, but what it is really all about is much simpler. It’s about whether monetary policy acting alone is capable of returning the economy to self-sustained growth with full employment, or if it needs to be supplemented by fiscal measures to stimulate demand such as increased government spending on infrastructure even at the cost of temporarily increasing the deficit and adding to the national debt. Those arguing that we may be headed for “secular stagnation” question the effectiveness of monetary policy and express concern about the costs of the non-conventional monetary policies that have been pumping massive amounts of liquidity into the economy. They argue that this artificially raises asset prices creating a potential for “bubbles” that could unexpectedly burst bringing about another devastating financial crisis while at the same time contributing further to the growing inequality of incomes and wealth. Opponents object to the idea of increased government spending and deficits, arguing that it would lead to the greater danger of a debt crisis with interest rates spiraling upward out of control. They argue that the confidence building effects of fiscal austerity outweighs any drag on the economy via diminished aggregate demand, while the others run models predicting that more spending and larger deficits in the short run actually reduces the debt burden in the long run by stimulating faster growth and rising government revenues.
In 1938 as it became obvious that the economy had still not recovered completely from the low point of the Great Depression six years earlier, economist Alvin Hansen, often referred to as the American Keynes, introduced the concept of “secular stagnation”. In addressing the annual meeting of the American Economic Association as its newly elected President, Hansen presented a paper arguing that changes brought about by the Depression had altered the structure of the economy in such a way that made it impossible for it to reach its previous potential. He attributed the situation mainly to a decline in the birth rate, and a higher rate of saving that left the economy chronically short of sufficient demand to reach and sustain full employment. Shortly afterwards war began in Europe and the U.S. government sharply increased spending on military equipment and supplies to aid the Allies, leading to a burst of economic activity that continued undiminished to the war’s end. Hansen’s work on “secular stagnation” was quickly forgotten and left to gather dust on library shelves until recently rediscovered and then brought to prominence by the forceful remarks of Larry Summers at the IMF Economic Forum last November.
The “secular stagnation” debate among economists is couched in esoteric terms such as “the natural rate of interest” and “liquidity trap”, but what it is really all about is much simpler. It’s about whether monetary policy acting alone is capable of returning the economy to self-sustained growth with full employment, or if it needs to be supplemented by fiscal measures to stimulate demand such as increased government spending on infrastructure even at the cost of temporarily increasing the deficit and adding to the national debt. Those arguing that we may be headed for “secular stagnation” question the effectiveness of monetary policy and express concern about the costs of the non-conventional monetary policies that have been pumping massive amounts of liquidity into the economy. They argue that this artificially raises asset prices creating a potential for “bubbles” that could unexpectedly burst bringing about another devastating financial crisis while at the same time contributing further to the growing inequality of incomes and wealth. Opponents object to the idea of increased government spending and deficits, arguing that it would lead to the greater danger of a debt crisis with interest rates spiraling upward out of control. They argue that the confidence building effects of fiscal austerity outweighs any drag on the economy via diminished aggregate demand, while the others run models predicting that more spending and larger deficits in the short run actually reduces the debt burden in the long run by stimulating faster growth and rising government revenues.
The Natural Rate of Interest
Economists’ discussion of secular stagnation focuses on the concept of the “natural rate of interest”, the general level of interest rates (adjusted for inflation) at which the supply of savings matches up with an economy’s desired level of investment when it is running at full potential with full employment. If real market rates of interest are above their “natural” level, as for example if the central bank’s monetary policy is too tight, saving will be too high (consumption too low) and businesses will be reluctant to borrow and invest leading to a slowdown in the economy. On the contrary, if market rates of interest (adjusted for inflation) are below the “natural” rate, perhaps because of monetary policy that is too accommodating, then saving will be inadequate (consumption too high) and the demand for credit and investment will be excessive, leading to an overheated economy and buildup of inflationary pressure.
Larry Summers and others who raise the possibility of “secular stagnation” suggest that there have been signs of a substantial decline in the “natural” or equilibrating level of interest rates going back as far as the 1980’s. They point out that despite relatively easy monetary policies and low interest rates in the intervening years -- policies that gave rise to periodic financial bubbles -- economic growth was not especially fast, there was persistent slack in the economy, and inflation remained low, so low that inflation appeared to be a thing of the past and economists began referring to this period as “The Great Moderation”.
This emphasis on interest rates in this analysis as the critical policy instrument and regulator of the economy is probably overdone. It arises from the current generation of economists’ dismissal of fiscal policy as being politically impractical, and a bias in favor of theories that accept monetary policy with its control over interest rates as the most efficient regulator of economic activity. Having been educated by an earlier generation of Keynesian economists among whom fiscal policy reigned supreme and monetary policy was considered less effective (e.g. “pushing on a string”), I am accustomed to thinking in Keynesian terms where government fiscal policies (the structure of taxation and government spending), consumers’ propensity to consume, and the “animal spirits” and current profitability of investment are the most powerful movers of the economy, not interest rates, with monetary policy mainly coming into play when the economy is overheated and inflation has become excessive.
Earlier generations of economists were heavily influenced by Knut Wicksell and the Stockholm School that preceded Keynes. Wicksell first introduced the concept of the “natural rate of interest” in 1898, but both he and Keynes saw interest rates having relatively little effect on both consumption and investment demand, the latter being mainly determined by the marginal efficiency of capital (the profitability of investments) and what Keynes called the “animal spirits” of investors. For both men the differences between market and “natural” rates of interest played a secondary role.
Central bankers and the current generation of economists pay homage to Wicksell by assuming that there is such a thing as a “natural rate of interest”, but they go much farther than Wicksell in giving it a dominant role in equilibrating the economy. They tend to treat the “natural” rate as a long run constant whereas Wicksell saw it varying under the influence of current economic conditions. Wicksell wrote:
“The natural rate is never high or low in itself, but only in relation to the profit which people can make with the money in their hands, and this, of course, varies. In good times, when trade is brisk, the rate of profit is high, and, what is of great consequence, is generally expected to remain high; in periods of depression it is low, and expected to remain low.”
Despite widespread use of the concept of the “natural rate of interest”, there remains much confusion and controversy about how the term should be defined, how to measure it, and exactly what role it plays in the economy. These questions are important, but the basic concept of secular stagnation remains valid nevertheless. The answers can affect the details of how secular stagnation works, but not the essence of the theory. For now It suffices to say that central bankers and the current generation of economists would do well to look beyond the concept of the “natural rate of interest” to many of Wicksell’s other keen insights into the relationship between the real and the financial or money side of the economy, ideas that are currently given insufficient attention.
Economists’ discussion of secular stagnation focuses on the concept of the “natural rate of interest”, the general level of interest rates (adjusted for inflation) at which the supply of savings matches up with an economy’s desired level of investment when it is running at full potential with full employment. If real market rates of interest are above their “natural” level, as for example if the central bank’s monetary policy is too tight, saving will be too high (consumption too low) and businesses will be reluctant to borrow and invest leading to a slowdown in the economy. On the contrary, if market rates of interest (adjusted for inflation) are below the “natural” rate, perhaps because of monetary policy that is too accommodating, then saving will be inadequate (consumption too high) and the demand for credit and investment will be excessive, leading to an overheated economy and buildup of inflationary pressure.
Larry Summers and others who raise the possibility of “secular stagnation” suggest that there have been signs of a substantial decline in the “natural” or equilibrating level of interest rates going back as far as the 1980’s. They point out that despite relatively easy monetary policies and low interest rates in the intervening years -- policies that gave rise to periodic financial bubbles -- economic growth was not especially fast, there was persistent slack in the economy, and inflation remained low, so low that inflation appeared to be a thing of the past and economists began referring to this period as “The Great Moderation”.
This emphasis on interest rates in this analysis as the critical policy instrument and regulator of the economy is probably overdone. It arises from the current generation of economists’ dismissal of fiscal policy as being politically impractical, and a bias in favor of theories that accept monetary policy with its control over interest rates as the most efficient regulator of economic activity. Having been educated by an earlier generation of Keynesian economists among whom fiscal policy reigned supreme and monetary policy was considered less effective (e.g. “pushing on a string”), I am accustomed to thinking in Keynesian terms where government fiscal policies (the structure of taxation and government spending), consumers’ propensity to consume, and the “animal spirits” and current profitability of investment are the most powerful movers of the economy, not interest rates, with monetary policy mainly coming into play when the economy is overheated and inflation has become excessive.
Earlier generations of economists were heavily influenced by Knut Wicksell and the Stockholm School that preceded Keynes. Wicksell first introduced the concept of the “natural rate of interest” in 1898, but both he and Keynes saw interest rates having relatively little effect on both consumption and investment demand, the latter being mainly determined by the marginal efficiency of capital (the profitability of investments) and what Keynes called the “animal spirits” of investors. For both men the differences between market and “natural” rates of interest played a secondary role.
Central bankers and the current generation of economists pay homage to Wicksell by assuming that there is such a thing as a “natural rate of interest”, but they go much farther than Wicksell in giving it a dominant role in equilibrating the economy. They tend to treat the “natural” rate as a long run constant whereas Wicksell saw it varying under the influence of current economic conditions. Wicksell wrote:
“The natural rate is never high or low in itself, but only in relation to the profit which people can make with the money in their hands, and this, of course, varies. In good times, when trade is brisk, the rate of profit is high, and, what is of great consequence, is generally expected to remain high; in periods of depression it is low, and expected to remain low.”
Despite widespread use of the concept of the “natural rate of interest”, there remains much confusion and controversy about how the term should be defined, how to measure it, and exactly what role it plays in the economy. These questions are important, but the basic concept of secular stagnation remains valid nevertheless. The answers can affect the details of how secular stagnation works, but not the essence of the theory. For now It suffices to say that central bankers and the current generation of economists would do well to look beyond the concept of the “natural rate of interest” to many of Wicksell’s other keen insights into the relationship between the real and the financial or money side of the economy, ideas that are currently given insufficient attention.
How Does Secular Stagnation Come About
Secular stagnation requires a very low real natural rate of interest, so low that central banks find it difficult or impossible to keep real market rates of interests as low or lower than the real natural rate. A lower natural rate is evident in the persistent decline in the yields of inflation-protected government bonds so that today despite extraordinarily easy monetary policies, we see negative real interest rates for terms in excess of 5 years. Since the natural rate can be thought of as a proxy for the average return on investment, a question to ask is what could make the returns on investment so low?
Three main categories of cause immediately come to mind.
The first would be the slowing growth or long term decline in the working age population such as that experienced by Japan, increasingly by Europe, and to a lesser extent by the U.S. where the effect has been moderated by a sizable inflow of immigrant workers. A slower growth of the work force, of course, directly translates into slower economic growth except to the extent offset by rising labor productivity. An aging population also has a propensity to save more and consume less, which reduces demand and diminishes the need for capital investment. With more saving and less demand for investment the returns are bound to diminish.
Secular stagnation requires a very low real natural rate of interest, so low that central banks find it difficult or impossible to keep real market rates of interests as low or lower than the real natural rate. A lower natural rate is evident in the persistent decline in the yields of inflation-protected government bonds so that today despite extraordinarily easy monetary policies, we see negative real interest rates for terms in excess of 5 years. Since the natural rate can be thought of as a proxy for the average return on investment, a question to ask is what could make the returns on investment so low?
Three main categories of cause immediately come to mind.
The first would be the slowing growth or long term decline in the working age population such as that experienced by Japan, increasingly by Europe, and to a lesser extent by the U.S. where the effect has been moderated by a sizable inflow of immigrant workers. A slower growth of the work force, of course, directly translates into slower economic growth except to the extent offset by rising labor productivity. An aging population also has a propensity to save more and consume less, which reduces demand and diminishes the need for capital investment. With more saving and less demand for investment the returns are bound to diminish.
A second important cause would be an increased concentration of income and wealth in the hands of a relatively small number of people, leading to less consumer demand, more saving and an excessive accumulation of capital. The increased supply of capital would be expected to result in a lower return, thus diminishing the opportunities and incentives for productive investment.
A third cause would be the lingering effects of a major financial shock such as that experienced in 2008-09, which resulted in large financial losses, capital impairment, forced deleveraging and consequent risk aversion. The financial crisis left households and all levels of government with an overhang of debt that induced them to cut back expenditures and take a more cautious approach to undertaking fresh commitments. Investors became content with modest returns as they put preservation of capital ahead of higher returns.
These three are the most obvious, and all have been at work over the last three decades to one extent or another, but there are a number of other possible causes worthy of consideration. Slower productivity growth is an issue, and some see a possibility that the number of transformative technological advances may be waning and the pace of innovation slowing. Others see less need for productive investment because of the declines in the cost of capital equipment, especially those associated with information technology where the operation of Moore’s Law has steadily reduced the cost of productivity enhancing electronic equipment. This means that the same level of saving purchases more capital every year. Then too, we have the fact that billion dollar enterprises can now be launched with little more than an idea as an investment. Persistently low inflation raises other issues because it means that any interest rate translates into a higher after-tax rate than it did when rates were higher. This is evidenced by the steady multi-year decline in inflation-protected bond yields, with the yield on such bonds now negative at a maturity of 5 years.
There are many reasons to believe, therefore, that the “natural” rate of interest at which the supply of saving and demand for capital are brought into equilibrium in an economy operating at full employment and close to its potential output may very well have been under downward pressure during much of the last 30 years. No one knows for sure how low that rate has fallen. It is not a quantity subject to easy measurement. We can study, and estimate, but mostly it is a matter of conjecture. The key question is not exactly how low it might be, but whether it has fallen below the level to which the central bank can steer market rates. If the central bank is incapable, lacks the tools, to push market rates down to the level of the “natural” rate, then investment in productive assets will fall short of the supply of saving, the economy will languish, consumption will lag, there will be insufficient aggregate demand to take up slack in the economy, production will remain below potential, involuntary unemployment will persist, wages will stagnate. A condition of “Secular Stagnation” will exist.
The Liquidity Trap Nonsense
Some economists like Paul Krugman go beyond “secular stagnation” to evoke the “Liquidity Trap” made famous by Keynes in his “General Theory” where he wrote:
“There is the possibility … that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto.”
The kind of liquidity trap that Keynes is describing is clearly a rare phenomenon, which if it exists at all (and Keynes says he has never seen it), does so for a brief period in the aftermath of a financial panic when the desire for liquidity is so strong that nothing will induce people to part with their cash for risk assets of any kind, in which case asset prices collapse, stock markets crash, bond yields go through the roof and the central bank is rendered helpless. Hyman Minsky, a follower of Keynes, put the liquidity trap idea in the proper context of “the immediate aftermath of a crisis” in this passage from his book “John Maynard Keynes”:
The Liquidity Trap Nonsense
Some economists like Paul Krugman go beyond “secular stagnation” to evoke the “Liquidity Trap” made famous by Keynes in his “General Theory” where he wrote:
“There is the possibility … that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto.”
The kind of liquidity trap that Keynes is describing is clearly a rare phenomenon, which if it exists at all (and Keynes says he has never seen it), does so for a brief period in the aftermath of a financial panic when the desire for liquidity is so strong that nothing will induce people to part with their cash for risk assets of any kind, in which case asset prices collapse, stock markets crash, bond yields go through the roof and the central bank is rendered helpless. Hyman Minsky, a follower of Keynes, put the liquidity trap idea in the proper context of “the immediate aftermath of a crisis” in this passage from his book “John Maynard Keynes”:
“The view that the liquidity-preference function is a demand-for-money relation permits the introduction of the idea that in appropriate circumstances the demand for money may be infinitely elastic with respect to variations in the interest rate… The liquidity trap presumably dominates in the immediate aftermath of a great depression or financial crisis.”
What we would expect to see in an actual liquidity trap is prices rising and interest rates falling on assets considered perfectly safe like Treasury bills, while risk assets suffer drastic price declines. This is exactly what happened in the “immediate aftermath” of the 2008-09 crisis but within a few weeks with the Fed pumping in liquidity and a basic level of confidence restored, stock prices recovered sharply beginning a long bull run and interest rates on other non-government debt eased back down. A liquidity trap does not exist unless the prices of risky or imperfectly safe assets are falling and their interest rates are rising. This is not the world we have lived in since 2008.
Talk of a “Liquidity Trap” is an extreme interpretation of Keynes that Krugman, for example, has mainly used for shock effect, as illustrated by the following quote from his blog:
“Being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense. For the moment — or more likely for the next several years — we’re living in a world in which none of what you learned in Econ 101 applies.”
Krugman then goes on to define being in a “Liquidity Trap” in terms far different from Keynes’ definition:
What we would expect to see in an actual liquidity trap is prices rising and interest rates falling on assets considered perfectly safe like Treasury bills, while risk assets suffer drastic price declines. This is exactly what happened in the “immediate aftermath” of the 2008-09 crisis but within a few weeks with the Fed pumping in liquidity and a basic level of confidence restored, stock prices recovered sharply beginning a long bull run and interest rates on other non-government debt eased back down. A liquidity trap does not exist unless the prices of risky or imperfectly safe assets are falling and their interest rates are rising. This is not the world we have lived in since 2008.
Talk of a “Liquidity Trap” is an extreme interpretation of Keynes that Krugman, for example, has mainly used for shock effect, as illustrated by the following quote from his blog:
“Being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense. For the moment — or more likely for the next several years — we’re living in a world in which none of what you learned in Econ 101 applies.”
Krugman then goes on to define being in a “Liquidity Trap” in terms far different from Keynes’ definition:
“In my analysis, you’re in a liquidity trap when conventional open-market operations — purchases of short-term government debt by the central bank — have lost traction, because short-term rates are close to zero. Now, you may object that there are other things central banks can do, and that they actually do these things to some extent: they can purchase longer-term government securities or other assets, they can try to raise their inflation targets in a credible way. And I very much want the Fed to do more of these things. But the reality is that unconventional monetary policy is difficult, perceived as risky, and never pursued with the vigor of conventional monetary policy.”
In other words, Krugman says you are in a liquidity trap when your central bank is not doing as much as he thinks they should be doing.
What Comes Next?
It is important to emphasize that most economists, including Larry Summers for example, though perhaps not Paul Krugman, are not prepared to proclaim that a condition of “Secular Stagnation” exists in the U.S., or even in Europe. Japan is perhaps a more likely candidate, although even that can be questioned at this time. They argue instead that it is a possibility, a danger that we should be aware of, and one that we should be prepared to counter. The frustration of an economy that seems unable to achieve the “escape velocity” needed for self sustaining growth, and constant downward revisions in the projected path of “potential” (full employment) GDP growth, are warning signs that something is amiss.
And even if the current hesitant recovery makes good headway as many predict, will it be able to continue on a satisfactory growth trajectory after the Fed withdraws the extraordinary measures it has taken to stimulate the economy? Will it be able to withstand the “normalization” of interest rates so fervently desired by all, with the short-term Fed Funds rate eventually reaching the 4% level considered “normal”? Many including myself have grave doubts that, even short of “secular stagnation”, the economy will have the strength to withstand monetary “normalization”, and the longer we put off normalization the greater is the danger of another financial crisis, of asset price bubbles that could develop suddenly and pop unexpectedly before anything can be done to prevent it. Liquidity pumped into the economy by the Fed at a rate well beyond the ability of the real economy to use it productively will inevitably flow into speculative activity and what Hyman Minsky called Ponzi finance -- credit extended on the basis of the expected price appreciation of the collateral rather than cash flow.
The Remedy
The remedy for an actual or threatened condition of “secular stagnation” is simply to do everything possible to increase the aggregate demand that is in short supply. As Summers said, we have an inverse Say’s Law at work. Says Law says that in the normal state of affairs supply creates its own demand so there can never be a shortage of demand. The reverse, which seems to be happening, is that a chronic shortage of demand is reducing supply so that we are stuck with an economy producing below capacity with insufficient jobs for those who want to work.
The remedy for an actual or threatened condition of “secular stagnation” is simply to do everything possible to increase the aggregate demand that is in short supply. As Summers said, we have an inverse Say’s Law at work. Says Law says that in the normal state of affairs supply creates its own demand so there can never be a shortage of demand. The reverse, which seems to be happening, is that a chronic shortage of demand is reducing supply so that we are stuck with an economy producing below capacity with insufficient jobs for those who want to work.
Larry Summers as the former Secretary of the Treasury in the Clinton Administration and Obama’s former Chief Domestic Policy Adviser is a master policy wonk, so rather than give you my laundry list of possible remedies I will conclude by copying his from a recent article he wrote for the Financial Times:
“... the secular stagnation challenge is not just to achieve reasonable growth but to do so in a financially sustainable way. There are, essentially, three approaches.
The first would emphasize what is seen as the deep supply-side fundamentals – labor force skills, companies’ capacity for innovation, structural tax reform and assuring the long-run sustainability of entitlement program. All of this is appealing – if politically difficult – and would indeed make a great contribution to the economy’s health in the long run. But it is unlikely to do much in the next five to 10 years. Apart from obvious delays – it takes time for education to operate, for example – our economy is held back by lack of demand rather than lack of supply. Increasing our capacity to produce will not translate into increased output unless there is more demand for goods and services. Training programs or reform of social insurance may, for instance, affect which workers find jobs but they will not affect how many find jobs. Indeed, measures that raise supply could have the perverse effect of magnifying deflationary pressure.
The second strategy, which has dominated US policy in recent years, is lowering relevant interest rates and capital costs as much as possible and relying on regulatory policies to assure financial stability. The economy is far healthier now than it would have been in the absence of these measures. But a strategy that relies on interest rates significantly below growth rates for long periods of time virtually guarantees the emergence of substantial bubbles and dangerous build-ups in leverage. The idea that regulation can allow the growth benefits of easy credit to come without the costs is a chimera. It is precisely the increases in asset values and increased ability to borrow that stimulate the economy that are the proper concern of prudential regulation.
The third approach – and the one that holds most promise – is a commitment to raising the level of demand at any given level of interest rates, through policies that restore a situation where reasonable growth and reasonable interest rates can coincide. This means ending the disastrous trend towards ever less government spending and employment each year – and taking advantage of the current period of economic slack to renew and build up our infrastructure. If the government had invested more over the past five years, our debt burden relative to our incomes would be lower: allowing slackening in the economy has hurt its potential in the long run.
Raising demand also means seeking to spur private spending. There is much that can be done in the energy sector to unleash private investment on both the fossil fuel and renewable sides. Regulation that requires the more rapid replacement of coal-fired power plants will increase investment and spur growth as well as helping the environment. And in a troubled global economy it is essential to ensure that a widening trade deficit does not excessively divert demand from the US economy.
Secular stagnation is not an inevitability. With the right policy choices, we can have both reasonable growth and financial stability. But, without a clear diagnosis of our problem and a commitment to structural increases in demand, we will be condemned to oscillating between inadequate growth and unsustainable finance. We can do better.” Understandably missing from Larry's list of remedies are some of the measures I would propose to drain the excess liquidity from financial markets gradually over time, curb excessive speculation with a financial transactions tax, and address inequality through a radical increase in taxation of the super wealthy. These will have to await the revolution.
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