The threat of secular stagnation has not gone away

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The economy is prone to sluggish growth — if the past few years are anything to go by

May 6, 2018

Unemployment in the US is below 4 per cent and growth in the economy is accelerating. By recent standards growth in Europe and Japan is also strong. In these circumstances many believe the idea of secular stagnation can be written off.

Certainly if the phenomenon is defined as the fatalistic view that the economies of the industrialised world are condemned to suffer permanent stagnation with high unemployment, then we are obviously not in a moment of secular stagnation.

However, this is not what Alvin Hansen intended when he coined the phrase, nor what I had in mind when I sought to revive the concept in 2013. Rather the idea of secular stagnation is that the private economy — unless stimulated by extraordinary public actions especially monetary and fiscal policies and, or, unsustainable private sector borrowing —will be prone to sluggish growth caused by insufficient demand.

On this interpretation, the past few years have confirmed the hypothesis.

In the US the Congressional Budget Office forecast, which is comfortably in the mainstream, calls for annual growth of 2.5 per cent over the next three years with growth of 3.3 per cent during 2018. But what is necessary to support this growth? As far as fiscal policy is concerned, the CBO projects growth in actual budget deficits of more than 1 per cent of gross domestic product in 2017-2019, with substantial further increases over time and the most rapid increase in the debt-to-GDP ratio during peak business cycle times than has ever been seen in peacetime.

In terms of monetary policy, indexed bond markets imply that real interest rates will be kept well below 1 per cent for the next 30 years. Meanwhile the economy has been supported by a stock market that has returned 22 per cent in 2017 and an average of 16 per cent over the past five years. This while private sector debt has grown relative to GDP.

If budget deficits had been at normal levels and not growing relative to the economy, real long-term interest rates had been steady in their customary range above 2 per cent and an extra $10tn in wealth had not been created by abnormal stock market returns, it is hard to believe that the US economy would be growing much at all. And it is almost inconceivable that it would be near its 2 per cent inflation target.

Elsewhere in the industrial world Japan’s economy is supported by a government debt-to-GDP ratio that hovers around 250 per cent and long-term real rates of less than minus 1 per cent. Europe has seen a reduction in the ratio of government debt to GDP in recent years but like Japan has received extraordinary stimulus from sub minus 1 per cent real interest rates and increases in the flow of private sector credit. Even with this stimulus Europe and Japan have struggled to achieve 2 per cent inflation.

What we are seeing is the achievement of fairly ordinary growth with extraordinary policy and financial conditions. Something similar took place in the years before the Great Recession.

Whether this is sustainable depends on several factors, not least whether private sector demand will autonomously increase as the financial crisis recedes so growth can be maintained with less unorthodox policy and exuberant financial conditions. Perhaps it can, but it is more likely that a combination of rising inequality, slow labour force and productivity growth, and greater competition from developing countries will keep private sector demand subdued.

There is also a question over whether the current policy mix and financial conditions can be maintained indefinitely. This is doubtful for fiscal policy especially in the US. Monetary policies involving low or negative real interest rates may be sustainable over the long term but they are likely to encourage financial risk, unsound lending and asset bubbles with potentially serious implications for medium-term stability.

The greatest concern remains over whether the next downturn can be handled. Traditionally the response to recession in the industrial world has been fiscal expansion and a 500 basis point cut in interest rates. But the fiscal cannon has already been fired in much of the industrial world leaving policymakers short on ammunition.

So secular stagnation as an issue remains very much alive. Current palliatives are appropriate but unlikely to be long-term solutions. The industrial world can hope that investment demands increase and saving needs decline. But policymakers must turn their attention to demand as well as supply issues going forward.

Secular Stagnation – a prolonged period in which satisfactory growth can only be achieved by unsustainable financial conditions –may be the defining macro-economic challenge of our times. The concept of “Secular Stagnation” originally formulated by the eminent Depression-era economist Alvin Hansen, has experienced a revival since my November 2013 speech on the topic.

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Secular stagnation even truer today

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This article was originally published by the Wall Street Journal on May 25, 2017.

Larry Summers is doubling down on his secular-stagnation hypothesis.

The Harvard economist and former Treasury secretary first offered the bleak diagnosis in November 2013 at an International Monetary Fund conference. The U.S. and much of the rest of the world was suffering from a chronic shortage of demand and profitable investment opportunities, he argued. There wasn’t any interest rate that would produce healthy growth (given that rates can’t go much below zero).

At a recent academic conference at the Federal Reserve Bank of San Francisco, I asked Mr. Summers how his secular stagnation hypothesis looks today, three and half years after he inserted a Depression-era phrase into today’s debate about the economic outlook. Many economists have had their doubts about his gloomy hypothesis, and not all has gone wrong with the U.S. economy. Unemployment, for example, has fallen to 4.4% from 7.2% in 2013, leading to a rise in wages.

Read more

Secular Stagnation in the Open Economy

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In an NBER working paper issued in April 2016, Secular Stagnation in the Open Economy, Gauti B. Eggertsson, Neil R. Mehrotra and Lawrence H. Summers look at conditions of secular stagnation – low interest rates, below target inflation, and sluggish output growth – that now characterize much of the global economy. They consider a simple two-country textbook model to examine how capital markets transmit secular stagnation and to study policy externalities across countries. They find capital flows transmit recessions in a world with low interest rates and that policies that trigger current account surpluses are beggar-thy-neighbor. Monetary expansion cannot eliminate a secular stagnation and may have beggar-thy-neighbor effects, while sufficiently large fiscal interventions can eliminate a secular stagnation and carry positive externalities.

The Age of Secular Stagnation

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Summers published an article title, “The Age of Secular Stagnation: What It Is and What to Do About It,” in the February issue of Foreign Affairs.  The article explores how expansionary fiscal policy by the U.S. government can help overcome secular stagnation problems and get growth back on track. Read more

Equitable Growth in Conversation

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Summers talks with Heather Boushey, of the Washington Center for Equitable Growth, about how inequality affects economic growth and stability. The discussion explores secular stagnation—what it is, what problems it creates, and the issues for policymaking—as well as how inequality plays a role in the phenomenon.
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Rate Delay Less Risky Than Premature Hike

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In an interview with Tom Keene of Bloomberg Surveillance from the Arab Strategy Forum in Dubai, Summers  voiced skepticism surrounding an expected Federal Reserve rate hike and the impact of lower commodities prices and devaluing currencies. Summers also discussed his thoughts on secular stagnation. Watch the full interview here. Read more

The Fed looks set to make a dangerous mistake

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August 23, 2015

Raising rates this year will threaten all of the central bank’s major objectives

Will the Federal Reserve’s September meeting see US interest rates go up for the first time since 2006? Officials have held out the prospect that it might, and have suggested that — barring major unforeseen developments — rates will probably be increased by the end of the year. Conditions could change, and the Fed has been careful to avoid outright commitments. But a reasonable assessment of current conditions suggest that raising rates in the near future would be a serious error that would threaten all three of the Fed’s major objectives — price stability, full employment and financial stability.

Like most major central banks, the Fed has put its price stability objective into practice by adopting a 2 per cent inflation target. The biggest risk is that inflation will be lower than this — a risk that would be exacerbated by tightening policy. More than half the components of the consumer price index have declined in the past six months — the first time this has happened in more than a decade. CPI inflation, which excludes volatile energy and food prices and difficult-to-measure housing, is less than 1 per cent. Market-based measures of expectations suggest that, over the next 10 years, inflation will be well under 2 per cent. If the currencies of China and other emerging markets depreciate further, US inflation will be even more subdued.

Tightening policy will adversely affect employment levels because higher interest rates make holding on to cash more attractive than investing it. Higher interest rates will also increase the value of the dollar, making US producers less competitive and pressuring the economies of our trading partners.

This is especially troubling at a time of rising inequality. Studies of periods of tight labour markets like the late 1990s and 1960s make it clear that the best social programme for disadvantaged workers is an economy where employers are struggling to fill vacancies.

There may have been a financial stability case for raising rates six or nine months ago, as low interest rates were encouraging investors to take more risks and businesses to borrow money and engage in financial engineering. At the time, I believed that the economic costs of a rate increase exceeded the financial stability benefits, but there were grounds for concern. That debate is now moot. With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the US stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria or overconfidence. The Fed does not have to do the job. At this moment of fragility, raising rates risks tipping some part of the financial system into crisis, with unpredictable and dangerous results.

Why, then, do so many believe that a rate increase is necessary? I doubt that, if rates were now 4 per cent, there would be much pressure to raise them. That pressure comes from a sense that the economy has substantially normalised during six years of recovery, and so the extraordinary stimulus of zero interest rates should be withdrawn. There has been much talk of “headwinds” that require low interest rates now but this will abate before long, allowing for normal growth and normal interest rates.

Whatever merit this view had a few years ago, it is much less plausible as we approach the seventh anniversary of the collapse of Lehman Brothers. It is no longer easy to think of economic conditions that can plausibly be seen as temporary headwinds. Fiscal drag is over. Banks are well capitalised. Corporations are flush with cash. Household balance sheets are substantially repaired.

Much more plausible is the view that, for reasons rooted in technological and demographic change and reinforced by greater regulation of the financial sector, the global economy has difficulty generating demand for all that can be produced. This is the “secular stagnation” diagnosis, or the very similar idea that Ben Bernanke, former Fed chairman, has urged of a “savings glut”. Satisfactory growth, if it can be achieved, requires very low interest rates that historically we have only seen during economic crises. This is why long term bond markets are telling us that real interest rates are expected to be close to zero in the industrialised world over the next decade.

New conditions require new policies. There is much that should be done, such as steps to promote public and private investment so as to raise the level of real interest rates consistent with full employment. Unless these new policies are implemented, inflation sharply accelerates, or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.

The writer is the Charles W Eliot university professor at Harvard and a former US Treasury secretary

Concern growth is not going to pick up

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On Thursday, May 7, 2015, Summers talked with Bloomberg’s Stephanie Ruhl and Erik Schatzker at the Salt Conference in Las Vegas, NV.  They discussed Treasury yields, Europe, China and concerns about growth in the United States.  Summers talked of the “dawning and growing awareness in the market of the idea we may have a chronic excess of savings over investment in the economy — a phenomenon known as secular stagnation.”  Read more

Growing concerns about the sense of stagnation

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In an interview on the Charlie Rose Show on January 29, 2015, Summers discussed the growing concerns about the sense of stagnation. Summers told Rose, “we are in unchartered territory in regards to the global economy, with problems with lack of demand, deflation that’s too low, central banks that have trouble being activists and too much savings.” Read more

FT Video: Make the middle class a priority

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Summers talked with FT editor, Lionel Barber, on January 19, 2015 about the Inclusive Prosperity report, why economic growth has been hampered and whether ECB action can lift middle-class incomes.

Inclusive Prosperity Commission

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The Inclusive Prosperity Commission, co-chaired by Lawrence H. Summers, released a new report on January 15, 2015 that offers bold new prescriptions to reinvigorate the middle class and reduce income inequality.  Summer said, “No industrial democracy will succeed unless its middle class enjoys sustained growth in living standards. This depends not only on strong economic growth but also on assuring that its benefits are widely shared.”   Read more

Why public investment really is a free lunch

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The IMF finds that a dollar of spending increases output by nearly $3

October 7, 2014

It has been joked that the letters IMF stand for “it’s mostly fiscal.” The International Monetary Fund has long been a stalwart advocate of austerity as the route out of financial crisis, and every year it chastises dozens of countries for their fiscal indiscipline. Fiscal consolidation – a euphemism for cuts to government spending – is a staple of the fund’s rescue programmes. A year ago the IMF was suggesting that the US had a fiscal gap of as much as 10 per cent of gross domestic product.

All of this makes the IMF’s recently published World Economic Outlook a remarkable and important document. In its flagship publication, the IMF advocates substantially increased public infrastructure investment, and not just in the US but much of the world. It asserts that when unemployment is high, as it is in much of the industrialised world, the stimulative impact will be greater if investment is paid for by borrowing, rather than cutting other spending or raising taxes. Most notably, the IMF asserts that properly designed infrastructure investment will reduce rather than increase government debt burdens. Public infrastructure investments can pay for themselves.

Why does the IMF reach these conclusions? Consider a hypothetical investment in a new highway financed entirely with debt. Assume – counterfactually and conservatively – that the process of building the highway provides no stimulative benefit. Further assume that the investment earns only a 6 per cent real return, also a very conservative assumption given widely accepted estimates of the benefits of public investment. Then, annual tax collections adjusted for inflation would increase by 1.5 per cent of the amount invested, since the government claims about 25 cents out of every additional dollar of income. Real interest costs, that is interest costs less inflation, are below 1 per cent in the US and much of the industrialised world over horizons of up to 30 years. So infrastructure investment actually makes it possible to reduce burdens on future generations.

In fact, this calculation understates the positive budgetary impact of well-designed infrastructure investment, as the IMF recognised. It neglects the tax revenue that comes from the stimulative benefit of putting people to work constructing infrastructure, as well as the possible long-run benefits that come from combating recession. It neglects the reality that deferring infrastructure renewal places a burden on future generations just as surely as does government borrowing.

It ignores the fact that by increasing the economy’s capacity, infrastructure investment increases the ability to handle any given level of debt. Critically, it takes no account of the fact that in many cases government can catalyse a dollar of infrastructure investment at a cost of much less than a dollar by providing a tranche of equity financing, a tax subsidy or a loan guarantee.

When it takes these factors into account, the IMF finds that a dollar of investment increases output by nearly $3. The budgetary arithmetic associated with infrastructure investment is especially attractive at a time when there are enough unused resources that greater infrastructure investment need not come at the expense of other spending. If we are entering a period of secular stagnation, unemployed resources could be available in much of the industrial world for quite some time.

While the case for investment applies almost everywhere – possibly excepting China, where infrastructure investment has been used a stimulus tool for some time – the appropriate strategy for doing more differs around the world.

The US needs long-term budgeting for infrastructure that recognises benefits as well as costs. Projects should be approved with reasonable speed. The government can contribute by supporting private investments in areas such as telecommunications and energy.

Europe needs mechanisms for carrying out self-financing infrastructure projects outside existing budget caps. This may be possible through the expansion of the European Investment Bank or more use of capital budget concepts in implementing fiscal reviews.

Emerging markets need to make sure that projects are chosen in a reasonable way based on economic benefit.

What is crucial everywhere is the recognition that in a time of economic shortfall and inadequate public investment, there is for once a free lunch – a way for governments to strengthen both the economy and their own financial positions. The IMF, a bastion of “tough love” austerity, has come to this important realisation. Countries with the wisdom to follow its lead will benefit.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary.

Bold reform is the only answer to secular stagnation

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September 8, 2014

There may be supply-side barriers that hold the economy back before constraints on demand bind

By Lawrence H. Summers

The economy continues to operate way below any estimate of its potential made before the onset of financial crisis in 2007, with a shortfall of gross domestic product relative to previous trend in excess of $1.5tn, or $20,000 per family of four. As disturbing, the average growth rate of the economy of less than 2 per cent since that time has caused output to fall further and further below previous estimates of its potential.

Almost a year ago I invoked the concept of secular stagnation in response to the observation that five years after financial haemorrhaging had been staunched, the business cycle was cycling back to what had been previously thought of as normal levels of output.

Secular stagnation in my version, like that of Alvin Hansen, the economist who coined the term in the 1930s, has emphasised the difficulty of maintaining sufficient demand to permit normal levels of output.

But with a high propensity to save, a low propensity to invest and low inflation, this has been impossible. Nominal interest rates cannot fall below zero, as they would have to for real interest rates to be low enough to enable saving and investment to be equated with the economy producing at its full potential. Furthermore, even if potential output can be attained, it would require interest rates so low that they risk financial instability.

Given the factors operating to reduce natural interest rates – rising inequality, lower capital costs, slowing population growth, foreign reserve accumulation, and greater costs of financial intermediation – it seems unlikely that the American economy is capable of demanding 10 per cent more output than it does now, at interest rates consistent with financial stability. So demand-side secular stagnation remains an important economic problem.

But, as the work of Robert J Gordon has shown, there may now be supply-side barriers that threaten to hold back the economy before constraints on the ability to create demand start to bind. Two ways of looking at the current situation point up the difficulty.
First, while I have emphasised that levels of GDP are far short of what pre-crisis trends would predict, the unemployment rate at 6.1 per cent (down from a 10 per cent peak) has reverted most of the way back to even relatively optimistic estimates of its normal level. In other words, even while economic growth performance has been very poor, it appears that demand has been advancing rapidly enough to substantially reduce slack in the labour market. Weak growth, along with substantial decreases in slack, suggests significant weakness in the growth of potential output.

To be fair, there is room to cavil about the unemployment rate as a measure of slack in the labour market. But the extent of apparent normalisation is even greater if one looks at measures of job openings and vacancies, new unemployment insurance claims, or the short-term unemployment rate.

Second, with Friday’s relatively weak employment statistics job growth has averaged 200,000 jobs a month over the past six months. If this continues, what would it imply for movements in the unemployment rate?

This depends on what happens to labour force participation, which has been trending downwards because of population ageing and long-term structural trends, even as the unemployment rate has declined sharply. Assume (optimistically, given recent trends) that the labour force participation rate for workers of a given age remains constant, and that the economy creates 200,000 jobs a month. The unemployment rate would then fall to about 4 per cent by the end of 2016.

While such a low unemployment rate is conceivable, it seems much more likely that employment growth would slow at some point, because of rising wage costs or policy actions, or because employers have difficulty finding workers. Then, the economy would be held back not by lack of demand but lack of supply potential.

Why has the economy’s supply potential declined so much relative to the pre-2007 trend? This will be debated in the years to come. Part of the answer lies in the damaging effect of past economic weakness on future potential. Part is the brutal demographics of an ageing population, the end of the trend towards increased women’s labour force participation, and the exhaustion of the gains from an increasingly educated workforce. And part is the apparent slowing of at least measured productivity.

To achieve growth of even 2 per cent over the next decade, active support for demand will be necessary but not sufficient. Structural reform is essential to increase the productivity of both workers and capital, and to increase growth in the number of people able and willing to work productively. Infrastructure investment, immigration reform, policies to promote family-friendly work, support for exploitation of energy resources, and business tax reform become ever more important policy imperatives.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary.

NYTimes: Europe is at risk of secular stagnation

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In a front page, New York Times story on August 30, 2014, Summer’s says, “Europe is at risk of secular stagnation.”  He added, “There is little chance that reasonable and rapid growth is going to return to the Eurozone.”  The article concluded, “A greatly diminished Europe will mean that the US will increasingly lack its best partners.” Read more

Secular Stagnation: facts, causes and cures

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Summers contributed a chapter, “Reflections on the New Secular Stagnation Hypothesis,” to the new Vox eBook, “Secular Stagnation: facts, causes and cures.” Read more

Secular Stagnation Q&A in The New Republic

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In a July 2014 interview with the New Republic, Summers discusses secular stagnation and says, the economy hasn’t grown rapidly “in a financially sustainable way” for a long time. Read more

Idle Workers + Low Interest Rates = Time to Rebuild Infrastructure

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If now is not the moment to rebuild, when is?

By Lawrence H. Summers 

The Boston Globe

April 11, 2014 — Are you proud of New York’s John F. Kennedy Airport? It’s a question I ask nearly every audience I speak to these days. JFK, after all, is the largest entry point for foreign visitors arriving in what sees itself as the greatest city on earth.

To a person, I’ve never heard anyone answer, “Yes.” Vice President Joe Biden took it one step further in a speech earlier this year, likening the airport down the road, New York’s LaGuardia, to being in “some third-world country.”

Yet the unemployment rate for construction workers in the United States is in the double digits. And the government can borrow — in the currency we print — at long-term rates of less than 3 percent. If now is not the moment to rebuild these airports, when will that moment ever come?

The American economy is not performing to the satisfaction of the American people. Total incomes are about $1.5 trillion less today — or $5,000 per person — than was anticipated in 2007 before the financial crisis began. The share of American adults working has increased only slightly since the recesssion’s trough, and more than 5 million fewer people are working than when employment was at peak levels in the mid-2000s. Median family incomes and hourly wages have remained essentially stagnant for more than a generation.

The single most important step the US government can take to reverse these discouraging trends is to mount a concerted, large-scale program directed at renewing our national infrastructure. At a time of unprecedented low interest rates and long-term unemployment, such a program is good economics but, more fundamentally, it is common sense.

Few Americans are impervious to the crumbling infrastructure in their everyday lives.

The country that brought the world the Internet and continues to lead the globe in information technology has an air traffic control system that relies on vacuum tubes and where sticky pieces of paper are moved around on bulletin boards to track flights. Even leaving aside the safety risks, the costs in extra fuel consumption and unneeded delays are measured well into the tens of billions of dollars. Can it possibly make sense to wait until every repair person capable of working with vacuum tubes has died off to complete the renovation of this antiquated system?

I travel constantly. Calls to my office on my iPhone are less likely to drop driving from Beijing to its airport or from Almaty in Kazakhstan to its airport than driving from the airport into Boston, New York, or Washington. I know I’m not alone in experiencing such problems. Surely, at a time when US companies are holding close to $2 trillion in cash, earning next to nothing for balance sheets, we should be investing in improving this frustrating deficiency.

As secretary of the Treasury during the Clinton administration, I used to visit a public school every time I went to a city outside Washington. I’ll never forget an occasion at an Oakland high school when I gave a speech extolling the importance of education. A young teacher came up to me and said, “Secretary Summers, that was a fine speech, and I agree with all of it. Just one thing — why should any of the students believe you when there is paint chipping off the walls of their classroom and when the first lunch period has to begin at 9:45 a.m. because this school is so overcrowded? There is no chipping paint at any bank. Maybe we think that is the most important thing.” She had a point I’ve never forgotten.

After 40 years of dangerous energy dependence, it is possible that within this decade the United States will become a major oil and natural gas exporter. Already, we produce more oil than Saudi Arabia. And there’s no denying that having America as the ultimate balancer in the world’s oil market will make it safer and more stable than the one we live in now. But that will not happen if we, as a nation, keep underinvesting in infrastructure to the point where trains and trucks — rather than pipelines — must play the primary role in moving energy resources around our country.

The terrible winter we’ve just suffered has no doubt left behind a legacy of potholes. The American Society of Civil Engineers estimates that driving on roads in need of repair costs the average Massachusetts motorist $313 annually. This is the equivalent of more than 50 cents a gallon. And yet gasoline taxes have not been raised in two decades, and as a country, we do not invest enough to maintain a transportation infrastructure, let alone to improve it.

There are many more examples. But beyond the power of examples, there is the reality that a substantial step-up in infrastructure investment would serve all of our major economic objectives. It is as close to a free lunch as economics will ever produce.

There is increasing concern that we may be in an era of secular stagnation in which there is insufficient investment demand to absorb all the financial savings done by households and corporations, even with interest rates so low as to risk financial bubbles. Raising demand through greater infrastructure investment is an antidote for such malaise as well as a source of better employment and economic growth.

Why? Investing in infrastructure offers the prospect of expanded economic capacity. With interest rates already near zero, incremental private outlays brought on by easier financial conditions are unlikely to have a very high return. On the other hand, the available evidence from the historical experience of the United States, in addition to cross-country comparisons and comparisons across US states, is that the social return to public infrastructure investment is very high.

We live in an ever more interdependent and competitive world. Savings can flow into any country. The fruits of research and development flow globally. Many iconic American companies now earn less than half their profits in the United States.

But one thing that is inherently immobile is our infrastructure. When we put money into strengthening our infrastructure, essentially all of what we spend stays in the United States. Once in place, all the benefits of the infrastructure go to Americans.

As an economic strategy, infrastructure investment also promotes fairness. The group in our society that has suffered most heavily from all of the structural change of the last generation is men with limited education. These men disproportionately work in construction, the core of infrastructure, and thus become the main beneficiaries of increased funding. Moreover, it is the majority of Americans, not the super-fortunate minority, who primarily benefit from improving public schools or airports or reducing potholes.

Finally, infrastructure investment is important for generational fairness. We live in a period when a — if not the — focus of economic policy has been on reducing government deficits and debts. These are important concerns, but they have been viewed too narrowly.

Infrastructure investments, even if not immediately paid for with new revenue sources, can easily contribute to reductions in long-term debt-to-income ratios because they spur economic growth, raise long-run capacity, and reduce the obligations of future generations. It is an accounting convention, not an economic reality, that borrowing money shows up as a debt, but deferring maintenance that will inevitably have to be done at some point does not. When maintenance or necessary investment is deferred, the bills climb much more quickly than the cost of federal borrowing at an average interest rate below 2 percent.

Where do we go from here? This should not be a partisan issue.

Democrats are correct that we need to commit more government money to measures like repairing highways and modernizing schools where there is no immediate cost recovery available. They are also right in their emphasis that a great nation cannot endure with its government operating on a shoestring. Even if we assume that entitlements are reformed, the rising share of the elderly in the population, health care costs that grow faster than the rest of the economy, and American international obligations mean that revenue increases are required if the United States is to invest adequately in its future.

Republicans are right that regulatory barriers hold back infrastructure investment. We need protections, but we need them to be administered more predictably and more rapidly. In 1903, it took Harvard less than 18 months to build Soldiers Field. Less than 18 months from when the stadium was conceived to when the first game was played — even without the benefit of modern construction equipment. It would take a decade today. In San Francisco, repairs to the Bay Bridge recently took nearly four times as long as building the original bridge in the 1930s.

And then there are the points that everyone should be able to agree on. Government needs to operate more efficiently. The Anderson Bridge connecting Cambridge and Boston has been under repair for nearly two years. I suspect that, with the right incentives, what was necessary could have been done in a matter of weeks rather than years. No doubt an important part of operating more efficiently will involve greater reliance on the private sector, but this must be done in a way that carefully protects taxpayer interests.

For all our problems, I would far prefer play the economic hand of the United States than that of any other major country. And while much more could be said with respect to tactics, I am confident that we as a nation will get them right if we can get behind the right basic principle: From the intercontinental railway to the interstate highway system to the Internet, American economic progress has depended on fundamental infrastructure investments. Our generation has not been doing its part. It is time for us to step up.

Lawrence H. Summers is a university professor and president emeritus at Harvard. He served as the secretary of the Treasury for President Clinton and the director of the National Economic Council for President Obama.

This article originally appeared in the Boston Globe.


Washington must not settle for secular stagnation

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January 5, 2014

By Lawrence Summers

We may, as I argued last month in the Financial Times, be in a period of “secular stagnation” in which sluggish growth and output, and employment levels well below potential, might coincide for some time to come with problematically low real interest rates.

Since the start of this century, annual US gross domestic product growth has averaged less than 1.8 per cent. The economy is now operating nearly 10 per cent – or more than $1.6tn – below what was judged to be its potential as recently as 2007. And all this is in the face of negative real interest rates for terms of more than five years and extraordinarily easy monetary policy.

It is true that even some forecasters who have had the wisdom to remain pessimistic about growth prospects for the past few years are coming around to more optimistic views in 2014 – at least in the US. This is encouraging but should be qualified by the recognition that, even on optimistic forecasts, output and employment will remain well below previous trend for many years. More troubling, even with today’s high degree of slack in the economy, and with wage and price inflation slowing, there are signs of eroding credit standards and inflated asset values. If we were to enjoy years of healthy growth under anything like current credit conditions, there is every reason to expect we would return to the kind of problems we saw in 2005-07 long before output and employment returned to trend or inflation picked up again.

So 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 emphasise what is seen as the deep supply-side fundamentals – labour force skills, companies’ capacity for innovation, structural tax reform and assuring the long-run sustainability of entitlement programmes. 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 programmes 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.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary