World Economy

US in Secular Stagnation

US in Secular StagnationUS in Secular Stagnation

Last week, Ben Bernanke inaugurated a new economics blog and within days provoked a stoush with Larry Summers, the lead proponent of the theory that the United States has entered an extended period of little or no growth known as secular stagnation.

Within the confines of the blogosphere, these two giants of economic policy over the past decade or more have rolled up their sleeves and are ducking it out over a question that determines how to solve the slow-growth malaise, Business Spectator reported.

Bernanke, former chairman of the Federal Reserve, argues that the slow economic growth of the past several years is due to several temporary headwinds in the aftermath of the financial crisis – including misguided fiscal contractions – that are already dissipating. He says the US economy looks to be “well on the way” to full employment.

Former US treasury secretary Larry Summers, who was runner-up to succeed Bernanke at the Fed but lost out to Janet Yellen, vehemently disagrees. He argues the economy is in a long-term slump because of a chronic shortfall in demand. Real interest rates can’t be lowered enough to encourage borrowing and investment because of ageing of baby boomers and the reduced capital needs of companies in the internet age.

The secular stagnation theory was coined towards the end of the Great Depression in 1938, and was proved wrong by the post-war economic and baby boom. Summers believes the theory was not so much wrong as premature, and argues the best way to solve the problem of inadequate aggregate demand is through fiscal policy in general and government infrastructure spending in particular.

The two men are both partly right. Interest rates are so low around the world, negative in some countries, both because of a glut of savings and because of weak demand. It’s the experience of the Japanese economy since the late 1990s, and it also describes Europe in recent years.


Bernanke sees stagnation theory as overly focused on domestic factors. He says foreign investment and a strong export performance can compensate for weak demand at home and provide an “antidote” to secular stagnation in the United States.

“If global imbalances in trade and financial flows do moderate over time, there should be some tendency for global real interest rates to rise, and for US growth to look more sustainable as the outlook for exports improves,” he writes.

His predecessor as Fed chairman, Alan Greenspan, with a tin ear for policy sensitivities, showed no such respect when within one week of retiring in 2006, and crucially before the Fed’s next policy meeting, he gave a private briefing to an investment bank. (Ironically, it was Lehman Brothers.)

That lapse of judgment provoked outrage in financial circles and rightly so, as Greenspan after 19 years as chairman was potentially providing live insights into policy thinking when his successor barely had a chance to get settled at his new desk.

The minutes of the Federal Reserve’s latest policy meeting show there is no consensus at all within the central bank about when the economy and sentiment can support lift-off of rates. First-quarter economic data has been disappointing, even before the soft payrolls report for March, which followed two years of upside surprises on employment.