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Secular Stagnation: Live
Alternative Perspectives
J. Bradford DeLong
U.C. Berkeley
, WCEG, and
NBER
http://bradford-delong.com
brad.delong@gmail.com
@delong
Original: 2017-04-05
Revised: 2019-06-14
Published:
https://www.imf.org/external/pubs/ft/fandd/2017/03/points.htm
This File:
https://www.icloud.com/pages/0FTAYBVrR3N8H4mtJ8FqbDMiQ
1135 words
1
You are reading this right now because of the long, steady
decline in safe interest rates at all maturities since 1990.
1
In the United States, we have seen the decline in short-term
safe interest rates from 4
%
to -1.2
%
on the real side and
from 8
%
to 0.5
%
on the nominal side. And we have seen
2
1
For considerably overlapping and much extended versions of this
argument, see J. Bradford DeLong (2016):
Three, Four... Many Secular
Stagnations!
http://www.bradford-delong.com/2017/01/three-four-
many-secular-stagnations.html
; (2015):
The Scary Debate
Over Secular
Stagnation
:
Hiccup
…
or Endgame
?
Milken Review
http://tinyurl.com/
dl20170106m
the decline in long-term safe interest rates from 5
%
to 1
%
on the real side, and from 9
%
to 3
%
on the nominal side.
The elusive Wicksellian “neutral” rate of interest—that rate
at which planned investment equals desired full-
employment savings—has fallen by more: the economy in
1990 had no pronounced tendency to fall short of full
employment; the economy today has.
An economy suffers from “secular stagnation” when the
average level of safe nominal interest rates is low and so
crashes the economy into the zero lower bound with
frequency. Thus, in the words of Alvin Hansen (1939):
2
“
sick recoveries
…
die in their infancy and depressions
…
feed on themselves and leave a hard and seemingly
immovable core of unemployment
…
”
Financial markets, at least, do not expect this problem to go
away for at least as generation. That makes, as I have
written, this current policy debate “
the most important
policy-relevant debate in economics since John Maynard
Keynes's debate with himself in the 1930s
…”
I have heard eight different possible causes advanced for
this secular fall in safe interest rates:
3
2
Alvin Hansen (1939): Economic
Pr
ogress and
D
eclining
P
opulation
G
rowth
American Economic Review
https://www.jstor.org/stable/
1806983
1.
High income inequality, which boosts savings too much because
the rich can't think of other things they'd rather do with their
money.
2.
Technological and demographic stagnation that lowers the return
on investment and pushes desired investment spending down too
far.
3.
Non-market actors whose strong demand for safe, liquid assets is
driven not by assessments of market risk and return but rather by
political factors or by political risk.
4.
A collapse or risk-bearing capacity as a
broken fi nancial sector
fi nds itself overleveraged and
fail
ing
to mobilize
savings,
thus
driv
ing a
large wedge between the returns on risky investments
and the returns on safe government debt.
5.
Very low actual and expected inflation, which means that even a
zero safe nominal rate of interest is too high to balance desired
investment and planned savings at full employment.
6.
Limits on the demand for investment goods coupled with rapid
declines in the prices of those goods, which together put too much
downward pressure on the potential profi tability of the investment-
goods sector.
7.
Technological inappropriateness, in which markets cannot fi gure
out how to properly reward those who invest in new technologies
even when the technologies have enormous social returns—which
in turn lowers the private rate of return on investment and pushes
desired investment spending down too far.
8.
Increased technology- and rent seeking-driven obstacles to
competition which make investment unprofi table for entrants and
market-cannibalizing for incumbents.
The fi rst of these was John A. Hobson’s explanation a
century ago for the economic distress that had led to the
rise of imperialism.
3
The second was, of course, Hansen’s,
4
3
John A. Hobson (1902):
Imperialism: A Study
(New York: James Pott)
<
http://fi les.libertyfund.org/fi les/127/0052_Bk.pdf
>
echoed today by Robert Gordon.
4
The third is Ben
Bernanke’s global savings glut.
5
The fourth is Ken Rogoff’s
debt-supercycle.
6
The fi fth notes that, while safe real interest rates are higher
than they were in the 1980s and 1990s, that is not the case
for the 1960s and 1970s. It thus attributes the problem to
central banks’ inability to generate the boost from expected
and actual inflation a full-employment flex-price economy
would generate naturally.
7
(6), (7), and (8) have always seemed to me to be equally
plausible as potential additional factors. But the lack of
communication between industrial organization and
monetary economics has deprived them of scrutiny. While
Gordon, Bernanke, Rogoff, Krugman, and many others
have covered (1) through (5), (6), (7), and (8) remain
undertheorized.
5
4
Robert Gordon (2016):
The Rise and Fall of American Growth
http://
amzn.to/2iVbYKm
5
Ben Bernanke
(2005):
The Global Saving Glut and the U.S. Current
Account Defi cit
http://www.federalreserve.gov/boarddocs/speeches/
2005/200503102/
6
Kenneth Rogoff (2015): Debt Supercycle,
Not
Secular Stagnation
http://www.voxeu.org/article/debt-supercycle-not-secular-stagnation
7
Paul Krugman (1998):
The Return of Depression Economic
s http://
tinyurl.com/dl20170106r
In general, economists have focused on a single individual
one of these causes, and either advocated policies to cure it
at its roots or waiting until the evolution of the market and
the polity removes it. By contrast, Lawrence Summers
8
has
focused on the common outcome. And if one seeks not to
cure a single root cause but rather to neutralize and palliate
the deleterious macroeconomic effects of a number of
causes working together, one is driven—as Larry has been
—back to John Maynard Keynes (1936):
9
A
somewhat comprehensive socialisation of
investment… [
seems
] the only means of securing an
approximation to full employment… not exclud[ing]
all manner of compromises and of devices by which
public authority will cooperate with private
initiative…
6
8
Lawrence Summers (2013): Secular Stagnation
http://
larrysummers.com/imf-fourteenth-annual-research-conference-in-
honor-of-stanley-fi scher/
;
https://www.youtube.com/watch?
v=KYpVzBbQIX0&ab_channel=JamesDecker
; (2014):
U.S. Economic
Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound
http://link.springer.com/article/10.1057
%
2Fbe.2014.13
; (2015):
Rethinking Secular Stagnation After Seventeen Months
http://
larrysummers.com/wp-content/uploads/2015/07/IMF_Rethinking-
Macro_Down-in-the-Trenches-April-20151.pdf
;(2016):
The Age of
Secular Stagnation
http://larrysummers.com/2016/02/17/the-age-of-
secular-stagnation/
.
9
John Maynard Keynes (1936):
The General Theory of Employment,
Interest and Money
https://www.marxists.org/reference/subject/
economics/keynes/general-theory/ch24.htm
Summers has, I think, a very strong case here. Ken Rogoff
likes to say that nine years from now nobody will be
talking about secular stagnation.
Perhaps.
But if that is so, it will most likely be so because we will
have done something about it.
7
