Larry Summers has responded.
In a blog post on Wednesday, Harvard professor Larry Summers responded to criticism from former Fed chair Ben Bernanke about his “secular stagnation” idea that says the economy currently can’t create enough aggregate demand to spur growth.
Wrapping up his response Summers concedes that he’d like nothing more than to be wrong, writing:
It may be that growth will soon take hold in the industrial world and allow interest rates and financial conditions to normalize. If so, those like Ben who judged slow recovery to be a reflection of temporary headwinds and misguided fiscal contractions will be vindicated and fears of secular stagnation will have been misplaced.
But there is a “but.”
But throughout the industrial world the vast majority of the revisions in growth forecasts have been downwards for many years now. So, I continue to urge that it is worth taking seriously the possibility that we face a chronic problem of an excess of desired saving relative to investment. If this is the case, monetary policy will not be able to normalize, there will be a continuing need for expanded public and private investment, and there will be a need for global coordination to assure an adequate level of demand and its appropriate distribution. Macroeconomists can contribute by moving beyond their traditional models of business cycles to contemplate the possibility of secular stagnation.
Among Bernanke’s critiques of Summers’ argument — and proposed solutions — is an increase in government spending (expanded fiscal policy). Bernanke says this might not be a “satisfactory long-term response … because government’s debt is already very large by historical standards and because public investment too will eventually exhibit diminishing returns.”
To this, Summers says that with interest rates at 0%, any positive return on increased government investment will allow these projects to pay for themselves.
Bernanke was also critical of Summers’ seeming lack of attention to international aspects of the global economy and how these factors could be leading towards what appears to be a secular stagnation situation, though this may not be the case.
With the benefit of hindsight, I wish I had been clearer in seeking to resurrect the secular stagnation hypothesis that one should take a global perspective. Indeed, the lower level of rates, the greater tendency towards deflation, and inferior output performance in Europe and Japan suggests that the spectre of secular stagnation is greater for them than for the United States. Moreover, in a world with integrated capital markets real rates anywhere will depend on conditions everywhere. Particularly in the 2003-2007 period it is appropriate to regard Ben’s savings glut coming from abroad as an important impediment to demand in the United States. Ben and I are, I think, in agreement that it is important to think about the saving-investment balance not just for countries individually, but for the global economy.