Free Lunch: The great and the good on secular stagnation

Δημοσιεύθηκε: 8 Απριλίου 2015 - 11:17

State-of-the-art head-scratching

Some of the world's most influential US economists have locked horns in a very polite, very didactic debate over secular stagnation. It started with former Federal Reserve chairman Ben Bernanke, who launched his career as a blogger with a rapid-fire series of four blog posts on the secular stagnation hypothesis and its policy implications. Larry Summers, as the one who revived the 80-year-old hypothesis, duly responded, and Paul Krugman has also weighed in. For a very succinct summary, you could read Brad DeLong's blog post on the debate which argues that all three are right. For more detail on the debate - and a few gripes about some of the claims made - read on.

Bernanke spreads his argument over four consecutive blog entries. The first explains that central banks only influence market interest rates in the short run - in the longer run they are really followers of the "equilibrium" or "natural rate of interest" determined by the fundamental sources of demand and supply of savings. So if interest rates are low - and they have been heading down since long before the crisis, it's a deeper phenomenon than central bank action.

Second, Bernanke takes on Larry Summers' argument that we may be in a secular stagnation, defined by a semi-permanent shortfall of demand, or differently put, more desired savings than people are willing to invest into capital. Summers' concern is that the inability of central banks to force interest rates below zero become an inability ever to equilibrate desired savings and investments, so that the economy continuously operates below full investment. Bernanke is sceptical: he thinks it is impossible for the natural rate of interest to be negative for very long, since this would make even the most idiotic investments profitable and that is simply not what we see. So he attributes current low market rates to temporary headwinds which are about to abate.

Thirdly, he thinks the stagnationists do not appreciate the global nature of the economy: so long as there are profitable investment opportunities anywhere in the world, excess savings should be manageable everywhere. The problem is when the savings glut is itself of global scale - which he long argued was the case before the crisis. Today, however, he thinks it has shrunk and sees good reason to think it will continue to take care of itself. Emerging markets' current account surpluses have at least halved since 2006; so has the US deficit. This analysis entails a key policy difference with Summers - since the global savings glut is largely induced by policies in the surplus countries, the correct response is to reverse those damaging policies, not to make up for deficient demand with additional fiscal deficit spending by already stretched governments in deficit countries.

Bernanke, fourthly, singles out one exception to his optimism: Germany's rising surplus, which has reached 7 per cent of the country's GDP. This is a problem in a slow-growing world, says Bernanke.

Larry Summers agrees with much of what Bernanke has to say, especially on the global aspects, but stands his ground on several important points. In particular, he dismisses concerns about government borrowing when interest rates are near zero. He also points out that market expectations challenge Bernanke's doubt that the equilibrium rate can be negative for very long. Krugman, meanwhile, argues that international capital flows need not be enough to get stagnant regions out of their liquidity traps.

There is plenty of food for thought in the linked posts, which taken together constitute as good a statement of the current thinking in mainstream policy macroeconomics as it gets. Take the time to read, mull, and digest. But note the following shortcuts - not to say corner-cutting - by the great and the good.

In discussing the eurozone, Bernanke repeats the conventional view that the German surplus is a problem for other euro countries without recognising how much the surplus vis-a-vis other euro countries has fallen. He also attributes intra-euro current account asymmetries to divergent "competitiveness". But it is a little-known fact, which Bernanke unfortunately does not help to disseminate, that the euro periphery unit labour costs in tradeable sectorsdid not rise out of line in the boom. All the action was in non-tradeables, which reflected a credit-fuelled import boom. Summers and Krugman, meanwhile, rely heavily on the supposed lower bound on monetary policy. As Free Lunch regularly points out, several central banks are plumbing the depths of interest rates well below zero and still can't find a lower bound.