The worst mistake is to ignore secular stagnation

Once there was a simple rule of thumb for determining a country's economic standing: the lower the interest rate, the better. Government policy was subject to the real-time verdict of the bond market. Low yields meant a better night's sleep for the finance minister, cheap loans for industry and mortgagees relaxed about the next bill.

Such logic still applies in countries as troubled as Greece. But another, newer rule is that comparisons with Greece tend to be foolish. Its state is borderline insolvent and cannot print the currency in which its bills fall due. Elsewhere, low rates are as much an indication that something is awry.

The persistence of this phenomenon has been called "secular stagnation" by Lawrence Summers, a former US Treasury Secretary, using the term to describe "a chronic excess of savings over investment". This imbalance drives down interest rates, and leaves demand in the economy stuck below a healthy level and resources sitting idle.

While whatever is causing this remains a matter of academic dispute, it is wrong to blame interference by central banks. As former chairman of the US Federal Reserve Ben Bernanke explains, policy rates sit close to zero because that is what economic conditions demand. Any central banker that tried to force them back up would bring about such deflation that a reversal would swiftly follow. Jean-Claude Trichet, formerly of the European Central Bank, gave not one but two demonstrations of this, in 2008 and 2011.

More difficult is whether this stagnation will prove temporary (as Prof Bernanke hopes) or represents a structural change to which policy makers must find a response (Prof Summers' position). Related is the question of why incentives to invest are so low. A pessimistic answer is that compared with earlier eras there is a dearth of good ideas to invest in. The rollout of railways, electricity grids and telephone networks demanded huge capital outlays, as did putting a car in every garage. Signing everyone up to social media needs somewhat less.

But this answer fails to convince. Investment is not purely determined by innovations at the cutting edge. Global growth is reasonable, and the capital stock of developing nations far below the level found in richer countries. Even in the more stagnant developed world, there are opportunities going begging: infrastructure to mend, houses to build, scientific research to fund. Britain has published a "National Infrastructure Plan" showing a pipeline of projects of more than £400bn.

Another suggestion is that a faulty financial system has left the money stuck in the wrong place. Export champions such as Germany and corporate winners such as Apple accumulate cash that they lack the will to invest. In theory, the financial system ought to help borrowers put the money to work. In practice, the money is either lent to governments determined to cut their spending, or inflates asset prices.

When such mighty brains as Professors Bernanke and Summers cannot agree, a pragmatic response is called for. It may be impossible to determine when, how or even whether secular stagnation will end, but this is no reason to ignore it. Taking the UK as an example, bond yields have fallen by half since 2010 despite a sharp rise in debt. Investment and productivity have meanwhile disappointed. These factors strengthen the case for the government borrowing to invest. The purpose would be to raise the sustainable growth rate. Once, the risk of this pushing up interest rates would have been a regrettable side-effect weighing against such an aim. In current conditions, it is more of a bonus.

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