An online debate between Larry Summers and Ben Bernanke about the state of the global economy and how to fix the United States’ low interest rate concerns is currently ongoing.
Summers previously presented a secular stagnation hypothesis as an explanation for current trends, which argued that the three primary goals for an economy of full employment, low and stable inflation rates, and financial stability are incredibly difficult to achieve simultaneously. The secular stagnation hypothesis presents the possibility that a slowdown in population growth and technological advances would cause firms to reduce investment, which in conjunction with reduced consumption by households, would cause full employment to be difficult to obtain. While the initial formulation of this hypothesis after the Great Depression seemed inaccurate, current conditions support the expected depression of consumption and investment, thereby restricting the growth potential of an economy. Summers suggests that fiscal policy be used to increase infrastructure spending as a means of realizing full employment.
Bernanke, however, is skeptical that the U.S. is currently facing secular stagnation. Rather than pointing to fiscal policy as the remedy for the Fed’s inability to achieve full employment with current interest rate levels, he contends that the issues driving Summers’ secular stagnation hypothesis is a result of international circumstances. Bernanke points out that an ongoing excess of savings by both people and governments outside of the U.S. has driven wages, GDP, and interest rates down, while causing unemployment to rise. This effect is ultimately attributed to a reduction of exports, as the money being saved internationally has caused spending flowing into the U.S. from other countries to fall. Thus, in Bernanke’s view, if other countries stop their high levels of saving in an effort to rectify their own growth slowdown, investment and spending on U.S. exports will cause the American economy to return to normal levels.
The problem with Bernanke’s solution is the difficulty for the U.S. to implement measures which can actively change conditions abroad and improve domestic situations as a result. Relying on other countries (especially those in Europe which are facing economic difficulties) to sort out their own situations before the global economy returns to normal levels would be a very inefficient solution for the U.S. While he disagrees with Summers’ attribution of the blame to secular stagnation, perhaps Summers’ proposal to focus on raising interest rates at home and taking an active role in developing a solution is the best stance after all.
http://www.nytimes.com/2015/04/03/upshot/bernanke-says-global-imbalances-bedevil-the-world-economy-discuss.html?ref=economy&abt=0002&abg=0
http://www.brookings.edu/blogs/ben-bernanke/posts/2015/04/01-larry-summers-response
http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/31-why-interest-rates-low-secular-stagnation
3 Comments
It will be interesting to see what kind of weight the market puts on Bernanke’s words. How much does his thinking reflect that of Yellen and the rest of the Fed governors?
I have a hard time accepting the secular stagnation hypothesis due to the continued emergence of emerging economies and the possible ‘internet’ revolution that we are currently undergoing. While the US population may not be increasing dramatically, many more consumers are becoming available to US companies abroad.
Our growth models suggest that in the long run growth depends on our own productivity increases, not those of developing countries that we know are behind the curve (the production possibility curve, that is). So while we see the internet everywhere, how has it actually resulted in more than a marginal improvement, and one achieved slowly at that? Phones aren’t new, computers aren’t new, and so on. I used to have a Rolodex and two phone books; now I have the online directory for campus, and my “contacts” file.
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