Accepting the reality of secular stagnation

• Author: Lawrence H. Summers
• Position: Charles W. Eliot University Professor at Harvard University.
• Pages: 19-21

March 2020 | FINANCE & DEVELOPMENT 17

POINT OF VIEW

A FUNDAMENTAL DIFFERENCE

between natural science

theories and social science theories is that natural sci-

ence theories, if valid, hold for all times and places. In

contrast, the relevance of economic theories depends

on context. Malthus’s theory of food availability was

valid for the millennia before he formulated it, but

not after the industrial revolution. Keynes’s ideas

were much more valid during the Great Depression

than during the inf‌lationary 1970s.

I am increasingly convinced that current mac-

roeconomic theories, with their premise t hat mon-

etary policy can determine the rate of in f‌lation,

may be unsuited to current economic real ity and so

provide misguided policy prescriptions. ey f ailed

to anticipate Japan’s def‌lationary slowdown that

began in 1990, or the global f‌inancia l crisis, slow

recovery, and below-target inf‌lation during a decade

of recovery, or the sustainability of hig h levels of

government debt with very low real interest rates.

Understanding these developments and cra fting

policies that respond ef‌fectively w ill likely require

that economists develop what mig ht be called a

“new old Keynesian economics” based on A lvin

Hansen’s Depression-era idea of secular stagnat ion.

is article sum marizes the case for new approaches

to macroeconomics by highlighting important

structura l changes in the economy of the industrial

world, explains the secul ar stagnation view, and

draws some policy implicat ions.

The investment dearth

Barring a chan ge in current trends, the industrial

world’s working-age population will decli ne over the

next generation, and China’s working-age popula-

tion will decline as wel l. At the same time, trends

toward increased labor force par ticipation of women

have played out with, for example, more women than

men now working in the United States.

ese demographic developments eliminate the

demand for new capital goods to equ ip and house

a growing workforce. is trend is reinforced by

the observation that the a mount of saving required

to purchase a given amount of capital goods has

declined sharply as t he relative price of equipment,

especially in the i nformation technology (IT) space,

has sharply decli ned. A $500 iPhone today has

more computing power than a Cray supercomputer

did a generation ago. In addition to capital goods’

having lower prices, the downward trend in t heir

prices encourages delaying investment.

Moreover the IT revolution has been associated

with a broader demassif‌ication of the economy.

E-commerce has reduce d the demand for shopping

malls, and the cloud has reduced the demand for

of‌f‌ice space by eliminat ing the need for f‌iling cabi-

nets, allowing of‌f‌ice s to be personalized with a f‌lick

of the switch, down to family photos on the wa lls.

Accepting the Reality of

Secular Stagnation

New approaches are needed to deal with sluggish growth,

low interest rates, and an absence of inf‌lation

Lawrence H. Summers

PHOTO: RALPH ALSWANG