From the blog of Lawrence H. Summers:
Summers gave the keynote address at Princeton University’s
Julius-Rabinowitz Center for Public Policy 4th Annual Conference on
February 19, 2015. In his remarks, Summers gave his perspective on the
“profound macroeconomic challenge of the next 20 years in the industrial
world: secular stagnation.”
Lawrence H. Summers
Speech at Julius-Rabinowitz Center, Princeton University
February 19, 2015
Thank you for those generous words. I am glad to be here, glad to see
so many old friends, my former Treasury colleague Josi Chapmen, from
whom I learned much of what little I know about the international
economic interactions relating to Europe. My former student, and then
government colleague, Alan Krueger, whose work has illuminated so much
to do with the working, or the non-working, of labor markets. My friend
David Wessel, who’s covered my activities in government for many, many
years at the Wall Street Journal. I can now tell you that on any
occasion when I looked good, it was because he was reporting accurately.
On any occasion when I looked bad, it was because he did not have an
accurate rendering.
I just want to say, before I launch into my topic, that as someone
who has spent his life, in a way, shuttling back and forth between
government and university, I think that conferences like this one, and
centers like the one that it’s convened in, are really profoundly
important. If, for example, the United States has had a more successful
response for financial crisis than Europe or Japan, it is importantly
because of the kind of close connections between the worlds of thought
and the worlds of action, that the American system makes possible. I
believe the cultivation and support of worldly academic research in
economics is something that is very, very important. I also believe that
economic ideas, when either right or wrong, spur change and spur
progress. When right, they make an important contribution. When wrong,
they provide important clarification that ultimately proves to
contribute to public policy.
What I’d like to do today is talk about my perspective, and I’ll try
to recognize that there are multiple perspectives, on what seems to me
to be the profound macroeconomic challenge of the next 20 years in the
industrial world, and that is a problem of what I like to call secular
stagnation, following Alvin Hansen.
I’m going to talk about six things. I’m going to talk about why we’re
talking about secular stagnation, the dismal performance of the
industrial world in recent years. I’m going to talk about the secular
stagnation hypothesis, as Hansen framed it. Talk about what’s the
central element in that, the low level of real interest rates. Reflect
on some of the challenges that have been posed to the hypothesis, and
then discuss what is it to be done.
This shows you US economic performance since 2007, measured relative
to what we aspired to in 2007. What you see is that the economy went off
a small cliff between 2007 and 2009 and that relative to what we
aspired to in 2007, there has been no catch-up. The GDP gap is indeed
smaller than it was in 2009, but that is entirely because our judgments
about potential has been revised downwards, in the face of dismal
performance. If anything, the picture is worse. In Europe, where there’s
been essentially no progress, and where the gap relative to potential
as we had assumed it would be, has steadily increased, and is continuing
to increase. Of course, this is all reminiscent of the Japanese
experience, and it would be be a rough summary of macroeconomics in this
decade to say that Japan is the old Japan, and Europe is the new Japan.
Europe today looks very much like Japan did seven or eight years
post-bubble. Demographically challenged, incipiently deflating with
severe financial strains, with dysfunctional politics, and ineffective
decision-making....MORE
