Wednesday, February 25, 2015

Larry Summers' Feb. 19 Speech: "Reflections on Secular Stagnation"

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