Former Treasury Secretary Summers talks secular stagnation and possible solutions

The most profound macroeconomic challenge of the next 20 years is secular stagnation, or the idea that the economy has equilibrated to downward growth, Lawrence Summers argued in a lecture on Thursday afternoon.

Summers served as Secretary of the Treasury under President Bill Clinton and Director of the National Economic Council under President Barack Obama. He is also President Emeritus of Harvard and a professor at Harvard’s Kennedy School of Government.

Summers opened the lecture by crediting the close ties between government and academia as the reason why the most recent recession had not turned into a depression, naming many of his friends from both fields in the audience.

The United States has not had sustainable, genuine macroeconomic growth in at least half a generation, Summers said, which motivates a debate over different macroeconomic theories to encourage such growth.

Previous explanations could be categorized as “financial network failure theory,” in which a sudden shock “turned out the lights” on the economy. However, these explanations took the view that once the lights were back on, the economy would not only recover rapidly, but also grow, due to a natural period of playing catch-up, he said.

“That was five years ago that the lights have been turned on, and we have not caught up at all,” he explained.

In Europe, Summers said, the picture was worse, displaying a graph that compared Japan in the period from 1983 to 2013 and Europe from 2000 to today.

“It would be a rough summary of macroeconomic[s] in this decade to say that Japan is the old Japan and Europe is the new Japan,” Summers said.

Evidence of secular stagnation is clear in both decreases in real interest rates and decreases in inflation, which tend to correlate with lower output, Summers said. Savings remain high relative to investment, he added, allowing secular stagnation to persist.

The main reason for this is likely that capital investment has become both cheaper and less necessary, he said, offering the example of Sony, a company with large investment needs in order to sustain its business, as compared to Snapchat, a type of company that requires very low investment.

“When you can start a company for nothing and with nothing [but still] have the possibility of wealth creation without investment … [that] reinforces the [reduction] in savings over investment,” Summers said.

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Rising inequality — the theme of the conference — and rising corporate profit shares also lead to "more money in the hands of people who have high savings propensities," Summers said, referring to wealthy individuals.

These factors combined lead to a low investment rate and high savings, which is not conducive to economic growth, he explained, adding that the economy is thus left in stagnation, as deflationary expectations persist and are fulfilled.

Turning briefly to alternative strategies to increase growth, Summers proposed structural reform, reduced real interest rates and increased spending in both the private and public sectors. In particular, Summers showed an International Monetary Fund publication that showed a one-percent increase in GDP debt-financed infrastructure today would increase GDP relative to debt by six percent within five years.

“It is certainly possible that exogenous variables will change in the future — in fact, I hope they will,” Summers said, giving the example of World War II helping to pull the United States out of the Great Depression. “But that is the task of economic policy.”

Summers was also posed a question about whether the economy was healthy.

"[A healthy adult is one who] doesn't know how they're going to die yet," Summer said. "In that sense, the economy is healthy."

The lecture, titled “Finance, Inequality and Long-Run Growth,” took place in Dodds Auditorium at 4:30 p.m. It was the keynote address of the Julis-Rabinowitz Center for Public Policy and Finance’s Fourth Annual Conference.