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Three, Four… Many
Secular Stagnations!
J. Bradford DeLong
U.C. Berkeley
, WCEG, and
NBER
http://bradford-delong.com
brad.delong@gmail.com
@delong
2017-01-07
pages:
http://tinyurl.com/dl20170107a
html:
http://www.bradford-delong.com/2017/01/three-four-many-
secular-stagnations.html
pdf:
3123 words
1
I. The Third Coming of John A.
Hobson
In my view, the current debate about “secular stagnation”
started by Larry Summers is best thought of as the third
coming of John A. Hobson.
The fi rst coming of John A Hobson was, of course, Hobson
(1902):
Imperialism: A Study
.
1
In Hobson’s schema,
unequal income distribution combined with the limited
physical capacity to consume of the rich meant that
anything like full employment could be maintained only
with a growing share of output devoted to government
purchases and investment. But where were there vents for
additional investment? Abroad, in the growing empire:
Investors who have put their money in foreign
lands, upon terms which take full account of risks
connected with the political conditions of the
country, desire to use the resources of their
Government to minimize these risks, and so to
enhance the capital value and the interest of their
private investments. The investing and
speculative classes in general also desire that
Great Britain should take other foreign areas
under her flag in order to secure new areas for
profi table investment and speculation
…
2
1
John A. Hobson (1902):
Imperialism: A Study
(New York: James Pott)
<
http://fi les.libertyfund.org/fi les/127/0052_Bk.pdf
>
Moreover, the military apparatus necessary to conquer and
to defend what had been conquered soaked up productive
capacity that would otherwise have been idle. As Winston
Churchill put it with respect to Great Britain’s naval
construction plans for the year 1909: “The Admiralty had
demanded six [Dreadnought-class] battleships: the
economists offered four: and we fi nally compromised at
eight.”
2
Thus governments that embarked on imperialism
and armaments found their domestic economies in
relatively good shape with respect to employment, capacity
utilization, and profi ts; while governments that minded
their knitting did not. And even though imperialism and
militarism were humanitarian and cost-benefi t disasters,
governments that pursued them tended to remain in offi ce.
And this pushed Europe toward World War I.
It is conventional among economists to not understand
Hobson’s “underconsumptionist” argument. As Ben
Bernanke commented in 2013:
3
A
s I pointed out
… [when]
Larry fi rst raised the
secular stagnation argument
…
it’s hard to imagine
that there would be a permanent dearth of profi table
investment projects
. As
Larry’s uncle Paul Samuelson
3
2
Winston Churchill (1923):
The World Crisis
(New York: Charles
Scribner)
http://amzn.to/2iMPzRB
3
Ben Bernanke (2015): Why
Are
I
nterest
R
ates so
L
ow
?
P
art 2:
Secular
S
tagnation
https://www.brookings.edu/blog/ben-bernanke/
2015/03/31/why-are-interest-rates-so-low-part-2-secular-stagnation/
taught me in graduate school at MIT, if the real
interest rate were expected to be negative indefi nitely,
almost any investment is profi table. For example, at a
negative (or even zero) interest rate, it would pay to
level the Rocky Mountains to save even the small
amount of fuel expended by trains and cars that
currently must climb steep grades. It’s therefore
questionable that the economy’s equilibrium real rate
can really be negative for an extended period
…
This, of course, misses the point that risk-bearing capacity
is an essential factor of production needed for private-
sector business investment, and risk bearing capacity must
be mobilized and paid for—and paid for very handsomely
given the adverse selection and moral hazard problems in
fi nancing private investment. A very healthy average risky
rate of profi t is perfectly consistent with a short-term safe
real rate of interest less than the negative of the rate of
inflation.
For Hobson, of course, the solution was progressive tax and
transfer (and perhaps predistribution?) policies to end the
Gilded Age and create a reasonable distribution of income,
in which fortunes would not be in the hands of those whose
stomachs were small and whose narrow eyes were not
much bigger, and who would thus hoard rather than spend
their incomes.
4
The second coming of John A. Hobson was, of course,
Alvin Hansen (1939).
4
Secular stagnation was “
sick
recoveries which die in their infancy and depressions which
feed on themselves and leave a hard and seemingly
immovable core of unemployment
…
”
We were “
rapidly
entering a world in which we must fall back upon a more
rapid advance of technology than in the past if we are to
fi nd private investment opportunities adequate to maintain
full employment
…” For Hansen, the solution was either (a)
more investment in research and development to speed
technological progress, or (b) public investment “
in human
and natural resources and in consumers’ capital goods of a
collective character
…”
In some sense Hobson’s fears became true and more than
true: World War I, and what followed. And when the world
economy reoriented itself after World War II we were no
longer in a Gilded Age but, rather, in an Age of Social
Democracy with a much more equal income distribution—
and so Hobson’s unequal income distribution and resulting
underconsumptionist worries were no longer relevant.
Alvin Hansen’s worries were similarly obsolete as the post-
World War II order formed itself. We got the greater public
investment, both in research and development to spur more
5
4
Alvin Hansen (1939): Economic
Pr
ogress and
D
eclining
P
opulation
G
rowth
https://www.jstor.org/stable/1806983
rapid technological progress—DARPA—and in the Cold
War arms race.
II. The Wheel Has Turned Again
A. The Longer Depression
But now the wheel of history has turned once again. We
have a Second Gilded Age. We have had what looks to
6
have been either the second-largest or the largest adverse
fi nancial business-cycle shock in history. We have had an
economic downturn followed by a very slow recovery that
has produced and will produce a cumulative output gap vis-
a-vis potential that will rival and may well exceed the Great
Depression itself as a multiple of the economy’s productive
potential.
But it is not just what people call “the Great Recession”
and should call “the Longer Depression”. It is the long,
steady decline in safe interest rates at all maturities since
1990: the decline in short-term safe real interest rates from
4
%
to -1.5
%
, and the decline in long-term safe real interest
rates from 5
%
to 1
%
.
B. Larry’s Core Worry
And so now we have Larry Summers (2013),
5
reacting to
the collapse of the short-term safe nominal Wicksellian
“neutral” rate of interest consistent with full employment
and with central banks’ ability to hit their inflation targets.
7
5
Lawrence Summers (2013): Secular Stagnation
http://
larrysummers.com/imf-fourteenth-annual-research-conference-in-
honor-of-stanley-fi scher/
;
https://www.youtube.com/watch?
v=KYpVzBbQIX0&ab_channel=JamesDecker
We are handicapped because there is not one place in which
Larry has developed his argument: it is evolving.
6
But the
debate Larry has started seems to me, as I wrote, “
the most
important policy-relevant debate in economics since John
Maynard Keynes's debate with himself in the 1930s
.”
7
Summers
’
s core
fear
is that the global economy—or, at
least, the North Atlantic chunk of it—will be stuck for a
generation or more in a situation in which, if investors have
realistically expectations,
then even if
central banks reduce
interest rates to accommodate those expectations and
even
if
governments follow sensibl
e but not extravagant
fi scal
policies, private fi nancial markets will
still fail
to support a
level of investment demand compatible with full
employment.
Thus economic policymakers will fi nd themselves either
hoping that investors form unrealistic expectations—
prelude to a bubble—or coping with chronic ultralow
8
6
Lawrence Summers (2015):
Rethinking Secular Stagnation After
Seventeen Months
http://larrysummers.com/wp-content/uploads/
2015/07/IMF_Rethinking-Macro_Down-in-the-Trenches-
April-20151.pdf
; Lawrence Summers (2016):
The Age of Secular
Stagnation
http://larrysummers.com/2016/02/17/the-age-of-secular-
stagnation/
; Lawrence Summers (2014):
U.S. Economic Prospects:
Secular Stagnation, Hysteresis, and the Zero Lower Bound
http://
link.springer.com/article/10.1057
%
2Fbe.2014.13
7
J. Bradford DeLong (2015):
The Scary Debate
Over Secular
Stagnation
:
Hiccup
…
or Endgame
http://tinyurl.com/dl20170106m
interest rates and the associated risks of stubbornly elevated
unemployment.
III. Causes of Secular Stagnation III
Such
“
badly behaved investment demand and savings
supply functions,
”
as Martin Feldstein called them when he
taught this stuff to me at Harvard back in 1980, could have
seven
underlying causes:
1.
High income inequality, which boosts savings too
much because the rich can't think of other things they'd
rather do with their money.
(Hobson)
2.
Technological and demographic stagnation that lowers
the return on investment and pushes desired investment
spending down too far.
(Hansen)
3.
Non-market actors whose strong demand for safe,
liquid assets is driven not by assessments of market risk
and return but rather by political factors or by political
risk. (Bernanke)
4.
A broken fi nancial sector that fails to mobilize the risk-
bearing capacity of society and thus drives too large a
wedge between the returns on risky investments and
the returns on safe government debt.
(Rogoff)
5.
Very low
actual and expected
inflation, which means
that even a zero safe nominal rate of interest is too high
9
to balance desired investment and planned savings at
full employment.
(Krugman, Blanchard)
6.
Limits on the demand for investment goods coupled
with rapid declines in the prices of those goods, which
together put too much downward pressure on the
potential profi tability of the investment-goods sector.
7.
Technological inappropriateness, in which markets
cannot fi gure out how to properly reward those who
invest in new technologies even when the technologies
have enormous social returns—which in turn lowers
the private rate of return on investment and pushes
desired investment spending down too far.
A. Other Economists’ Views as Partial
The fi rst thing to note is that other economists who have
been worrying at related issues have views all of which
appear to be a subset of Summers-style secular stagnation
concerns. Hobson saw income inequality as the root—that’s
number 1 on the list. Hansen saw demographic and
technological stagnation—that’s number 2, and today this
point of view is echoed by Gordon.
Bernanke, the former
Federal Reserve chairman, says we have entered an age of
a
“
global savings glut
” because of mercantilism and
political risk in emerging markets—that’s number 3 on the
10