Earlier this month, former U.S. Treasury secretary Larry Summers published a Washington Post column warning that, despite the low unemployment rate (3.9 percent) and solid economic growth, America might still be suffering from “secular stagnation.”
What is secular stagnation? The legendary Harvard economist Alvin Hansen first introduced the concept during the Great Depression, and in recent years Summers has been using it to help explain America’s underlying challenges. “The idea of secular stagnation,” he wrote in his Post column, “is that the private economy — unless stimulated by extraordinary public actions, especially monetary and fiscal policies and unsustainable private-sector borrowing — will be prone to sluggish growth caused by insufficient demand.”
Sizing up our current economic situation, Summers argued that “extraordinary policy and financial conditions” have given us only “fairly ordinary growth” — which is similar to what happened prior to the 2007–09 recession. If we took away those “extraordinary” conditions, he said, the economy would be in much worse shape.
More specifically: “If budget deficits had been at normal levels and not growing relative to the economy, real long-term interest rates had been steady in their customary range above 2 percent and an extra $10 trillion in wealth had not been created by abnormal stock market returns, it is hard to believe that the U.S. economy would be growing much at all. And it is almost inconceivable that it would be near its 2 percent inflation target.”
Hoover Institution economist John Cochrane takes a different view. “I see no evidence that our growth is supported by unusual stimulus,” Cochrane writes. “More growth from more ‘demand’ is over. But supply side growth can continue for years. If we are to grow now, it will be from better supply, and policy focused on incentives.”
In other words: “The U.S. economy can no longer produce more by simply matching people looking for work with idle machines. To grow now, we need more people or better machines and businesses. We need to bring people into the workforce, who aren’t now even looking for work, or we need higher productivity.”
Both Cochrane and Summers are worth reading in full. (To read a 2014 Summers speech on “secular stagnation,” go here.)