Sekerci: Secular stagnation and the outlook of our economy


Burak Sekerci, Columnist

On Tuesday, the International Monetary Fund presented the World Economic Outlook, a twice-yearly document that concentrates on the world’s economic performance. The IMF depicted a rather pessimistic scenario: The United States, Germany and Japan, the rich kids on the block, should expect lower growth rates than their pre-recession levels. According to Financial Times, this gloomy outlook will reignite economists’ fears that the world will experience low growth rates for some prolonged amount of time because of what today’s economists call “secular stagnation.” But what is secular stagnation?

Secular stagnation was first proposed by Alvin Hansen, a Keynesian economist, during the Great Depression era. He argued that depressed economies face slowing growth as savings increase, leaving less resources available for consumption and, more importantly, for investment. Hansen also suggested innovation was slowing and populations were aging, which doomed the slumping economies of 1930s to an endless stagnation. Well, this never happened: In the period after World War II, the economy boomed, consumption increased, technological breakthroughs were made and baby boomers came into the workforce. Today’s version of secular stagnation suggested by the former U.S. Secretary of the Treasury Larry Summers is not much different. It consists of the same guidelines Hansen provided, but adds the discussion of interest rates and the zero lower bound.

Just like in the 1930s, saving rates are high, investment is low and rich-country populations are aging. Summers argues that, due to secular stagnation, the real interest rate that will balance investment and saving is now naturally lower than it was in the past and is even negative. Because the Federal Reserve cannot lower nominal interest rates under zero, this new negative natural real interest rate is very hard to adjust toward. In fact, because we can’t achieve this target, the economy stagnates as investment comes short of savings, decreasing the U.S. output. In addition, our populations are aging, the labor force is diminishing and most big companies do not need big investments to grow, leading to our modern model of stagnation.

However, Ben Bernanke, the former U.S. Federal Reserve chairman during the financial crisis, believes the new negative natural real interest rate can not stay forever and disagrees with Summers. A negative real interest rate should mean every investment would be profitable, and thus having negative interest rates for a long time is theoretically implausible.

Bernanke suggests the low interest rates are caused by “global saving glut,” which means countries like China and Germany increase savings by accumulating foreign exchange reserves, and then buy American bonds. He also suggests that as Europe slumps, capital will flow out outward and likely land on U.S. soil. These factors would drive down interest rates, appreciate the dollar and increase the trade deficit, slowing growth.

Regardless of which explanation is correct, it is obvious the world economies are stagnating and the economic environment more or less resembles the environment back in the 1930s. I believe that the stagnation that the world is experiencing right now is explained a little partly by both sides of the argument. Populations, mostly in Europe and Japan, are ageing, but this should not affect growth immediately. Also, new innovations in the future will increase our productivity and will open up new doors for humanity.

However, the “global saving glut” is not just an idea — it is a reality right now. The dollar is strengthening against most foreign currencies, making it harder to export goods and easier to import. Less products will be produced for export from the United States, thus reducing output and growth. This is where the two sides collide: The problem is caused by secular stagnation in places like Europe, not by other countries’ controlled exchange policies. Although these two economists represent two different sides, according to the Washington Post the solution is the same for their problems: Raise the inflation target above the 2 percent levels. The “global saving glut” will be fixed by a depreciating dollar, and the secular stagnation will be fixed when the real interest rates are pushed to the natural negative level.

We should be worried, but we shouldn’t be pessimistic. All is not lost, and I think that with the correct steps, we can achieve the growth levels seen before the recent recession. Mankind has not reached its final frontiers; we can still make innovations that will carry us forward, and it is our generation that will make the next leap.

Burak Sekerci is a McCormick sophomore. He can be reached at [email protected]. If you would like to respond publicly to this column, send a Letter to the Editor to [email protected].