Is Larry Summers Right About “Secular Stagnation”?

Larry Summers has always had a talent for stirring up a debate, and in recent weeks he has outdone himself. His argument that the United States economy may be suffering from “secular stagnation,” first made at an I.M.F. conference in November, has focussed attention on just how disappointing America’s economic performance has been over the past decade, and has raised important policy questions that deserve to be widely discussed. Writing in the Washington Post earlier this week, Summers warned that relying on low interest rates to boost the economy for long periods “virtually ensures the emergence of substantial financial bubbles,” and he called for more public and private investment.

Having written two books about bubbles, I’m sympathetic to the point that Summers is making, which is essentially a reiteration of the argument that Alvin Hansen and other American Keynesians put forward in the late nineteen-thirties and early forties. However, the way Summers framed the argument, in terms of interest rates, and, particularly, the “natural interest rate”—a concept borrowed from Knut Wicksell, a Swedish economist who lived around the turn of the twentieth century—has caused some unnecessary confusion. To try and clarify Summers’s thesis and illuminate its strengths and weaknesses, I’ll recast it in a way that should be more familiar: in terms of supply and demand.

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