Summers goes negative
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In a new speech at the IMF Economic Forum, Larry Summers said the US may be in a near-permanent slump — an assertion Peter Coy calls “deeply pessimistic”. What the US faces, Summers warns, is secular stagnation. The problem: nominal interest rates can’t go any lower, because they’re already near the zero lower bound, but the economy may need real interest rates of negative two or three percent to get back to full employment. Here’s Summers:
We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back, below their potential.
Paul Krugman is annoyed, because he agrees with Summers, and “Larry’s formulation is much clearer and more forceful, and altogether better, than anything I’ve done”. The US economy, repeats Krugman, still needs good old-fashioned Keynesian policy like burying gold in coal mines or faking an alien attack.
The most radical part of Summers’ speech, Krugman says, is his assertion that we may need very negative real interest rates (that is, interest rates after accounting for inflation) to kickstart growth. When real interest rates go negative, monetary policy becomes less effective, says Krugman. Summers adds that rates can stay low, but QE can’t go on indefinitely, even if the economic conditions that make it necessary continue forever. If that’s true, says Krugman, “we may be an economy that needs bubbles just to achieve something near full employment”.
Ryan Avent thinks there’s far too much over-thinking going on. Inflation is far too low across the globe, and particularly in Europe, so central bankers should raise their inflation goals and “try to increase expectations of inflation”. The Fed is at least studying the possibility of increasing its inflation target above 2% to juice growth.
Tyler Cowen disagrees, saying that negative real interest rates would neither help the economy nor help return the economy to full employment.
James Pethokoukis thinks Summers is too dismissive of things like quantitative easing, or shifting to targeting nominal GDP growth rather than inflation. And, contrary to Summers’ fears of stagnation, he says the US may be in better shape than we think: current productivity metrics may not capture the full economic benefits of the IT revolution. — Ben Walsh
On to today’s links:
The “cost of employee turnover due to various forms of workplace discrimination is about $64B per year” – Senator Klobuchar
Your semi-regular reminder that Europe’s youth unemployment situation is dismal – NYT