Is America’s economy adrift in the doldrums? Lawrence Summers, perhaps the nation’s most inventive applied economist, thinks so. Speaking to an IMF forum last month, he described America’s current condition as “secular stagnation” in which we are stuck in a rut of weak demand, low growth, and low employment. This is the “L-shaped” recovery, or — strictly speaking, non-recovery — some warned about after the financial freeze of 2008. It is also sometimes dubbed “the new normal.”
“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 activities, holding our economies back below their potential,” Summers said. The phenomenon is not new; after all, before 2008, when Alan Greenspan had ensured endless cheap money through low interest rates, leading to asset bubbles, the real economy did not respond.
“Even a great bubble wasn’t enough to produce any excess of aggregate demand,” Summers said. “Even with artificial stimulus to demand, coming from all this financial imprudence, you wouldn’t see any excess.”
Summers explained that monetary policy is inadequate in trying to deal with our predicament because the “natural rate of interest” to ensure full employment and growth is now negative. When you take into account inflation, it is even lower. Central banks can hardly offer below 0 percent interest rates, because anyone holding cash would rather hoard it under the mattress rather than be charged for its safekeeping.
Quantitative easing may have served a purpose, but now it is an impotent policy. Worse, even though it is redundant, markets have come to depend on it and go into a tailspin whenever Fed Chairman Ben Bernanke mentions the T word — tapering. It seems unless we are careful, Summers warns, we are going Japanese, meaning that, like Japan’s economy in the last two decades, we could find ourselves caught in a downward spiral in which falling growth chases falling prices chasing falling demand chasing falling employment.