Summary. Secular stagnation is the idea that even at zero interest rates, it’s possible an economy does not achieve full employment. Ergo negative interest rates are needed, but implementing the latter is difficult. Ergo it’s conceivable there is no escape from excess unemployment.
The truth is that as Keynes pointed out and as MMTers keep repeating, it doesn’t matter how reluctant businesses are to invest or how reluctant households are to spend, if the state simply increases and carries on increasing the amount of money spent and fed into household pockets, the point must eventually come where households react by spending enough to bring full employment. And until household spending rises far enough, there is no theoretical limit to the latter public spending.
As leading MMTer Warren Mosler put it in his “Mosler’s law” which appears at the top of his blog: “There is no financial crisis so deep that a sufficiently large tax cut or increase in public spending cannot deal with it.”
Summers first proposed his secular stagnation idea in a speech at an IMF conference in 2013. Mostly it’s incoherent nonsense far as I can see, but if Summers is saying anything at all, I go along with the summary of his speech set out by Gavyn Davies in the Financial Times. As Davies puts it in his 2nd and 3rd paragraphs, the theory is that demand can decline to such an extent that even a zero interest rate won’t solve the problem, thus a NEGATIVE rate is needed, and allegedly because cutting interest rates “has been the only means available to boost demand”.
Now the first flaw there is that cutting interest rates is most certainly not the “only means available to boost demand”. That is, if a zero rate doesn’t bring full employment, the state can simply print money and spend it, and/or cut taxes. The effect of that is to boost household cash balances, and (if the increased public spending option is taken) to increase employment in all the usual public sector areas: education, health, infrastructure repair, law and order, defence and so on.
And if the latter policy is implemented in robust enough form and for long enough, then household cash balances must at some point induce households to spend enough to bring full employment.
Indeed, the latter is exactly what we’ve done over the last three years or so. That is we’ve implemented fiscal stimulus (i.e. have government borrow and spend (and/or cut taxes)), then we’ve had central banks print money and buy government bonds: that’s called “Quantitative Easing”. And that comes to the same thing as having government and central bank, i.e. “the state”, print money and spend it and/or cut taxes.
Perhaps Summers hasn’t heard of QE. Or if he has, it seems he doesn’t understand the basic central bank book keeping entries involved when central banks do QE.
Two years later: 2015.
Having briefly sumarized Summers’s ideas as of 2013, we’re now in 2015 and he seems to have learned nothing in the meantime. In this speech given a few days and entitled “Reflections on Secular Stagnation” he says:
“Go back to basic Keynesian economics, and imagine that the point where the IS curve coincides with full employment involves a nominal interest rate that is lower than the attainable nominal interest rate. In that case, the creation, the printing of more money will be unavailing in generating economic growth.”
What on Earth is he talking about? Robert Mugabe didn’t find the “IS curve” any problem when he was printing and churning out ludicrously large amounts of money. It would be nice if Harvard economists had the same grasp of this subject as Robert Mugabe, wouldn’t it? (As I pointed out here some time ago).
And later in his speech of a few days ago he says:
“Secular stagnation is the phenomenon that the equilibrium level that savings are chronically in excess of investment, at reasonable interest rates.”
Well obviously it’s possible there is a decline in the amount that firms want to invest, and obviously its also possible there is a rise in the desire by households to save – in particular save MONEY rather than save in the sense of acquiring bigger houses, newer cars, etc. But the solution is easy: GIVE PEOPLE MORE MONEY!
Of course if the latter process goes too far, then excess inflation ensues. But until that point is reached or looks as though it’s about to be reached, there’s nothing wrong with simply printing money and expanding public spending and/or cutting taxes.