Top economists debate 'secular stagnation'
Joseph E. Stiglitz
In the aftermath of the 2008 financial crisis, some economists argued that the United States, and perhaps the global economy, was suffering from “secular stagnation,” an idea first conceived in the aftermath of the Great Depression.
Many believed that the economy recovered only because of government spending on World War II, and many feared that with the end of the war, the economy would return to its doldrums. For reasons now well understood, these dire predictions fortunately turned out to be wrong.
Those responsible for managing the 2008 recovery (the same individuals bearing culpability for the under-regulation of the economy in its pre-crisis days) found the idea of secular stagnation attractive, because it explained their failures to achieve a quick, robust recovery.
The events of the past year have put the lie to this idea, which never seemed very plausible.
The sudden increase in the US deficit, from around 3 percent to almost 6 percent of GDP, owing to a poorly designed regressive tax bill and a bipartisan expenditure increase, has boosted growth to around 4 percent and brought unemployment down to an 18-year low.
The Obama administration made a crucial mistake in 2009 in not pursuing a larger, longer, better-structured, and more flexible fiscal stimulus. Had it done so, the economy’s rebound would have been stronger, and there would have been no talk of secular stagnation.
Some of us warned at the time that the downturn was likely to be deep and long, and that what was needed was stronger and different from what Obama proposed. I suspect that the main obstacle was the belief that the economy had just experienced a little “bump,” from which it would quickly recover.
Put the banks in the hospital, give them loving care (in other words, hold none of the bankers accountable or even scold them, but rather boost their morale by inviting them to consult on the way forward), and, most important, shower them with money, and soon all would be well.
But the economy’s travails were deeper than this diagnosis suggested. The fallout from the financial crisis was more severe, and massive redistribution of income and wealth toward the top had weakened aggregate demand.
The US needed a fundamental reform of its financial system. The 2010 Dodd-Frank legislation went some way, though not far enough, in preventing banks from doing harm to the rest of us; but it did little to ensure that the banks actually do what they are supposed to do, focusing more, for example, on lending to small and medium-size enterprises.
More government spending was necessary, but so, too, were more active redistribution and pre-distribution programs — addressing the weakening of workers’ bargaining power, the agglomeration of market power by large corporations, and corporate and financial abuses.
Instead, policymakers failed to do enough even to prevent poor households from losing their homes.
A fiscal stimulus as large as that of December 2017 and January 2018 (and which the economy didn’t really need at the time) would have been all the more powerful a decade earlier when unemployment was so high. The weak recovery was thus not the result of “secular stagnation”; the problem was inadequate government policies.
Here, a central question arises: Will growth rates in coming years be as strong as they were in the past? That, of course, depends on the pace of technological change. Investments in research and development, especially in basic research, are an important determinant, though with long lags.
But even then, there is a lot of uncertainty. Growth rates per capita have varied greatly over the past 50 years, from between 2 and 3 percent a year in the decade(s) after World War II to 0.7 percent in the last decade.
There are many lessons to be learned as we reflect on the 2008 crisis, but the most important is that the challenge was — and remains — political, not economic: There is nothing that inherently prevents our economy from being run in a way that ensures full employment and shared prosperity. Secular stagnation was just an excuse for flawed economic policies.
Joseph E. Stiglitz is the winner of the 2001 Nobel Memorial Prize in Economic Sciences. His most recent book is “Globalization and its Discontents Revisited: Anti-Globalization in the Era of Trump.” Copyright: Project Syndicate, 2018.
Lawrence H. Summers
Joseph Stiglitz recently dismissed the relevance of secular stagnation to the American economy, and in the process attacked (without naming me) my work in the administrations of Presidents Bill Clinton and Barack Obama.
Stiglitz echoes conservatives like John Taylor in suggesting that secular stagnation was a fatalistic doctrine invented to provide an excuse for poor economic performance during the Obama years.
This is simply not right.
The theory of secular stagnation holds that, left to its own devices, the private economy may not find its way back to full employment, which makes public policy essential. I think this is what Stiglitz believes, so I don’t understand his attacks.
In all of my accounts of secular stagnation, I stressed that it was an argument not for any kind of fatalism, but rather for policies to promote demand, especially through fiscal expansion. What about the policy record? Stiglitz condemns the Obama administration’s failure to implement a larger fiscal stimulus policy. He was a signatory to a November 19, 2008 letter also signed by noted progressives James K. Galbraith, Dean Baker, and Larry Mishel calling for a stimulus of US$300-400 billion — less than half of what the Obama administration proposed. So matters were less clear in prospect than in retrospect.
We on the Obama economic team believed that a stimulus of at least US$800 billion — and likely more — was desirable, given the gravity of the economic situation. We were told by those on the new president’s political team to generate as much validation as possible for a large stimulus because big numbers approaching US$1 trillion would generate “sticker shock” in the political system.
So we worked to encourage a variety of economists, including Stiglitz, to offer larger estimates of what was appropriate.
Despite the incoming president’s popularity and an all-out political effort, the Recovery Act passed by the thinnest of margins, with doubts about its ultimate passage lingering until the last moment. I cannot see the basis for the argument that a substantially larger fiscal stimulus was feasible. And the effort to seek a much larger one certainly would have meant more delay at a time when the economy was collapsing.
Unrelated to the topic of secular stagnation, Stiglitz takes a swipe at me by saying that Obama turned to “the same individuals bearing culpability for the under-regulation of the economy in its pre-crisis days.”
Under the auspices of the government-sponsored enterprise Fannie Mae, Stiglitz published a paper in 2002 arguing that the chance that the mortgage lender’s capital would be depleted was less than one in 500,000, and in 2009 he called for nationalization of the US banking system. So I would expect Stiglitz to be well aware that hindsight is clearer than foresight.
Removal of ‘systemic risk’
What about the Clinton administration record on financial regulation? With hindsight, it clearly would have been better if we had foreseen the need for legislation like the 2010 Dodd-Frank reforms and had a way to enact it with a Republican-controlled Congress. And certainly we did not foresee the financial crisis that came eight years after we left office.
The other principal attack on the Clinton administration’s record targets the deregulation of derivatives in 2000. With the benefit of hindsight, I wish we had not supported this legislation.
It is also important to recall that we pursued the 2000 legislation not because we wanted to deregulate for its own sake, but rather to remove what the career lawyers at the US Treasury, the Fed, and the Securities and Exchange Commission saw as systemic risk arising from legal uncertainty surrounding derivatives contracts.
More important than litigating the past is thinking about the future. Even if we disagree about past political judgments and about the use of the term “secular stagnation,” I am glad that an eminent theorist like Stiglitz agrees with what I intended to emphasize in resurrecting that theory: We cannot rely on interest-rate policies to ensure full employment. We must think hard about fiscal policies and structural measures to support sustained and adequate aggregate demand.
Lawrence H. Summers was US Secretary of the Treasury (1999-2001), Director of the US National Economic Council (2009-2010), and President of Harvard University (2001-2006), where he is currently University Professor. Copyright: Project Syndicate, 2018.