The past few weeks has seen a flurry of articles written by the like of Paul Krugman, Kit Junkes at SocGen, Economist Free Exchange and others.
Most interpreted his comments to mean we need more bubbles, but clearly, that is not what he said. Summers saw fit to expand on his comments (at FT on December 15 and at his Reuters blog yesterday) to help clear things up for those having trouble grasping his English the first time around.
Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. This idea confuses prediction with recommendation. It is of course far better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles. On the other hand, it is only rational to recognize that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely. The risk of financial instability provides yet another reason why preempting structural stagnation is so profoundly important.
He made his case for secular stagnation:
Why should not the economy return to normal after the effects of the financial crisis are worked off? Is there a basis for believing that equilibrium real interest rates have declined? There are many a priori reasons why the level of spending at any given level of safe short-term interest rates is likely to have declined. These include (i) reduced investment demand, due to slower labor force growth and perhaps slower productivity growth; (ii) reduced consumption demand, due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital; (iii) on a global basis increased savings and increased risk aversion, as governments accumulate trillions in liquid reserves; (iv) the continuing effects of the financial crisis, including greater costs of financial intermediation, higher risk aversion, and continuing debt overhangs; (v) continuing declines in the cost of durable goods, especially those associated with information technology, meaning that the same level of saving purchases more capital every year; and (vi) the observation that any given real interest rate translates into a higher after tax real interest rate than it did when inflation rates were higher. Logic is supported by evidence. For many years now indexed bond yields have trended downwards. Indeed, U.S. real rates are substantially negative at a five-year horizon.
The best “rebuttal” was from Goldman Sachs. (Nothing displayed below?)
[pdf width=”100%” height=”1100px”]https://s3.amazonaws.com/2013-wealthcop-PDF/GS.20131206-summers-rebuttal.pdf[/pdf]