reflections on secular stagnation dr. lawrence h. summers february 19, 2015
TRANSCRIPT
Reflections on Secular Stagnation
Dr. Lawrence H. SummersFebruary 19, 2015
2
Outline
I. Problematic post-crisis economic performance in the industrial world
II. The secular stagnation hypothesis
III. Why have real interest rates fallen?
IV. Issues raised by secular stagnation hypothesis?
V. What is to be done?
3
Downward Revision in Potential GDP, USA
Sources: Congressional Budget Office, Bureau of Economic Analysis
4
8
8.5
9
9.5
10
10.5
11
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Tri
llio
ns
of
20
05
Eu
ros
Eurozone Actual and Potential GDP
Actual
2008
YearEstimated:
PotentialGDP Estimates
2010 2012
2014
Downward Revision in Potential GDP, Eurozone
Sources: IMF World Economic Outlook Databases, Bloomberg
5
50
1983 1988 1993 1998 2003 2008 20132000 2005 2010 20 15
100
150
Japan Actual
Euro Actual
14% BelowExpectation
13% BelowExpectation
100=
1991
(Jap
an)
and
2007
(Eur
o A
rea)
(Log
Sca
le)
Japan and Euro Area, Forecast Versus Reality
Europe Mirrors Japan’s Experience
Sources: OECD 1992 “Long Term Prospects For The World Economy”, IMF 2007, 2007 & 2014 WEO Database
6
Falling Potential A Global Phenomenon
Sources: Laurence Ball “Long-Term Damage From The Great Recession in OECD Economies”, IMF WEO 2008 & 2014
Change in 2013 Potential Output Estimate Since 2007
-20 +6
7
Recent U.S. Business Cycles Financially Unsustainable
Sources: Federal Reserve, Bureau of Economic Analysis
8-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
US TIPS Yield Curve
2008 - Jan
2015 - Jan
Interest Rates (Less Inflation) Have Fallen Sharply
Sources: Federal Reserve Refet S. Gürkaynak, Brian Sack, and Jonathan H. Wright, Bloomberg
9
Long Term Expected Rates Have Plunged
Sources: Federal Reserve Refet S. Gürkaynak, Brian Sack, and Jonathan H. Wright, Bloomberg (End of January 2015 vs. 2014)
Rate Five Year/Five Years Forward Now Year Ago
Nominal 2.3 4.2Inflation 1.8 2.5Real 0.6 1.7
10
“Secular Stagnation” Dates To The 1930s
“This is the essence of secular stagnation - sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment.”
- Alvin Hansen, 1939
Sources: Alvin Hansen “Economic Progress and Declining Population Growth”, American Economic Review, March 1939
11
Possible Savings/Investment Curves
12
Private Investment Shortfall
Sources: IMF 2014 WEO Database
18
20
22
24
26
28
30
2000 2002 2004 2006 2008 2010 2012
Perc
ent o
f GD
P
Eurozone
16
20
24
28
2000 2002 2004 2006 2008 2010 2012
Perc
ent o
f GD
P
USA
16
20
24
28
32
36
40
2000 2002 2004 2006 2008 2010 2012
Perc
ent o
f GD
P
Japan
13
-1
0
1
2
3
4
5
1985 1990 1995 2000 2005 2010
Rea
l Int
eres
t Rat
e
World Real Interest Rate
World Rates Have Fallen Steadily
Sources: Mervyn King “Measuring the World Real Interest Rate”
14
As Have U.S. TIPS
Sources: Bloomberg
15
Large Rate Cuts Are Common
Sources: Brad DeLong, Federal Reserve
16
0.7%0.7%
0.6%
0.1%
-0.1%
-0.2%-0.3%
-0.2%
-0.1%
-0.4%
0.0%
0.4%
0.8%
1995-2000 2000-2005 2005-2010 2010-2015 2015-2020 2020-2025 2025-2030 2030-2035 2035-2040
Cont
ribu
tion
By
Reg
ion
(At
Ann
ual
Rat
e)
Advanced Economy Change in Working Age Population
Europe
Asia(Japan, Korea,
Hong Kong, Singapore,
& Australia)
US & Canada
Demographics Challenging
Sources: United Nations Population Division, IMF
17
Even Including India and China
Sources: United Nations Population Division, IMF
18
75
80
85
90
95
100
105
110
115
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
10
0=
19
47
Relative Price of Fixed Investment vs GDP
Capital Investment Has Gotten Cheaper
Sources: Bureau of Economic Analysis
19
Corporations Have Less Investment Needs
Sources: Fortune Magazine, Company Financial Reports
20
0%
4%
8%
12%
16%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Pe
rce
nt
of
Glo
ba
l G
DP
World Foreign Exchange Reserves
Emerging Economies
Advanced Economies
Rising Reserve Accumulation
Sources: International Monetary Fund’s COFER Database, IMF
21
Regulation Has Increased Demands For Safe Assets
Sources: Treasury Borrowing Advisory Committee 2013 Q2 Discussion Charts, p.60
22
0
5
10
15
20
25
1913 1923 1933 1943 1953 1963 1973 1983 1993 2003
Pe
rce
nt
of
Tota
l In
co
me
Income Share of Top 1%
Rising Inequality
Sources: World Top Incomes Database
23
0%
2%
4%
6%
8%
10%
12%
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Pe
rce
nt
of
GD
P
After Tax Profits and Retained Earnings
ProfitsAfter Tax
RetainedEarnings
And Rising Corporate Profit Share
Sources: Bureau of Economic Analysis
24
Lower Inflation and Tax Effects
• Consider investor in 40% tax bracket• Pre-Tax Real Rate = i –π• Post-Tax Real Rate = (i) (1-τ)- π
25
Rising Financial Intermediation Cost
Sources IMF October 2014 Global Financial Stability Report
26
Issues Raised By The Secular Stagnation Hypothesis
• Can equilibrium real interest rates really be subzero?
• Is the issue on the supply or demand side?
• Past fears of secular stagnation proved unfounded
• Isn’t the United States approaching full employment?
27
Inflation Expectations
Sources: Bloomberg
28
Large Rate Cuts Are Common
Sources: Brad DeLong, Federal Reserve
29
Alternative Strategies
• Structural Reform
• Reduce Real Rates
• Increase Spending
30
Monetary Policy
• How much scope at liquidity trap?• More effective in conjunction with other
measures• Risks of bubbles and financial instability• Backward bending supply of saving?• Need for international coordination
31
Focus On Structural Reform
• Has been tried for years
• Risk of destabilizing deflation
• Inverse Say’s Law – Lack of demand reduces potential supply
• Political economy issues
• Increased competitiveness is a zero sum game
32
Focus On Increases In Spending
• Operates to raise equilibrium real interest rates• Rational response to low real borrowing costs• Major public investment gaps• Investments likely to reduce debt burdens• Remove barriers to private investment• Measures to promote consumption and
housing investment• Measures to promote external adjustment in
surplus countries
33
Infrastructure Investment Can Boost GDP 3 For 1
Sources: IMF October 2014 World Economic Outlook Ch.3 “The Macroeconomic Effects of Public Investment”
34
While Making Debt More Sustainable
Sources: IMF October 2014 World Economic Outlook Ch.3 “The Macroeconomic Effects of Public Investment”
35-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1971 1976 1981 1986 1991 1996 2001 2006 2011
Perc
ent o
f GD
P
Net Public Investment
USA
Eurozone
But Has Been Hit By Austerity
Sources: US Bureau of Economic Analysis, Eurozone AMECO database
36
Other Possible Responses
• Public equity investments
• Work sharing
• Population and immigration policies