Grim Tidings from Larry Summers — And the Data

Larry Summers has a dark view of the global economy. In an opinion piece for the Financial Times, Summers describes the dangers facing the global economy as the highest since 2008 — and he is quite straightforward about the risks he sees ahead:

“The problem of secular stagnation — the inability of the industrial world to grow at satisfactory rates even with very loose monetary policies — is growing worse in the wake of problems in most big emerging markets, starting with China. […] Industrialized economies that are barely running above stall speed can ill-afford a negative global shock. Policymakers badly underestimate the risks of both a return to recession in the west and of a global growth recession. If a recession were to occur, monetary policymakers lack the tools to respond. There is essentially no room left for easing in the industrial world.”

(The secular stagnation theme is one that Summers has spoken of and written about quite eloquently since he delivered a speech on the topic sponsored by the IMF in late 2013.)

For those inclined to such a view, several data points released in the last seven days would seem to offer new evidence:

  • A week ago today, an ugly non-farm payrolls report showed weak wage gains, the worst 2 months for job creation in a year, and labor participation rate at 38 year lows.
  • Continuing on the same theme this week in developed market economies, German exports plummeted 5.2%, while German industrial output fell 1.2%.
  • Following the non-rate hike at last month’s meeting, FOMC minutes released yesterday include the following sobering quotation in the staff review of the financial situation: “concerns about prospects for global economic growth, centered on China, prompted an increase in financial market volatility and a deterioration in risk sentiment during the intermeeting period”

(The usual caveats about over generalizing individual data points in isolation, of course, apply here.)

The secular stagnation hypothesis asserts that developed market economies can’t grow — even with highly accommodative monetary policy. (In addition, Summers also asserts that conditions are now being worsened by two key factors: Weakness in emerging markets, especially China — and the inability or unwillingness among key policy makers to recognize the risks and respond appropriately.

With little room for greater monetary accommodation, Summers recommendation is a new and concerted focus on fiscal stimulus:

Long-term low interest rates radically alter how we should think about fiscal policy. Just as homeowners can afford larger mortgages when rates are low, government can also sustain higher deficits. […] The case for more expansionary fiscal policy is especially strong when it is spent on investment or maintenance. Wherever countries print their own currency and interest rates are constrained by the zero bound there is a compelling case for fiscal expansion until demand accelerates. While the problem before 2008 was too much lending, many more of today’s problems have to do with too little lending for productive investment.

A greater role for fiscal policy is something former Fed chief Ben Bernanke appears to support. In an interview with Charlie Rose this week, in support of his new book ‘The Courage to Act’, Bernanke said that Congress had gone into “contractionary mode” in 2009, “delivering cuts at a time when the economy needed more help.” He went on to add, “With fiscal policy not being helpful…So much fell on the The Fed that The Fed was really being asked to do…too much. And that, to some extent, is still the case today.” (Quote begins near the 15:00 mark)

But ask yourself: With the majority conference in total disarray — caught in the chaos of an ‘historic implosion‘, replete with audible weeping on the House floor — what are the odds Congress will unite to craft coherent legislation on fiscal stimulus?


2 Responses to "Grim Tidings from Larry Summers — And the Data"

  1. BenL8   October 13, 2015 at 3:30 pm

    Bernie Sanders calls for a $1 trillion infrastructure investment over 5 years. The Progressive Caucus calls for a $1.05 trillion jobs program over 3 years. Summers and Bernanke are calling for "fiscal stimulus" according to this article. The Republicans still complain about the federal debt, and stimulus is verboten. Where is the media? Professor Lawrence Seidman calls for a direct money creation stimulus, a stimulus without debt, a joint action involving the Fed and Congress to print money out of thin air, and then hire workers. This is QE but directed not at banks but at non-utilized workers. Monitor for signs of inflation, but stimulate until inflation appears. Between 1933 and 1937 unemployment dropped from 25% to 9.6%, and Roosevelt was re-elected in a landslide. What happened to the inflation one might expect? It never became sustained, it even dropped to deflation for two months in 1936. See here:
    Today, as article mentions, labor participation rate is at 38 year low. What is maintaining corporate profits as such a high level? When and if they decline, how will that impact GDP and unemployment? Wage growth is almost non-existent, and the pricing of necessities is increasing, the ten year price-drop in consumer goods is likely over, and a weak equilibrium has set in.

  2. Tom Warner   October 13, 2015 at 11:56 pm

    Well the odds of the US Congress doing this are of course exactly zero, though maybe some European parliaments might consider it.

    The problem with all “secular stagnation” theories is that US growth is not at all unusually slow, especially after accounting for the slowing of working-age population growth due to boomer retirement. Real growth per working-age adult will probably be higher this year than any year since the late 1990s.

    It seems to me that Summers has lost sight of the fact that this is no longer early cycle. In 2010-2011 there was good reason to ask why growth wasn’t as strong as it usually is after a recession (though the answer was pretty obvious – housing usually leads such bounce-backs).

    It’s now late 2015. It’s long past time to stop pining for the make-up growth that never happened. We’re more than six years into this cycle since the last trough. Growth is good, and though China and EMs are some worry, there’s still not really any sign of the next recession coming.

    If all there is to this purported “stagnation” is slower population growth, lower inflation and lower interest rates, without any long-term slowdown of productivity growth, then there isn’t really any stagnation after all. There was just a very bad recession.

    Perhaps there’s a better argument for this kind of view in Europe, but a fiscal loosening is a one-off treatment for a cyclical downturn, not a cure for a permanent slowdown of the long-term growth rate.