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95 Foreign Aff. 2 (2016)
The Age of Secular Stagnation: What It Is and What to Do about It

handle is hein.journals/fora95 and id is 234 raw text is: The Age of Secular Stagnation What It Is and What to Do About It Lawrence H. Summers s surprising as the recent financial crisis and recession were, the behavior of the world's industrialized economies and financial markets during the recovery has been even more so. Most observers expected the unusu- ally deep recession to be followed by an unusually rapid recovery, with output and employment returning to trend levels relatively quickly. Yet even with the U.S. Federal Reserve's aggressive monetary policies, the recovery (both in the United States and around the globe) has fallen significantly short of predictions and has been far weaker than its predecessors. Had the American economy performed as the Congressional Budget Office forecast in August 2009-after the stimulus had been passed and the recov- ery had started-U.S. GDP today would be about $1.3 trillion higher than it is. Almost no one in 2009 imagined that U.S. interest rates would stay near zero for six years, that key interest rates in Europe would turn negative, and that central banks in the G-7 would collectively LAWRENCE H. SUMMERS is President Emeritus and Charles W. Eliot University Professor of Economics at Harvard University. He served as U.S. Secretary of the Treasury from 1999 to 2001 and Director of the National Economic Council from 2009 to 2010. expand their balance sheets by more than $5 trillion. Had economists been told such monetary policies lay ahead, moreover, they would have confidently predicted that inflation would become a serious problem-and would have been shocked to find out that across the United States, Europe, and Japan, it has gener- ally remained well below two percent. In the wake of the crisis, governments' debt-to-GDP ratios have risen sharply, from 41 percent in 2008 to 74 percent today in the United States, from 47 percent to 70 percent in Europe, and from 95 percent to 126 percent in Japan. Yet long-term interest rates are still remarkably low, with ten-year government bond rates at around two percent in the United States, around 0.5 percent in Germany, and around 0.2 percent in Japan as of the beginning of 2016. Such low long-term rates suggest that markets currently expect both low inflation and low real interest rates to continue for many years. With appropriate caveats about the complexities of drawing inferences from indexed bond markets, it is fair to say that inflation for the entire industrial world is expected to be close to one percent for another decade and that real interest rates are expected to be around zero over that time frame. In other words, nearly seven years into the U.S. recovery, markets are not expecting normal conditions to return anytime soon. The key to understanding this situation lies in the concept of secular stagnation, first put forward by the economist Alvin Hansen in the 1930s. The economies of the industrial world, in this view, suffer from an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest. The result is that excessive saving 2 FOREIGN AFFAIRS

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