Stagnation is gripping several of the world’s largest economies and many view this as secular, not transient. This column argues that many economies need both demand-side stimulus and supply-side reform to close the output gap and restore potential-output growth. A combined monetary-fiscal stimulus – i.e. helicopter money – is needed to close the output gap, and this should be accompanied with extensive debt restructuring, policies to halt rising inequality, and additional public infrastructure investment.
The disappointing post-Crisis performance of the US economy and even more disappointing performance of continental Europe and Japan have revived interest in the possibility of secular stagnation. This column argues that a consensus is forming that inadequate demand will no longer be a factor in whatever US stagnation occurs in coming years. In Japan and Europe, on the other hand, the case for boosting demand is strong and inadequate demand is almost surely a main cause of the stagnation.
Weak, post-Crisis growth has been blamed on secular stagnation. This column argues that the debt super-cycle view provides a more accurate and useful framework for understanding what has transpired and what is likely to come next. The difference matters. Unlike secular stagnation, a debt super-cycle is not forever. After deleveraging and borrowing headwinds subside, expected growth trends might prove higher than simple extrapolations of recent performance might suggest.
Nowhere in the developed world is secular stagnation more visible than in the Eurozone. This column explains this phenomenon with asymmetric external balances within the Eurozone. Southern countries had accumulated current-account deficits and became debtors when the Crisis hit, whereas the northern ones became creditors. The burden of the adjustments has been borne almost exclusively by the debtor countries creating a deflationary bias. Suggested fiscal policy prescriptions are government investment programmes, to be implemented by northern countries (and in particular, Germany).
The secular stagnation hypothesis has gained traction in the aftermath of the Global Crisis. This column argues that demography has played an important role in reducing the interest rates. The increase in life expectancy, which has not been offset by an increase in the retirement age, has led to an increase in the stocks of savings. The latter will go into price increases for assets in fixed supply – such as housing – rather than in adding new capital. Potential remedies for absorbing the extra savings are increasing the retirement age and an extension of the pay-as-you-go benefit systems.
The anaemic recovery from the Global Crisis and the downward trend in real interest rates since 1980 have revived interest in the idea of secular stagnation. This column argues that if the US, UK, and Eurozone had not pursued contractionary fiscal policies from 2010 onwards, the recovery would not have been so slow and nominal interest rates would no longer be at the zero lower bound. Expanding the stock of government debt would have ameliorated, not worsened, the shortage of safe assets.
To many observers, the long-lasting, underwhelming performance of growth, employment and investment suggests that something fundamental has changed with the way advanced economies’ macroeconomies are working. One leading explanation – the notion of ‘Secular Stagnation’ – has gained traction among some economists and policymakers while being rejected by others. This column opens a Vox Debate on Secular Stagnations which will involve frequent, invited ‘Lead Commentaries’ on all issues surrounding concept and its implications for policy, analysis and research.
Lead Commentaries
Secular stagnation: The time for one-armed policy is over
Stagnation is gripping several of the world’s largest economies and many view this as secular, not transient. This column argues that many economies need both demand-side stimulus and supply-side reform to close the output gap and restore potential-output growth. A combined monetary-fiscal stimulus – i.e. helicopter money – is needed to close the output gap, and this should be accompanied with extensive debt restructuring, policies to halt rising inequality, and additional public infrastructure investment.
Secular Stagnation in the US
The disappointing post-Crisis performance of the US economy and even more disappointing performance of continental Europe and Japan have revived interest in the possibility of secular stagnation. This column argues that a consensus is forming that inadequate demand will no longer be a factor in whatever US stagnation occurs in coming years. In Japan and Europe, on the other hand, the case for boosting demand is strong and inadequate demand is almost surely a main cause of the stagnation.
Debt supercycle, not secular stagnation
Weak, post-Crisis growth has been blamed on secular stagnation. This column argues that the debt super-cycle view provides a more accurate and useful framework for understanding what has transpired and what is likely to come next. The difference matters. Unlike secular stagnation, a debt super-cycle is not forever. After deleveraging and borrowing headwinds subside, expected growth trends might prove higher than simple extrapolations of recent performance might suggest.
Secular stagnation in the Eurozone
Nowhere in the developed world is secular stagnation more visible than in the Eurozone. This column explains this phenomenon with asymmetric external balances within the Eurozone. Southern countries had accumulated current-account deficits and became debtors when the Crisis hit, whereas the northern ones became creditors. The burden of the adjustments has been borne almost exclusively by the debtor countries creating a deflationary bias. Suggested fiscal policy prescriptions are government investment programmes, to be implemented by northern countries (and in particular, Germany).
The role of demography in explaining secular stagnation
The secular stagnation hypothesis has gained traction in the aftermath of the Global Crisis. This column argues that demography has played an important role in reducing the interest rates. The increase in life expectancy, which has not been offset by an increase in the retirement age, has led to an increase in the stocks of savings. The latter will go into price increases for assets in fixed supply – such as housing – rather than in adding new capital. Potential remedies for absorbing the extra savings are increasing the retirement age and an extension of the pay-as-you-go benefit systems.
Fiscal policy explains the weak recovery
The anaemic recovery from the Global Crisis and the downward trend in real interest rates since 1980 have revived interest in the idea of secular stagnation. This column argues that if the US, UK, and Eurozone had not pursued contractionary fiscal policies from 2010 onwards, the recovery would not have been so slow and nominal interest rates would no longer be at the zero lower bound. Expanding the stock of government debt would have ameliorated, not worsened, the shortage of safe assets.
A new Vox Debate on Secular Stagnation
To many observers, the long-lasting, underwhelming performance of growth, employment and investment suggests that something fundamental has changed with the way advanced economies’ macroeconomies are working. One leading explanation – the notion of ‘Secular Stagnation’ – has gained traction among some economists and policymakers while being rejected by others. This column opens a Vox Debate on Secular Stagnations which will involve frequent, invited ‘Lead Commentaries’ on all issues surrounding concept and its implications for policy, analysis and research.