Reflections on Secular Stagnation. Dr. Lawrence H. Summers February 19, 2015

Transcription

1 Reflections on Secular Stagnation Dr. Lawrence H. Summers February 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? 2

3 Downward Revision in Potential GDP, USA Sources: Congressional Budget Office, Bureau of Economic Analysis 3

4 Trillions of 2005 Euros Downward Revision in Potential GDP, Eurozone 11 Eurozone Actual and Potential GDP Year Estimated: 10.5 Potential GDP Estimates Actual Sources: IMF World Economic Outlook Databases, Bloomberg 4

5 100=1991 (Japan) and 2007 (Euro Area) (Log Scale) Europe Mirrors Japan s Experience Japan and Euro Area, Forecast Versus Reality Euro Actual 14% Below Expectation 13% Below Expectation Japan Actual Sources: OECD 1992 Long Term Prospects For The World Economy, IMF 2007, 2007 & 2014 WEO Database 5

6 Falling Potential A Global Phenomenon Change in 2013 Potential Output Estimate Since Sources: Laurence Ball Long-Term Damage From The Great Recession in OECD Economies, IMF WEO 2008 &

7 Recent U.S. Business Cycles Financially Unsustainable Sources: Federal Reserve, Bureau of Economic Analysis 7

8 European Credit Boom Sources: World Bank, Bloomberg 8

9 2.5 Real Yield Curve Before and After Crisis US TIPS Yield Curve Jan Jan Sources: Federal Reserve Refet S. Gürkaynak, Brian Sack, and Jonathan H. Wright, Bloomberg 9

10 Expected Rates Have Plunged Rate Five Year/Five Years Forward Now Year Ago Nominal Inflation Real Sources: Federal Reserve Refet S. Gürkaynak, Brian Sack, and Jonathan H. Wright, Bloomberg (End of January 2015 vs. 2014) 10

11 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

12 Liquidity Trap Framework 12

13 Possible Savings/Investment Curves 13

14 Percent of GDP Percent of GDP Percent of GDP Private Investment Shortfall 30 Eurozone USA 40 Japan Sources: IMF 2014 WEO Database

15 Real Interest Rate World Rates Have Fallen Steadily 5 World Real Interest Rate Sources: Mervyn King Measuring the World Real Interest Rate 15

16 As Have U.S. TIPS Sources: Bloomberg 16

17 Large Rate Cuts Are Common Sources: Brad DeLong, Federal Reserve 17

18 Contribution By Region (At Annual Rate) Demographics Challenging 0.8% 0.7% 0.7% Advanced Economy Change in Working Age Population 0.6% Europe 0.4% 0.1% US & Canada 0.0% Asia (Japan, Korea, Hong Kong, Singapore, & Australia) -0.1% -0.2% -0.3% -0.2% -0.1% -0.4% Sources: United Nations Population Division, IMF 18

19 100=1947 Capital Investment Has Gotten Cheaper 115 Relative Price of Fixed Investment vs GDP Sources: Bureau of Economic Analysis 19

20 Corporations Have Less Investment Needs Sources: Fortune Magazine, Company Financial Reports 20

21 Percent of Global GDP Rising Reserve Accumulation 16% World Foreign Exchange Reserves Emerging Economies 12% 8% Advanced Economies 4% 0% Sources: International Monetary Fund s COFER Database, IMF 21

22 Increased Demand For Safe Assets Sources: Treasury Borrowing Advisory Committee 2013 Q2 Discussion Charts, p.60 22

23 Percent of Total Income Rising Inequality 25 Income Share of Top 1% Sources: World Top Incomes Database 23

24 Percent of GDP And Rising Corporate Profit Share 12% After Tax Profits and Retained Earnings 10% Profits After Tax 8% 6% 4% 2% Retained Earnings 0% Sources: Bureau of Economic Analysis 24

25 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

26 Rising Financial Intermediation Cost Sources IMF October 2014 Global Financial Stability Report 26

27 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

28 Inflation Expectations Sources: Bloomberg 28

29 Large Rate Cuts Are Common Sources: Brad DeLong, Federal Reserve 29

30 Alternative Strategies Structural Reform Reduce Real Rates Increase Spending 30

31 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

32 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

33 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

34 Infrastructure Investment Can Boost GDP 3 For 1 Sources: IMF October 2014 World Economic Outlook Ch.3 The Macroeconomic Effects of Public Investment 34

35 While Making Debt More Sustainable Sources: IMF October 2014 World Economic Outlook Ch.3 The Macroeconomic Effects of Public Investment 35

36 Percent of GDP But Has Been Hit By Austerity 2.5% Net Public Investment 2.0% 1.5% USA 1.0% Eurozone 0.5% 0.0% % Sources: US Bureau of Economic Analysis, Eurozone AMECO database 36

37 Other Possible Responses Public equity investments Work sharing Population and immigration policies 37