Too Much Untapped Potential to Buy into the Secular Stagnation Argument

RealTime Economic Issues Editor (PIIE)
April 10, 2015 10:30 AM

Ben Bernanke has joined Lawrence Summers in debating whether the US and other major world economies are in a period of secular stagnation, where a chronic shortfall in demand is causing and will continue to cause low growth, low inflation, and low interest rates.

In the short video below, four Peterson Institute experts pointedly discuss why they do not buy the case for secular stagnation.

Jacob Funk Kirkegaard argues that for Europe, there is still vast potential for productivity growth that remains untapped while euro area leaders drag their feet on regulatory reforms.

The same goes for China, where Nicholas R. Lardy argues that the vast disparity between China's state and private sectors means there is enormous potential for increased productivity if China further liberalizes its economy, particularly for services.

David J. Stockton expects productivity growth in the US and other advanced economies to return to their historical averages, noting that over the past hundred years the United States has had periods of above and below average growth. Over the next three to five years, Stockton believes the global and US economies may look like a structural stagnation story, but small growth in the labor force and weak investment is not the same as chronic shortages of aggregate demand.

Following Stockton, Adam S. Posen warns against confusing a run of subpar growth and medium-term drag on growth from underinvestment with a trend. Posen explains this same argument was used to explain Japan's stagnation in the 1990s, but Japan subsequently had some of the strongest per capita and total factor productivity growth rates in the G-7 during 2002–08. Posen also argues that people underestimate how much bad fiscal policy in the United States and Europe following the Great Recession has negatively affected growth.

Excerpted from the Institute's latest Global Economic Prospects session held April 7, 2015.