Brown Economists: 'Secular Stagnation' May Strangle Economy
Friday, 18 Apr 2014 09:21 AM
A deleveraging shock, a drop in population growth, or an increase in income inequality could shift people from borrowing to savings, the economists say. Essentially, there simply aren't enough promising real-world investments, forcing investors to put their money into stocks, junk bonds, etc. — and not investments that create demand for a product. This weak demand results in economic stagnation.
And with a short-term interest rates already at zero, the Fed will be "unable to generate a sufficient monetary stimulus," they assert. The outcome: a "permanent slump in output,"Eggertsson and Mehrotra write.
"It's not a baseline scenario, but I think people should at least be starting to consider the possibility that this could go on for a while," Eggertsson told CNBC.com.
That could "lead us to be a little bit less optimistic than people have been about re-normalization coming [for the economy] in the next year or two."
GDP expanded 2.6 percent in the fourth quarter and has run at about a 2 percent growth rate since the recession ended in June 2009.
Economic stagnation is commonly defined as a prolonged period of slow economic growth (traditionally measured in terms of the GDP growth), usually accompanied by high unemployment.
The economists base their recent conclusion on the "secular stagnation" hypothesis by Harvard economic professor Alvin Hansen, who contended that inadequate capital investment hindered full deployment of labor and other economic resources. During the Great Depression, private capital investment fell because of excess capacity and lack of good investment opportunities.
Former White House economic adviser Larry Summers is perhaps the most prominent advocate of the secular stagnation theory.
"In its current World Economic Outlook , the IMF essentially endorses the secular stagnation hypothesis, noting that the real interest rate necessary to bring about enough demand for full employment has declined significantly and is likely to remain depressed for a substantial period," Summers writes in The Washington Post.
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- Summers: Income Inequality May Push US to 'Downton Abbey Economy'
- Americans Grapple With Income Inequality
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