By Isaac Cohen*
Harvard Professor Lawrence Summers, former advisor to President Barack Obama and former Secretary of the Treasury of President Bill Clinton, recently reiterated the hypothesis that the prolonged slow recovery from the Great Recession can be better explained by what he calls “secular stagnation.”
In the March/April issue of the prestigious bi-monthly FOREIGN AFFAIRS, Professor Summers defines “secular stagnation” and proposes remedies to overcome it, in the following terms. In the industrialized economies, an increasing propensity to save and a decreasing propensity to invest are dragging down demand, reducing growth and inflation and pulling down interest rates.
At a time when monetary policies have reached a lower limit, additional expansionary monetary instruments are insufficient and fiscal policy becomes more relevant. Expansionary fiscal policies, in the form of public investments, reduce saving rates and stimulate growth, particularly given low real interest rates, low inflation and slack employment in the construction sector. However, in the United States, public investment is at the lowest level in six decades.
Finally, Professor Summers recognizes expansionary policies may cause larger fiscal deficits, burdening future generations already challenged by an aging population. Even so, he concludes “those future generations will be better off owing lots of money in long-term bonds at low rates in a currency they can print,” than they would be inheriting a deteriorated infrastructure.
*International analyst and consultant. Commentator on economic and financial issues for CNN en Español TV and radio. Former Director, UNECLAC.