Summers On Stagnation
[Originally published on 6/24/2014]
Larry Summers has published a very interesting speech, U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound . I heard a version of the same thoughts last October, at the joint Brookings-Hoover conference "The U.S. Financial System-Five Years After the Crisis."
I was struck then, as I am now, at how much consensus there is among macroeconomists. Yes, you heard it here. And Larry expresses it elegantly, as you might expect. While the press talks about recovery, macroeconomists look at output growth and employment and it still looks pretty dismal.
First, reductions in demand for debt-financed investment. ...probably to a greater extent, it is a reflection of the changing character of productive economic activity... Ponder the fact that it used to require tens of millions of dollars to start a significant new venture, and significant new ventures today are seeded with hundreds of thousands of dollars. All of this means reduced demand for investment, with consequences for equilibrium levels of interest rates.
[Fourth] is a substantial shift in the relative price of capital goods [falling about 20% since 1980].. Something similar, but less dramatic, is present in the data on consumer durables. To take just one example, during a period in which median wages have been stagnant over the last 30 years, median wages in terms of automobiles have almost doubled..
In sum, one aspect of the new " stuff cheap, people [with skills] expensive " economy is a reduction in the real rate of interest. It took a lot of money to build railroads. It doesn't take a lot of money to build apps.
as I've emphasized in the past, public investments have a potentially substantial role to play...ask if anyone is proud of Kennedy Airport, and then to ask how it is possible that a moment when the long-term interest rate in a currency we print is below 3 percent and the construction unemployment rate approaches double digits is not the right moment to increase public investment in general-and perhaps to repair Kennedy Airport in particular
It's hard to argue with fixing potholes, especially in Chicago. And there is no argument against investment that earns a positive rate of return. The question, though, is not whether those are good investments but whether making such investments can raise GDP 5%, potential GDP by 5%, and raise the desultory growth rate. Even at a multiplier of one, there are not $750 billion of positive net present value roads and bridges to build -- and we haven't started with the opposition of anti-sprawl and environmental lobbies who don't want roads and bridges built in the first place. The Keystone pipeline, and LNG export terminals are infrastructure too. (I should be careful however. There surely are $750 billion a year of alternative-energy boondoggles to build!)
See also Beazer: Back In The Bargain Bin on seekingalpha.com