Secular stagnation: The solution that cannot be named

Posted: November 17, 2013 in economy
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EARLIER this month the IMF held a research conference in honour of Stanley Fischer. It featured a murderer’s row of macroeconomic stars as speakers including, to round out the event, one Larry Summers. The video of Mr Summers’ talk is now publicly available and is being heralded, with some justification, as an important and incisive piece of analysis. It also perfectly and maddeningly encapsulates the problem at the heart of the rich world’s economic debate—and its economy, for that matter.Mr Summers argument is short and sweet. The rich world risks following the path blazed by Japan in the 1990s. That is not a place we should want to go, Mr Summers reminds us. He recounts an exercise conducted in the early days of the Clinton administration, when the president’s economic advisers assembled a series of long-run economic forecasts. “Japan’s real GDP today is about half what we believed it would be at the time,” Mr Summers somberly intones.To diagnose the malady leading the rich world down this road, he highlights two observations. First, he points out, the expansion prior to the crisis was a strange one. Borrowing and asset prices soared, he notes, but by most key measures—capacity utilisation, unemployment, and inflation—the economy was not bumping up against its potential. “Even a great bubble wasn’t enough to produce any excess in aggregate demand,” Mr Summers …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/11/secular-stagnation?fsrc=rss

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