john maynard keynes Tim Gidal/Picture Post/Getty Images

Secular Stagnation Revisited

The right way to respond to financial crises is not with expansionary fiscal policy, but with policies that restore the value of private assets. And the right way to prevent financial crises in the first place is to intervene in the financial markets to moderate swings in asset values and to head off recessions before they happen.

WARWICK – The public spat between Nobel laureate Joseph Stiglitz and former US Treasury Secretary Larry Summers is remarkable for the personal animosity that it reveals between two economists who essentially agree about the economics. Stiglitz levels a not-so-subtle attack on Summers for failing to insist on a larger fiscal deficit when he ran the National Economic Council under the Obama presidency. Summers responds that the politics made a larger fiscal stimulus infeasible. But while they agree that the Great Recession could have been overcome with a big fiscal stimulus, neither has laid out the economic model that underpins their confidence in this outcome.

Summers reinvigorated the work of Alvin Hansen, who introduced the concept of secular stagnation in the 1930s. But I have not seen Summers lay out a fully articulated dynamic general equilibrium model that supports his advice. And in his written work on this topic, he has seamlessly shifted between a definition of secular stagnation that involves permanently lower growth rates as a result of low investment and permanently lower employment as a result of deficient aggregate demand.

These are not the same thing. In his rebuttal to Stiglitz, Summers comes down in favor of the latter definition. In his words, “left to its own devices, the private economy may not find its way back to full employment following a sharp contraction.”