1. Lecture 10. Secular Stagnation
Economics 1490
THE WORLD ECONOMY:
GROWTH OR STAGNATION?
with
Professor Dale W. Jorgenson
Lecture 10. Secular Stagnation
October 3, 2017
Harvard University Department of Economics
Fall 2017

2. THE WORLD ECONOMY:
GROWTH OR STAGNATION?
A. Comparing Economies
B. U.S. Crisis and Recovery
C. European Slowdown
D. Asian Economic Miracles
E. Sustainability of Economic Growth
F. World Economic Outlook

3. B. U.S. CRISIS AND RECOVERY
6. U.S. Financial Crisis
7. Monetary Policy 
8. Financial Regulation
9. Fiscal Policy 
10. Secular Stagnation

4. SUPPLEMENTARY READINGS
Robert J. Gordon (2016), “The Ascent and Descent of Growth,” Ch. 1 in Robert J. Gordon, The Rise and Fall of American Growth, Princeton, Princeton University Press, pp
Kenneth Rogoff (2015), “Debt Supercycle Not Secular Stagnation,” VOX, April 22.
Lawrence Summers (2016), “The Age of Secular Stagnation: What It Is and What to Do About It,” Foreign Affairs, March/April.

5. SOURCES OF WORLD ECONOMIC GROWTH Annual percentage growth rates

6. SOURCES OF U.S. ECONOMIC GROWTH Annual percentage growth rates

7. SECULAR STAGNATION
More than (seven) years after the onset of the financial crisis, there is considerable controversy over why growth remains so sluggish across many advanced economies. Theories include a sustained lack of aggregate demand (“secular stagnation”), slowing innovation (implying a downward shift in aggregate supply), adverse demographics, lingering uncertainty, post-crisis political fractionalisation, debt overhang, insufficient fiscal stimulus, and excessive financial regulation.
Stephanie Lo and Kenneth Rogoff

8. SECULAR DEFICIENCY OF AGGREGATE DEMAND
The key to understanding this situation lies in the concept of secular stagnation [5], first put forward by the economist Alvin Hansen in the 1930s. The economies of the industrial world, in this view, suffer from an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest. The result is that excessive saving acts as a drag on demand, reducing growth and inflation, and the imbalance between savings and investment pulls down real interest rates. When significant growth is achieved, meanwhile—as in the United States between 2003 and 2007—it comes from dangerous levels of borrowing that translate excess savings into unsustainable levels of investment (which in this case emerged as a housing bubble).
Larry Summers

9. ALTERNATIVE EXPLANATIONS OF THE SLOWDOWN
Secular Stagnation Due to Slowing Innovation
Demographics
Heightened Policy Uncertainty
Slow Growth Due to Policy Errors

10. DEBT OVERHANG
In our view, the leading candidate as an explanation for why growth has taken so long to normalize is that pockets of the global economy are still experiencing the typical sluggish aftermath of a financial crisis. Moreover, focusing on more recent events, Mian and Sufi’s (2014) estimates suggest that the effects of US household leverage might be large enough to explain the entire decline in both house prices and durable consumption.
Stephanie Lo and Kenneth Rogoff

11. ENDING A FINANCIAL CRISIS
Given the potential role of leverage in financial crises, one might suspect that an important marker for a complete end to the crisis would be a significant unwinding of the excess pre-crisis leverage. Therefore, an economy’s overall debt level and composition matter, both because private defaults can create contingent liabilities for the government and because there can be amplification mechanisms across sectors that exacerbate the negative effect of debt on growth.
Stephanie Lo and Kenneth Rogoff

12. RISING LEVELS OF DEBT Public Debt, Advanced Countries
Private Domestic Credit, Advanced Countries
Public Plus Private External Debt, Advanced Countries
Total Debt, United States

13. PUBLIC DEBT, ADVANCED COUNTRIES

14. PRIVATE DOMESTIC CREDIT, ADVANCED COUNTRIES

15. PUBLIC PLUS PRIVATE EXTERNAL DEBT

16. TOTAL U.S. DEBT

17. RISING LEVELS OF DEBT AND DELEVERAGING
Gross Public Debt
Household Debt
Non-Financial Corporate Debt
Financial Institution Debt

18. GROSS PUBLIC DEBT

19. HOUSEHOLD DEBT

20. NON-FINANCIAL CORPORATE DEBT

21. FINANCIAL INSTITUTE DEBT

22. RISING LEVELS OF DEBT: INTERNATIONAL COMPARISON IN 2013
Gross Public Debt
Household Debt
Non-Financial Corporate Debt
Financial Institution Debt
External Liabilities

23. GROSS PUBLIC DEBT

24. HOUSEHOLD DEBT

25. NON-FINANCIAL CORPORATE DEBT

26. FINANCIAL INSTITUTION DEBT

27. EXTERNAL LIABILITIES

28. DEBT OVERHANG
If you looked at the trend from before the crisis in and extrapolated the trend to now, you would not be wildly off. And yet the whole debt‐overhang idea is that what is really defining life right now is that we were dealing with some overhang of the crisis, so if that were true there should be no way to dictate the current level of real interest rates from stuff that happened prior to the crisis. And I would argue that it is closer to right to say that real rates are spot on the trend.

29. CHANGES TO MEDIUM TERM GDP FORECAST

30. U.S. TIPS TEN-YEAR REAL YIELD

31. THE PACE OF DELEVERAGING
One reason it is too soon to sort out the alternative viewpoints is simply that the pace of deleveraging remains modest or non-existent in many sectors around the global economy, implying that the debt overhang may still be a significant impediment, even if debt crisis risks have receded for the moment. Thus, exploring ways to continue advancing private sector deleveraging, without excessively eroding the capacity of the public sector to backstop the system and handle catastrophes, remains an important challenge in restoring growth. 
Stephanie Lo and Kenneth Rogoff

32. SECULAR STAGNATION: SUMMARY
Two Leading Theories of the Slow Recovery Are Rogoff’s “Debt Overhang” and Summers’ “Secular Stagnation”
Both Imply Slow Private Investment and Slow Growth in Labor Productivity.
Elimination of Debt Overhang Requires Deleveraging and Will Take Time.
Secular Stagnation Requires Fiscal Policy that Overcomes the Limitations of ARRA.