Afternoon Must-Read: Barry Eichengreen: Secular Stagnation: The Long View

…a rise in global saving, slow population growth that makes investment less attractive, averse trends in technology and productivity growth, and a decline in the relative price of investment goods. A long view from economic history is most supportive of the last of these…. I define secular stagnation as a downward tendency of the real interest rate, reflecting an excess of desired saving over desired investment, resulting in a persistent output gap and/or slow rate of economic growth….

Figure 1 shows nominal and real interest rates for the United States over the last two centuries…. The figure points to an alternative interpretation, namely that the decline in real interest rates starting in the 1980s is mean reversion after the exceptional period of high interest rates and inflation that preceded it…. Figure 3 shows the estimates of Robert Gallman (1966)…. The U.S. in the 19th century displays the behavior familiar from 21st century emerging markets, with investment rates rising from 16 per cent in 1834-43 to 28 per cent in 1899-1908. Subsequently, U.S. savings rates headed back down. This… suggests that even if high global savings are a factor in current low real interest rates, they may not remain so indefinitely.

A second popular explanation… is a decline in the relative price of investment goods…. With less investment spending chasing the same savings, the result can be lower real interest rates and, potentially, a chronic excess of desired saving over desired investment….. Even if the post-1980 decline in the relative price of investment goods is part of the explanation for the concurrent decline in real interest rates, there is no ruling out that it may be reversed in the future.

A third possible explanation for secular stagnation, due originally to Alvin Hansen (1938), is that the rate of investment is being dragged down by a low rate of population growth…. My own work with Molly Fifer (2002) suggests that increases in old-age dependency ratios have approximately equal negative effects on savings and investment rates and minimal impact on real interest rates….

A fourth popular if controversial explanation for low interest rates and the slow growth with which they are evidently associated is a dearth of attractive investment opportunities…. Here some observers will point to the fact that productivity growth in the United States has been disappointing in recent years as having positive implications for the future. A wide variety of connected activities and sectors, such as health care, education, industrial research and finance, are being disrupted by the latest wave of new technologies…. Once a broad range of adaptations is complete, productivity growth will accelerate…. Again, this is not a prediction but a suggestion to look to the range of adaptation required in response to the current wave of innovations when seeking to interpret our slow rate of productivity growth and when pondering our future…