Afternoon Must-Read: Lawrence Summers: Response to Marc Andreesen on Secular Stagnation

…is not whether technology has stopped advancing; but rather whether there is a mismatch between desired saving and investment opportunities that results in low equilibrium real interest rates, precipitates financial instability, and may inhibit economic growth…. For the roughly 30 years after World War II, the American economy generated consistent growth in living standards with business cycles of relatively low amplitude.  From the early 1980s until the late 1990s, the economy again preformed quite well…. We have plenty of experience with satisfactory economic performance to set as an aspiration….

Markets–in the form of 30-year indexed bonds–are now predicting that real rates well below 2 percent will prevail for more than a generation…. I think it is quite plausible and consistent with Marc’s picture that equilibrium real rates were roughly constant at around 2 percent until the mid-1990s and have trended downward since that time…. Marc and I agree that we are headed into a period of soft real interest rates, where there will be more money available than great deals.  This may, as he suggests, not be all bad; as it will make it easier for risky ideas to get funded.

The danger… is that the zero lower bound on nominal rates will prevent the attainment of full employment as desired investment falls short of desired saving. A related danger is that the very low interest rates will encourage risk-taking and asset price inflation in ways that will ultimately give rise to financial instability…. The experience of the US economy in the 1930s demonstrates [that] even with rapid innovation it is possible for economic performance to be very poor when finances are not successfully managed…