1. Reflections on Secular Stagnation Dr. Lawrence H. Summers February 19, 2015

2. Outline I.Problematic post-crisis economic performance in the industrial world II.The secular stagnation hypothesis III.Why have real interest rates fallen? IV.Issues raised by secular stagnation hypothesis? V.What is to be done? 2

3. Downward Revision in Potential GDP, USA Sources: Congressional Budget Office, Bureau of Economic Analysis 3

4. Downward Revision in Potential GDP, Eurozone Sources: IMF World Economic Outlook Databases, Bloomberg 4

5. Europe Mirrors Japan’s Experience Sources: OECD 1992 “Long Term Prospects For The World Economy”, IMF 2007, 2007 & 2014 WEO Database 5

6. Falling Potential A Global Phenomenon Sources: Laurence Ball “Long-Term Damage From The Great Recession in OECD Economies”, IMF WEO 2008 & 2014 6 Change in 2013 Potential Output Estimate Since 2007 -20 +6

7. Recent U.S. Business Cycles Financially Unsustainable 7 Sources: Federal Reserve, Bureau of Economic Analysis

8. Interest Rates (Less Inflation) Have Fallen Sharply 8 Sources: Federal Reserve Refet S. Gürkaynak, Brian Sack, and Jonathan H. Wright, Bloomberg

9. Long Term Expected Rates Have Plunged 9 Sources: Federal Reserve Refet S. Gürkaynak, Brian Sack, and Jonathan H. Wright, Bloomberg (End of January 2015 vs. 2014)

10. “Secular Stagnation” Dates To The 1930s 10 “This is the essence of secular stagnation - sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment.” - Alvin Hansen, 1939 Sources: Alvin Hansen “Economic Progress and Declining Population Growth”, American Economic Review, March 1939

11. Possible Savings/Investment Curves 11

12. Private Investment Shortfall Sources: IMF 2014 WEO Database 12

13. World Rates Have Fallen Steadily Sources: Mervyn King “Measuring the World Real Interest Rate” 13

14. As Have U.S. TIPS Sources: Bloomberg 14

15. Large Rate Cuts Are Common Sources: Brad DeLong, Federal Reserve 15

16. Demographics Challenging Sources: United Nations Population Division, IMF 16

17. Even Including India and China Sources: United Nations Population Division, IMF 17

18. Capital Investment Has Gotten Cheaper Sources: Bureau of Economic Analysis 18

19. Corporations Have Less Investment Needs Sources: Fortune Magazine, Company Financial Reports 19

20. Rising Reserve Accumulation Sources: International Monetary Fund’s COFER Database, IMF 20

21. Regulation Has Increased Demands For Safe Assets 21 Sources: Treasury Borrowing Advisory Committee 2013 Q2 Discussion Charts, p.60

22. Rising Inequality Sources: World Top Incomes Database 22

23. And Rising Corporate Profit Share Sources: Bureau of Economic Analysis 23

24. Lower Inflation and Tax Effects Consider investor in 40% tax bracket Pre-Tax Real Rate = i –π Post-Tax Real Rate = (i) (1-τ)- π 24

25. Rising Financial Intermediation Cost 25 Sources IMF October 2014 Global Financial Stability Report

26. Issues Raised By The Secular Stagnation Hypothesis Can equilibrium real interest rates really be subzero? Is the issue on the supply or demand side? Past fears of secular stagnation proved unfounded Isn’t the United States approaching full employment? 26

27. Inflation Expectations 27 Sources: Bloomberg

28. Large Rate Cuts Are Common Sources: Brad DeLong, Federal Reserve 28

29. Alternative Strategies Structural Reform Reduce Real Rates Increase Spending 29

30. Monetary Policy How much scope at liquidity trap? More effective in conjunction with other measures Risks of bubbles and financial instability Backward bending supply of saving? Need for international coordination 30

31. Focus On Structural Reform Has been tried for years Risk of destabilizing deflation Inverse Say’s Law – Lack of demand reduces potential supply Political economy issues Increased competitiveness is a zero sum game 31

32. Focus On Increases In Spending Operates to raise equilibrium real interest rates Rational response to low real borrowing costs Major public investment gaps Investments likely to reduce debt burdens Remove barriers to private investment Measures to promote consumption and housing investment Measures to promote external adjustment in surplus countries 32

33. Infrastructure Investment Can Boost GDP 3 For 1 Sources: IMF October 2014 World Economic Outlook Ch.3 “The Macroeconomic Effects of Public Investment” 33

34. While Making Debt More Sustainable Sources: IMF October 2014 World Economic Outlook Ch.3 “The Macroeconomic Effects of Public Investment” 34

35. But Has Been Hit By Austerity Sources: US Bureau of Economic Analysis, Eurozone AMECO database 35

36. Other Possible Responses Public equity investments Work sharing Population and immigration policies 36