In a lengthy Washington Post op-ed Lawrence Summers gives a good college try to explaining low real interest rates:
●First, increases in inequality — the share of income going to capital and corporate retained earnings — raise the propensity to save.
●Second, an expectation that growth will slow due to a smaller labor force growth and slower productivity growth reduces investment and boosts the incentives to save.
●Third, increased friction in financial intermediation caused by more extensive regulation and increased uncertainty discourages investment.
●Fourth, reductions in the price of capital goods and in the quantity of physical capital needed to operate a business — think of Facebook having more than five times the market value of General Motors.
If there is an increased propensity to save, I wonder how it’s being manifest? The St. Louis Federal Reserve doesn’t report it:
Maybe Dr. Summers sees saving somewhere else.
I’d buy the third one. That we have more extensive regulation and increased uncertainty is obvious. I wonder how you’d go about quantifying those?
His fourth explanation is particularly interesting. Doesn’t that also militate against his proposals for infrastructure spending to spur economic growth? I.e. there just isn’t as much multiplier as there used to be.
And in this paragraph he makes an argument I’ve been making here for years:
What is needed now is something equivalent but on a global scale — a signal that the authorities recognize that secular stagnation, and its spread to the world, is the dominant risk we face. After last Friday’s dismal U.S. jobs report, the Fed must recognize what should already have been clear: that the risks to the U.S. economy are two-sided. Rates will be increased only if there are clear and direct signs of inflation or of financial euphoria breaking out. The Fed must also state its readiness to help prevent global financial fragility from leading to a global recession.
The way I have usually phrased it is that the tools that were effective in nudging the domestic economy just aren’t as effective under globalization. Here’s something “on a global scale”: how about China and Germany abandon their mercantilist policies? If the two of them started importing a couple of hundred billion more, that would probably have some real impact.
Indeed, I think we’re likely to see phlegmatic growth here as long as China, Germany, and Japan maintain mercantilist policies. “Beggar thy neighbor” policies are dandy until you’ve actually beggared your neighbor. Then they’re problematic.