Topic 10: Secular Stagnation

Question 1

What does summers say about secular stagnation?

Answer 1

Caused by:

• Reduced population growth.
• Reduced capital intensity of leading industries.
• Falling relative prices of capital goods.
• Very low interest rates or yields on capital investment.

If the returns to capital today are very low, then the real interest rate needed to achieve full employment (the equilibrium real interest rate) will likely also be very low, possibly negative.

In the long run this could caused decreased aggregate supply.

Question 2

Counterarguments to secular stagnation.

Answer 2

Empirically, full employment has in fact been achieved without financial bubbles and government investment.

Slow growth is in fact due to GFC headwinds, risk premia.

As such, secular stagnation may not exist / be a long term deal.

Question 3

What are some other aspects to secular stagnation?

Answer 3

• Rise in assets under more risk sensitive management.
• Weak governance in democracies, political stalemates that have increased deficits and reduced public investment, R&D.
• Ageing and health R&D. While a boon, governments need to resolve medical expinditure and retirement age issues.
• Rising oligopoly power as frontier industries consolidate.
• Slowdown in human capital accumulation.
• Unanticipated abundance of fossil fuels - i.e. an unexpected fall in energy prices.