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2015-04-09 07:36:53
Apr 3rd 2015, 16:23 by R.A. | LONDON
BEN BERNANKE, until last year the chairman of America's Federal Reserve, has
started blogging. Not just a little bit, either. Mr Bernanke has in the space
of a few posts embroiled himself in a weighty online debate with some of the
titans of economics, and blogging. Both Paul Krugman and Larry Summers are
scrapping with the former chairman on the live and important subject of secular
stagnation.
Secular stagnation is an old idea which received an intellectual revival in
2013, when Mr Summers, who not long before was one of Barack Obama's chief
economic advisors, began to deliver speeches on the topic. It describes a world
in which there are lots of savings and comparatively few attractive places to
invest them. The excess of saving over investment represents a shortfall in
demand, and weak demand shows up in anaemic growth figures and low inflation.
Normally a central bank would try to fix the imbalance between saving and
investment by reducing interest rates (which should discourage saving and
encourage borrowing). But in a weak enough economy with low enough inflation
the interest rate needed to balance saving and investment might become negative
maybe even really negative. Given the difficulty of achieving a negative
nominal interest rate, the central bank might find it hard to push an economy
out of that sort of trap once it fell in.
Indeed, Mr Summers reckons there are generally two ways out, one bad and one
good. The bad one occurs when a long period of very low interest rates leads to
a bubble in asset prices. The bubble in asset prices can support consumer
borrowing and spending, providing an economy with the sensations of a decent
recovery while the good times last (after which things often look even worse
than before). The good one occurs when governments recognise the problem and
take direct action to fix it: by borrowing (to soak up excess saving) and
investing the proceeds of that borrowing in demand-boosting investment. Mr
Summers is an advocate for this approach; he would like America's government to
borrow at historically low interest rates in order to tackle the country's many
pressing infrastructure needs.
At his blog, Mr Bernanke worked through these arguments and then made an
important, if not entirely original, point. Unless one assumes that the entire
world is in secular stagnation, secular stagnation shouldn't really be much of
a long-term problem. Old countries with poor growth prospects might accumulate
lots of savings and have little need for big investments. But those countries
shouldn't suffer from chronic weak demand. Instead, the excess saving should
flow abroad in search of better returns. Capital outflows should weaken the
domestic currency, and that should lead to rising import demand from abroad. A
stagnating economy should be able to export its way to a healthy level of
demand.
Of course, Mr Bernanke allowed, the world could get into trouble if big,
fast-growing economies like China decided to save huge amounts of money by
buying rich-country debt, in order to depress the value of their currencies and
boost their exports. If governments were interfering in the market like that
then capital might not flow the right way and secular stagnation might stick
around. But the way to solve that problem, he argues, is not through
deficit-financed demand stimulus but by leaning on the Chinas of the world to
knock it off.
Into the discussion, then, plunges Mr Krugman. He points out that China is only
part of the problem. Europe is increasingly the source of the demand drain, and
Europe is not out there accumulating American debt (as China's government did
in the 2000s). Instead, the euro-area economy is falling into a Japan-like
trap. It is stagnating secularly, suffering from weak domestic demand while
stuck with interest rates near zero. But even though the euro has fallen a lot
against the dollar, it probably hasn't fallen by enough to get Europe out of
its trouble.
That is because euro-area inflation has also tumbled, raising the real, or
inflation-adjusted return on money stashed in Europe. German government bonds
don't look like an especially good investment; the return out to 10 years, Mr
Krugman points out, is effectively zero. But German bonds are safe, and given
the very weak outlook for euro-area inflation they offer a real return that, in
this fallen world of rock-bottom yields, is not all that bad. Less money is
therefore flowing out of Europe than one might anticipate given the crummy
state of euro-zone growth prospects. And the euro zone will therefore putter
along in future rather than hum at its economic potential. As the Japanese
example demonstrates, this sort of stagnation can last for a long time. We
should therefore expect Europe to be a demand suck for a long time, and we
should consider a more Summersian policy response: deficit spending.
The debate is inching toward the right question: what sort of imbalance between
saving and investment do we have here, anyway? Is the problem that the world
has too much saving and too little investment? Or is it that the saving and the
investment are stuck in different places?
It seems obvious that the world as a whole does not have too few investment
opportunities. Much of the world is very poor relative to America, which
suggests that much of the world is overflowing with profitable investment
opportunities. It would not cost that much money to build massive new highway
networks and ports in Africa, but one could easily imagine such investments
paying off handsomely. And yet the savings that could finance such investments
are not flowing toward them in anything like the quantities needed to address
the world's imbalances.
That isn't that hard to understand. Should capital flow to China? Given the
massive investment the country has experienced over the last 15 years the
return on new capital might not be especially high; meanwhile, controls on
capital flows into and out of the country still make investing there more of a
challenge than investing in rich economies. Many of the emerging economies with
financial markets that are developed enough to handle portfolio inflows are not
obviously in a position to deliver high returns: think of Brazil or Russia, for
example. In much of the emerging world large-scale portfolio investment is
basically impossible; foreign-direct investment is the only real option, and
FDI cannot be done well at scale. That is in some ways a good thing. In
countries with weak institutions a tidal wave of foreign capital could cause
more harm than good. And even the limited investment that is made is illiquid,
and while returns may be good on average the variance is high.
So in one sense there is a geographic imbalance between savings and investment.
But this imbalance is persistent and structural. It also isn't new. It is hard
to rate this as the cause of secular stagnation. The transitory geographic
imbalance of the 2000s the China glut is fading, and yet secular stagnation
remains an apparent feature of the rich world. Perhaps worst of all, China may
be slipping toward stagnation as its population ages and inflation rates
tumble.
The imbalance is a global one, in other words. Its effects are more or less
acute depending on which big economy one focuses on. But the problem, it seems
to me, is that the industrialised world has a much greater capacity to produce
things than an interest in buying things. The world is stuck with too little
demand. So what ought to be done about it?
Mr Bernanke's solution, to lean on currency manipulators, is probably not going
to do the trick. It isn't clear that Chinese consumers are capable of driving
forward the global economy. America could ask Europe and Japan to halt their
quantitative easing programmes, which should push their currencies higher
relative to the dollar. But that move would almost certainly lead to galloping
deflation in both economies and a serious recession (and possibly a break-up)
in Europe. That seems a poor way to get Europeans splashing out on new goods.
Another option, which Mr Bernanke does not consider, is for America to do more
monetary easing rather than less. One way of looking at the global economy is
that it is in need of a source of excess demand and upward price pressure.
Rich-world central banks with interest rates close to zero can only do so much
to create their own demand. They will attempt to recover by siphoning off
spending from the relative well-positioned American and British economies. If
those economies which also remain stuck with low interest rates are not allowed
to run hot then the demand drain and disinflationary pressure from abroad will
slowly drag them back to general crumminess.
This can be put more simply: the world as a whole is not spending enough money.
Large parts of the world economy are short-run incapable of spending more for
political and economic reasons. Unless other parts take up the slack, then the
too-little-spending problem will grow more serious and ever more of the world
will slip into this monetary trap.
What else is there? The solutions that remain are all politically tricky to
implement. There is the Summersian option of deficit spending in rich
countries. This could be effective in closing the savings-investment imbalance
but has two big problems. The first is that doing it adequately is almost
certainly beyond the capability of the American political system. As Mr Summers
repeatedly points out, the government has failed manifestly to tackle even the
highest-return infrastructure projects available: like improvements to
America's crumbling but critical JFK airport. Republican presidents have
historically had more luck running massive deficits, so circumstances might
change after 2016.
Yet even then, there is a second concern: that while there are lots of positive
return investments not being made in America there probably aren't that many
positive return investments not being made in America. American public
infrastructure needs are enormous but probably amount to about $200 billion a
year at the absolute most, which is less than the euro-zone current-account
surplus. Directing money to uses beyond those would probably yield relatively
low returns, at least in narrow financial terms. (If America wanted to borrow
heavily to build a moon base that's its business.)
Congress could just hand the money out. There is much to recommend that
solution (though not its politics). It has its downsides. Much of the proceeds
would go toward consumption, on goods and services produced by companies that
are already investing at close to optimal levels. Lots might go toward
residential investment. But the spending should also create new labour demand
in low-productivity sectors, adding to employment, adding to wage pressure and
kicking the economy back into a better equlibrium.
Still, this is probably not the first best solution. We would not say that
savings, in that case, were being mobilised to their most productive uses. Not
while so much of the world is so poor.
There is another option available. The rich world could address the imbalance
within its economies while simultaneously addressing the geographic imbalance.
It could allow much more immigration. Investing in people in developing
countries in hard and risky. But if those people wanted to come to America and
were allowed to, then lots of things change. Investing in those people would
not then require that money be sent abroad, to a different financial system in
a different currency overseen by a different government. If the savings are in
rich countries and the most productive investments are in poor ones, then the
savings can move or the investments can move.
What this discussion should make clear is that secular stagnation isn't much of
a puzzle. Rather, it is a dilemma. The ageing societies of the rich world want
rapid income growth and low inflation and a decent return on safe investments
and limited redistribution and low levels of immigration. Well you can't have
all of that. And what they have decided is that what they're prepared to
sacrifice is the rapid income growth. In aggregate that decision looks somewhat
reasonable if not entirely right. But it is a choice with pretty significant
distributional consequences. And the second era of secular stagnation will come
to an end when political and demographic shifts allow the losers from this
arrangement to say: enough.