Ben Bernanke on the secular stagnation hypothesis

Here is his second real blog post.  Excerpt:

My greatest concern about Larry’s formulation, however, is the lack of attention to the international dimension. He focuses on factors affecting domestic capital investment and household spending. All else equal, however, the availability of profitable capital investments anywhere in the world should help defeat secular stagnation at home. The foreign exchange value of the dollar is one channel through which this could work: If US households and firms invest abroad, the resulting outflows of financial capital would be expected to weaken the dollar, which in turn would promote US exports. (For intuition about the link between foreign investment and exports, think of the simple case in which the foreign investment takes the form of exporting, piece by piece, a domestically produced factory for assembly abroad. In that simple case, the foreign investment and the exports are equal and simultaneous.) Increased exports would raise production and employment at home, helping the economy reach full employment. In short, in an open economy, secular stagnation requires that the returns to capital investment be permanently low everywhere, not just in the home economy. Of course, all else is not equal; financial capital does not flow as freely across borders as within countries, for example. But this line of thought opens up interesting alternatives to the secular stagnation hypothesis, as I’ll elaborate in my next post.

Keep ’em coming Ben, but you’re not a real blogger until you’ve covered the infield fly rule…


I'm so daft, why didn't I invest in China out of high school?!

First thing I noticed: Bernanke joins in the crowd not crediting Krugman for reviving the secular stagnation thesis long before Summers joined in.

That's two years before Summers ever mentioned the term.

As for the excerpted bit, it's interesting to see Ben challenging closed-economy modeling, which is a widespread, deeply rooted problem, especially in US academia. But his argument isn't very strong. I don't agree at all that the US is in secular stagnation, but if it were, I doubt very much that the export gains from foreign investment would be enough to get us out.

Tom, good point! Not only he discusses it, he emphasizes the international dimension. He argues that the trade deficit is to blame for the very low real rate curve. BB just argues that intl trade can actually alleviate the pressure now.

But Tyler Cowen wrote about Great Stagnation, closely parallel to secular stagnation, in January 2011 not November 2011 as Krugman did. And others wrote about a plateau in science even earlier (Gordon I believe wrote about productivity lapses, but a non-economist wrote an article I recall from the 1990s on this theme). And let's not forget Alvin Hansen? who wrote about this in the late 1930s. Further Krugman in his 2011 post fails to mention demographics as a driver, only mentioning Chinese savings as a destabilizing factor (same as M. Wolf does).

I'm not praising Krugman's 2011 article. I just think it's odd that Summers is so widely credited with reviving the secular stagnation thesis, when he was really just chiming in with what Krugman had been saying, and moreover at a late date when the thesis was already far less plausible than in 2011. Guys like Bernanke are usually fastidious about giving due credit, which is why I thought this exception was interesting.

Secular stagnation is a demand-side theory, unrelated to Tyler's supply-side "great stagnation" theory. I disagree with both for different reasons. Tyler these days seems to disagree with his former self as well.

So, what did Japan do wrong?

B.B. is a smart guy so it is easy (for people with pretentions to not being ignorant) to make sort-of-not-completely-uninformed comments on B.B.'s meandering prose. So here we go. I would prefer my treasury secretaries not to focus their "intuitions" on adapted forms of "simple cases." Then again, I am not sure I am prepared to live in a world where the sort of person who becomes a U.S. treasury secretary refuses to focus his intuitions on "simple cases." Sure I would like to live there, but am I prepared to live there? Well, even if I am, what about everybody I know, both the employed and the unemployed, the rich and the not-rich? There are about 200 well-known and named paradoxes in the accepted economics literature canon. (cite to Palgrave's, Lanchester, several obscure bloggers, and, dread word, google books...)
It is time for a new one. New paradox, that is.

Seems like you're rambling, but I'd like to see your 200 paradoxes...I can add them to my arsenal of weapons against orthodox economics.

Bernanke was Fed chair. Summers was Treasury Secretary.

Ray - start with a good google search of Wikipedia past and present. Palgrave's will give you the first few dozen, Lanchester's book on economic terms will give you clues as to what words to plug in to your search. Also, if you think I "ramble", you might be mistaken. My comment was based on Pascal's distinction between certain but useless knowledge of trivial facts and uncertain but extended knowledge of useful facts, la verite des profondeurs clairs. I don't think I could have implied that distinction in fewer words - hence, the rambling you noticed was not activated by the words you read.
Steven Kopits - one of my unusual reading interests is biographies and autobiographies of Treasury Secretaries and the sort of people who become, in my slightly enhanced view of this specific world and similar worlds, Treasury Secretaries (the literary value of Treasury Secretary writings is, in my opinion, almost an order of magnitude better than that of Secretaries of State. I do not know why this is, but I have some theories. People who run the Fed - with one or two exceptions relevant for our present purposes - don't write very much that is worth reading, do they?) Are you saying that Bernanke is not "the sort of person who becomes a U.S. Treasury Secretary"? Or did you just assume the comment you replied to was worth no more of your time and capacity for understanding than you gave it? Anyway, thanks for participating in my obviously failed attempt at something like a Socratic dialogue. I was interested in what the defense might be of Bernanke's prose choices in the quoted excerpt - because I have been told that Bernanke is the contemporary equivalent of Keynes and Fisher, and I am not sure that is true. Instead I got a dismissive Ken Jennings-level insult.

" Increased exports would raise production and employment at home, helping the economy reach full employment."

Yeah, OK, a dollar falling against another currency could increase exports or at least make some exports more competitive on world markets. Be that as it may, what's "full employment"? Has there ever been a period when everyone that wanted a job had one? Why is there this never-ending concern about employment anyway? People don't want jobs, they don't want to go to bed early and miss the Conan O'Brien show so they can get up and slither off to the salt mine. They just want money. That's the issue in its entirety. In fact, they turn down jobs that they feel don't pay them enough. Isn't that what the minimum wage is all about? More money? In fact, without the various levels of government digging around in the economy probably pretty much everybody would be employed.

Bernanke: "the availability of profitable capital investments anywhere in the world should help defeat secular stagnation at home ... the resulting outflows of financial capital would be expected to weaken the dollar, which in turn would promote US exports" - in theory, but not in practice. The US maintains a 'strong dollar' policy in the same way central banks of yesteryear used to raise interest rates to 'sterilize gold outflows' and keep gold from leaving a country. Also, investing in other parts of the world is risky due to lack of clear rules. Here in the Philippines there are entrenched interests that will fight you if you are a foreigner (who in any event by law must partner with a Filipino), and we saw what happened to Target in Canada, they left the country after a failed start, possibly for different reasons (Walmart was more successful). Bernanke realizes this with his comment ("of course financial capital does not flow as freely across borders as within countries")

How is the Fed maintaining a strong dollar when it has interest rates low and, until recently, was supplementing that with QE? Maintaining a strong dollar is even harder if Europe and Japan are both attempting to stimulate.

It's a straw an set up to him telling you what he really thinks is going on - any guesses? Probably structural issues like lack of US competitiveness in a global marketplace for human capital, corporate tax policy, others?

"And when I get that feeling/I want secular stagnation."

"you’re not a real blogger until you’ve covered the infield fly rule… " What does this mean???

It's a reference to a fairly complicated baseball rule, that for some reason wonky bloggers love to debate.

Gautam, wikipedia has an entry on this rule. Good luck understanding it!

I don't recall Tyler ever addressing the infield fly rule, but if he did, I'm guessing he'd be against it.

Keep ‘em coming Ben, but you’re not a real blogger until you’ve covered the infield fly rule…

Real bloggers use paragraphs.

and real bloggers provide plenty of links and use expressions like " a Straussian reading of" something. Also real bloggers treat the comments with contempt by just ignoring them

That's less contemptuous than curating them mercilessly. Also, what makes you think the hosts here ignore the comments? Because they don't get into it on every thread like Scott Sumner?

Good for Bernanke. He's making the distinction between the narrower concept "capital investment" and the much different concept "investment", and making the optimistic case that, with respect to capital investment, the money's gonna go where the money's gonna go (i.e., to the highest rate of return - r). In other words, he's making the free market case that r will exceed (or be sufficiently high to compete with) returns from speculation provided money is free to go where money wants to go. It's an ironic case for Bernanke to make given that he has spent, what, almost seven years inflating the value of financial assets to preserve the "investment" of speculators. I often ask what's the alternative to monetary stimulus, the alternative that promotes capital investment rather than speculation. The obvious answer is fiscal stimulus, but it's not a realistic alternative given the resistance from those on the right. Bernanke is offering an alternative (i.e., the free flow of capital), but will that actually work in an era of excessive inequality, not only here but in less developed countries as well? It should work, in theory anyway. In any case, it's far better, and much more appealing, than the hard way for correcting excessive inequality.

And Katy Perry personally reads my replies to her tweets.


At risk of over-simplification:
It has always seemed to me that "exports" are working for (or transfers of resources to) an external "economy;" raising the issue of the nature of the exchange (what do we get in return?).

"Imports" imply the reverse that others are working for (or providing resources to) our "economy;" raising the issue of what do we give up (exchange) in return?

There does not seem to be a uniform pattern.

China was willing to take promises of future calls on U S goods and services.

The "petro-dollars" and the period of Japanese expansion seemed to involve exchanges of ownership of U S assets.

So, the export- import functions blithely referenced may need to be qualified, not simply quantified.

Fuck You, Bernanke!

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