Secular Stagnation

The theory that rich economies may suffer from chronically weak demand and very low interest rates, and the debate about whether it still applies.

In the years after the 2008 crisis, rich economies grew slowly despite very low interest rates. In 2013, economist Lawrence Summers revived an old idea to explain this: secular stagnation, meaning a long-lasting period of weak growth, where “secular” means long-term rather than cyclical.

Origins

The term was first used by economist Alvin Hansen in 1938, who worried that slowing population growth and fewer investment opportunities would leave the U.S. economy stuck with weak demand. The boom after World War Two seemed to prove him wrong.

The modern argument

Summers argued that in many rich economies, desired saving exceeds desired investment, pushing down the neutral interest rate, the rate at which the economy is neither stimulated nor restrained. Reasons include:

Ageing populations saving for retirement.
Rising inequality, since richer people save more of their income.
Cheaper capital goods, such as computers, requiring less investment spending.
A global savings glut, especially from Asian economies and oil exporters, a term used by Ben Bernanke.
Slower population and productivity growth, reducing investment needs.

If the neutral rate falls below zero, central banks cannot cut rates enough, and economies may be stuck with weak demand, low inflation and slow growth.

Evidence

Interest rates fell steadily for decades before 2020. Japan seemed to show the pattern first.

The debate after 2021

When inflation surged after the pandemic and interest rates rose sharply, some economists argued secular stagnation was over. Others argue that the underlying forces, such as ageing and high saving, remain, and rates may fall again. Large government deficits and investment needs, such as for the energy transition and artificial intelligence, could keep rates higher.

Too much saving

Imagine an economy where many people are approaching retirement and saving heavily, while businesses see few profitable investments. Savings pile up, interest rates fall to near zero, and yet spending stays weak. This is the situation secular stagnation describes.

Thinking low interest rates always mean loose policy

If the neutral interest rate has fallen, even very low rates may not be stimulating. What matters is the rate compared with the neutral rate.

Key takeaways

Secular stagnation means long-lasting weak demand and growth.
Alvin Hansen coined it in 1938; Lawrence Summers revived it in 2013.
Ageing, inequality, cheap capital and a savings glut may push the neutral rate down.
After 2021's inflation and higher rates, economists debate whether it still applies.