The Context of Professor Summers’ Speech

I don’t imagine that the majority of my readers have degrees in economics. Even having one myself (albeit a mere bachelor’s) I am often befuddled by the jargon and mathiness of professional academic papers. I even find myself googling terms and references just reading Bloomberg, the Financial Times, or The Economist. My goal, then, is to fill the gap between the professional economists and my readers who, while intelligent and curious, have other specialties.

So let’s begin with the title of professor Summers’ talk: “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound.” I have run these terms by several people and have confirmed that they are meaningless to the average person. I said in my previous post that I would do my best to translate, so here goes.

The general topic is, of course, U.S. Economic Prospects. Dr. Summers has been invited to give a speech to a group of business economists — as opposed to academics. This means they work as economists for companies (think ‘applied math versus pure math’), and as such are always interested in what the current data actually mean for the immediate future. Summers emphasizes his understanding and appreciation of this distinction in the introduction of his speech, saying

Indeed, I think it is fair to say that some of the themes that are today central to discussions of academic macroeconomists, but that had receded from the debate for many years, were always kept alive at the National Association for Business Economics.

Another way of understanding this is that in the world of business, it is more important to be right in a real-world sense than to take credit for having the latest, greatest theory. Which takes us to the bigger question of “what is macroeconomics for?” Summers explains that the world of macroeconomics today is different in substantial ways from that of just a few years ago, thanks to the major disruption to financial markets that began in 2007. Prior to the crash, macroeconomists were convinced that the days of large-scale depressions were in the past, that during recent decades a “great moderation” had taken hold. As if, “we know too much to fall into the errors of the past: our sophisticated models give our central bank the power to use minor tweaks to keep the economy on a steady upward path of growth.” No longer would we be victims of wild swings in the business cycle.

The Great Recession gave the lie to that notion, and rudely at that. So Summers sees the opportunity to question everything: to do meta-macro (as a philosopher might say), or, if you like, macro-macro, where even the business cycle itself comes under interrogation: “As I shall discuss, there is room for doubt about whether the cycle actually cycles.” He doesn’t need to point out to the economists in the room that the “recovery” since 2009 (when the recession technically ended) has been anemic by most measures. The big question he wishes to pose is whether the very slow growth we have seen in the past five years is symptomatic of a gradual rebound from a severe low in the business cycle, or if it is indicative of a “new normal,” a much flatter growth curve going forward. For the latter to be the case there would have to be structural reasons for it, such as shifts in demographics or technology that make the prospects for future economic growth permanently and broadly diminished — secular stagnation.

In my next post I will define the three terms in the speech’s title: secular stagnation, hysteresis, and the zero lower bound, after which we will have to drill into each of them at some depth.