By John Weeks.

[more stuff like this in my new book, The Economics of the 1%:  How mainstream economics serve the rich, obscures reality and distorts policy (Anthem Press,, about $15]

The US economy according to “Larry” Summers, better known for his views on women, minorities, and services to financial capital.

In case you missed it and you continue in the naïve view that economic recovery is just around the corner, the United States, perhaps the known world, suffers from secular stagnation.  It must be true.  Larry Summers said so and the putatively sensible Paul Krugman agrees.  Indeed, he thinks Mr Summers has turned radical on us:

What Larry did at the IMF wasn’t just give an interesting speech. He laid down what amounts to a very radical manifesto. (see links at the end).

Setting aside the rather in-group phrasing (my old buddy “Larry”), what is secular stagnation and why does the disgraced former president of Harvard think we have it?  The idea that capitalist economies can suffer from long periods of slow growth or no growth (“stagnation”) is as old as the economics profession.  Adam Smith foresaw an end to growth resulting from the process of competition eliminating profits, which betrays a quite confused theory of prices.  In effect Smith was saying that profit has no cause, just an arbitrary mark-up over cost.

Around 1800 David Ricardo set forth the argument that an increasing demand for agricultural products, food and inputs, results in farmers expanding onto decreasingly productive land (the much misrepresented principle of diminishing returns).  This process generates rising rents which eventually eliminate the producers’ profits, and the economy descends into zero growth.  While Ricardo’s logic improves on Smith’s, it fails the empirical test.  During the nineteenth and twentieth centuries increases in agricultural productivity far outran the demand for agricultural products (whether that continues in this industrially polluted world remains to be seen).

Karl Marx unambiguously did not  support any form of the secular stagnation argument.  In his analysis, capitalism suffers from boom and bust, never at rest and rarely stable.  Then, we come to Keynes, who most certainly did embrace the secular stagnation thesis and is the inspiration for Summers’ impressively vulgar interpretation of the thesis.  To put Mr Summers’ “radical manifesto” in a nut-shell, capitalists’ expectations for profits are so low that no positive rate of interest can induce your sensible businessman/woman to investment in buildings, machines and other productive assets.

It all seems quite plausible, doesn’t it?  The slow growth of the US economy and those in Europe result from the pessimism of investors.  And not even a zero rate of interest will induce them to use their hoards of cash productively.  As Krugman puts it, “in this situation the normal rules of economic policy don’t apply”.  We need the government to step in and raise public expenditure, which, we hope, would bring a recovery in business optimist as the economy and household consumption increase.

The analysis underlying this manifesto radical suffers from a serious problem.  It is nonsense.  It presumes that in its normal state vigorous optimism characterizes a capitalist economy, so that only in abnormal times would governments find it necessary to boost demand.  We might call this approach to capitalism the “soft intervention” view, that for the most part the capitalists keep the economy trucking along, but occasionally the titans of industry need a bit of a kick in the pants from government expenditure.

Reality is quite different.  I was recently at an informal meeting in which a prominent and respectable British economist Robert Skidelsky reminded the gathering that the public sector is not the occasional source of support for the private economy.  It plays a continuous role in maintaining economic stability and growth (I recommend his biography of J M Keynes, and his recent book, Skidelsky on the Crisis).

The chart below gives us a picture of what has been happening.  During thirty years, 1950-1979, the US economy went through several “business cycles”, with an average rate of growth of four percent.  During these decades the federal government functioned as a major source of demand in the economy, albeit a large part by military expenditures.  In 1981 came Ronald Reagan to the presidency, telling us that government is the problem and promising to take it off our backs.  He was as good as his word, with the promise carried on by Bush I, Clinton and Bush II.  In 1981 federal expenditure was over 22 percent of GDP, and down to barely 18 percent in 2001.

US economic growth, 1950-2012 (3 year moving average)

Source: Economic Report of the President 2013 and earlier years.

The belief that a vigorous private sector characterizes the normal functioning of a capitalist economy, and the public sector needs to occasionally “fill the gap” in aggregate demand is false.  Equally false is the suggestion that interest rates have a major impact on private investment decisions.  The facts are quite different:  for the last 30 years  corporations have increasingly obtained their finance internally, from profits and sales of new stock (it is called “financialization”, Larry).

And even before the boom in internal funding. borrowing rates represented a trivial portion of investment costs for large corporations.   The main gain from lower interest rates is speculation, because the cowboy capitalists bet on very narrow margins when they play the currency and bonds markets.

Do we suffer from “sector stagnation”?  Indeed, we do, and the virus causing it has a common name, “neo-liberalism”.  In all the advanced capitalist countries the story is the same, reduction of public sector demand and pathetic growth rates or actual decline.  Paul Krugman is an extremely valuable spokesman for progressive economic policy.  His enthusiasm for Summers’ secular stagnation demonstrates the extent to which he has not split with mainstream views, in this case neo-liberalism with a Keynesian façade.

As for Summers, he must take the hutspa prize.  Having designed the deregulatory measures that allow and encourage unproductive investment, he now laments that the incentive to invest productively is too weak to maintain even moderate growth.  You’re on to something, Larry.  Too bad you didn’t realize that when you were advising Clinton. (Where the full speech can be watched).

John Weeks

John Weeks is Professor Emeritus and Senior Researcher at the Centre for Development Policy and Research, and Research on Money and Finance Group at the School of Oriental & African Studies at the University of London.