NEWS INDIA TIMES

nThursday at the Brookings Insti- tution I ampresenting a paper, with Lukasz Rachel, carrying for- wardmy work on the idea of secu- lar stagnation and the closely related idea that fundamental economic forces are driving down the neutral rate of in- terest - where savings and investment are balanced at full employment. The idea of secular stagnation dates to Alvin Hansen, who wrote in the 1930s that it was possible for private-sector investment demand to fall far short of private-sector sav- ing and that interest rates could not fall far enough to bring them into balance. As a con- sequence, Hansen argued, there might be a permanent need for large government budget deficits if the economy is to avoid protracted weakness and deflation. WorldWar II and the postwar spending boom lifted the U.S. economy from the stag- nation of the 1930s, leading some to con- clude that the secular-stagnation hypothesis was wrong. An alternative view that I think is closer to right holds that the hypothesis was correct but that sufficient remedies were found initially in wartime military spending, then inmassive national projects such as building out the suburbs and reducing saving by allowing Social Security tomeet retire- ment needs andmaking consumer credit widely available. Fast-forward to the present. In the indus- trial world, real interest rates average well below zero andmarkets suggest they will re- main below zero for decades to come. The ratio of government debt to gross domestic product is very high and rising rapidly. And yet even with super-stimulative monetary and fiscal policy, growth is sluggish at best and, even a decade after the financial crisis, inflation has not, on average, risen to central banks' 2 percent target. The core of the problem is that there is not enough private investment to absorb, at nor- mal interest rates, all the private saving. The result is extremely low interest rates, weak demand, and low growth and inflation, along with the bidding up of the price of existing capital assets. What has happened to private saving and private investment? Many things, including increases in saving caused by people having fewer children, more inequality, longer retire- ment periods and increased uncertainty. Probably more important, demand for pri- vate investment has fallen off as the econ- omy's structure has changed. Computing power costs a tiny fraction of what it used to. Malls have been replaced by e-commerce. People prefer small urban apartments to large suburban houses. Cars and appliances need to be replaced less often. In any event, the end of labor force growthmeans less de- mand for new capital. This all has been widely recognized in dis- cussions of the falling neutral real rate of in- terest, something the Fed has taken aboard with Chair Jerome Powell saying that the cur- rent real interest rate of about 0.5 percent was very close to the neutral rate, a decline of perhaps 3 percentage points fromneutral real rates a generation ago. Our paper takes matters further by point- ing out that real rates would have declined by far more than they have but for increases in government debt, pay-as-you-go pensions and public health insurance. Using a variety of modeling approaches, we estimate that but for public policy, neutral real rates would likely have declined by as much as 7 percent since 1970 and would be several percentage points negative today. Some key aspects of our analysis include: -If the neutral real rate is significantly neg- ative, there can be no assurance that even in the long run economies will reach full em- ployment without appropriate policy. The traditional Keynesian view in which perma- nent depression is possible is more right than the New Keynesian approach in which un- employment is attributed only to temporary price rigidities. -The large increases in government debts that we have witnessed in recent decades are less a consequence of fiscal irresponsibility than a response to shortfalls in private invest- ment relative to private saving. For the world as a whole, it is a matter of arithmetic that the government can run a deficit only to the ex- tent that the private sector runs a surplus. Rising private-sector surpluses have been a driver of public-sector deficits. -Satisfactory growthmay, given the econ- omy's current structure, depend on unsus- tainable policy settings.Witness the slowdown likely in the United States when budget deficits stop rising, even though they are at what may well be unsustainable levels. Likewise the adequate growth of the 2005- 2007 period required low rates, an epic hous- ing bubble and vast erosion of credit standards. -If full employment is to be maintained in the years ahead, it will be necessary to assure that investment absorbs saving. Low interest rates may be insufficient to assure that this occurs andmay have various toxic effects, in- cluding bubbles in asset prices andmisallo- cations of investment. -Fiscal measures, including larger budget deficits, improved Social Security that re- duces retirement saving, redistributions of income to poorer consumers with higher spending propensities, and social insurance that reduces precautionary saving, all oper- ate to reduce saving and raise neutral real rates. -Measures such as reductions inmonop- oly power, investment mandates (such as the retirement of coal-fired power plants) and in- vestment incentives by operating to increase investment also operate to raise neutral real rates. We think our results, if they stand up to professional scrutiny, will require a rethink- ing of conventional views regarding macro- economics andmacroeconomic policy. -T HE W ASHINGTON P OST Opinion 3 News India Times March 15, 2019 O Published weekly, Founded in 1975. The views expressed on the opinion pages are those of the writers and do not necessarily reflect those of News IndiaTimes. Copyright © 2019, News IndiaTimes News IndiaTimes (ISSN 0199-901X) is published every Friday by ParikhWorldwide Media LLC., 35 Journal Square, Suite 204, Jersey City, NJ 07306 Periodicals postage paid at Newark, N.J. , and at additional mailing offices. Postmaster: Send address change to News IndiaTimes, 35 Journal Square, Suite 204, Jersey City, NJ 07306 Annual Subscription: United States: $28 Lawrence H. Summers TheRiskToOur EconomyFrom Secular Stagnation Disclaimer: Parikh Worldwide Media assumes no liability for claims/as- sumptions made in advertisements and advertorials . Dr. Sudhir M. 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(212) 675-7624 New York Office 3601 36 Ave, Long Island City, NY 11106 Tel: (718) 784-8555 E-mails editor@newsindiatimes.com advertising@newsindia-times.com Website www.newsindiatimes.com Chicago Office 2652 West Devon Avenue, Suite B Chicago, IL 60659 Tel. (773) 856-3345 California Office 650 Vermont Ave, Suite #46 Anaheim, CA 92805 Mumbai Office Nikita Ajay Pai Goregaon, West Mumbai Ahmedabad Office 303 Kashiparekh Complex C.G. Road, 29 Adarsh Society Ahmedabad 380009 Tel. 26446947 F ax. 26565596 Writes editorials on The Washington Post Trump's Proposal ToEnforceCampus Free SpeechWill OnlyHurt Conservatives By Musa al-Gharbi O ne year ago this month, President DonaldTrump declared that the campus free-speech crisis was "overblown." Since then, the trends have ac- tually moved in an evenmore positive direc- tion:We're seeing fewer disinvitations, shout-downs and blowups on campuses na- tionwide. Nonetheless, Trump announced Saturday his intent to issue an executive order that wouldmake federal research funding contin- gent on whether or not a given college ade- quately protects free speech. Again, given that Trump himself believes that there is no crisis, and given that the trends over the past year have been positive, it is important to see this maneuver for what it is: an attempt to give redmeat to a Repub- lican base that increasingly views higher ed- ucation as a culture war issue. To be clear, this perception is not entirely unfair. Universities, especially elite schools, have grown increasingly ideologically ho- mogenous over the past few decades. The causes are numerous, and only some of them are plausibly within the control of faculty or administrators. However, this growing divide does have important implications for the life prospects of those who find themselves ex- cluded. It has important implications for col- leges and universities, too: People tend to disinvest from institutions if they do not feel that they have a voice or stake in them. Hence the growing calls from the right to de- fund institutions of higher learning - and es- pecially social research (fields that tend to be far less ideologically diverse than the acad- emy overall). Trump's plan, however, is a betrayal of conservative values and interests. Let's start with values: Conservatives have long appreciated that many social problems are complex and fluid - that the success of government initiatives is typically dependent upon local knowledge and local buy-in. Absent these, well-inten- tioned efforts tend to fail and often cause great harm in the process. As a consequence, conservatives consistently assert that one- size-fits-all and top-down approaches to so- cial problems are unlikely to yield the intended results. This same logic holds with regard to in- creasing ideological perspectives in higher ed. One cannot legislate an institutional cul- ture that encourages viewpoint diversity - let alone an environment where diversity is ef- fectively leveraged to improve research or teaching. This must be willingly and willfully enacted by faculty, students and administra- tors in their day-to-day interactions. Agents must be convinced, not compelled, to learn and grow fromdiverse perspectives. -T HE W ASHINGTON P OST

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