Economists urge caution in debate over stagnation

Secular stagnation hung over the annual meeting of more than 5,000 economists from around the world this past weekend--as a description of the economy and not as comment on the liveliness of the cocktail parties.

Support for the thesis that the industrial world is mired in a prolonged period of slow or no growth was dimmed, though not banished, by the recent strength of the United States economy.

A standing-room only crowd packed a hotel ballroom on Saturday to hear two leading proponents of the proposal, Professors Lawrence Summers of Harvard University and Robert Gordon of Northwestern University in Evanston, Illinois, defend their views.

"Just because we have 5 percent growth doesn't mean we are out of the woods," Summers, a former Treasury secretary and senior White House official, told the American Economic Association meeting in Boston, alluding to the US economy's pace of expansion in the third quarter.

He rattled off a variety of reasons for caution. Among them: the risk of financial bubbles, the difficulties the Federal Reserve may face in raising interest rates back to more normal levels, and continued excess capacity in Japan and Europe.

Summers also compared the euro area's situation today with that of Japan in the late 1990s, before it slipped into a deflationary funk, and warned that the US could be in for an extended period of a "dismal growth rate below 1-1/2 percent."

Fellow Harvard professor Greg Mankiw took issue with that gloomy prognosis as far as the US is concerned. In particular, he highlighted the improving labor market, where unemployment is at a six-year low and wages have begun to rise.

"We are returning to normalcy," said Mankiw, who is also chairman of the economics department at Harvard in Cambridge, Massachusetts and a former chief White House economist.

The outcome of the debate over secular stagnation has widespread ramifications for the economies and societies of industrial countries.

Meager growth raises the risk of economies falling into deflation while making it harder for governments to reduce budget deficits and debt as tax revenue falls and spending rises. It would also depress living standards.