Thursday, April 2, 2015

The "secular stagnation" opportunity

I am surprised that it took such a long time for an eminent economist to advocate the international dimension of secular stagnation. I had blogged about it here and here.

Now, Ben Bernanke no less, has kicked off his new blog with a reference to how opportunities elsewhere (see also this) can stoke sustainable, demand-supported, economic growth in developed economies,
My greatest concern about Larry’s formulation, however, is the lack of attention to the international dimension. He focuses on factors affecting domestic capital investment and household spending. All else equal, however, the availability of profitable capital investments anywhere in the world should help defeat secular stagnation at home. The foreign exchange value of the dollar is one channel through which this could work: If US households and firms invest abroad, the resulting outflows of financial capital would be expected to weaken the dollar, which in turn would promote US exports. (For intuition about the link between foreign investment and exports, think of the simple case in which the foreign investment takes the form of exporting, piece by piece, a domestically produced factory for assembly abroad. In that simple case, the foreign investment and the exports are equal and simultaneous.) Increased exports would raise production and employment at home, helping the economy reach full employment. In short, in an open economy, secular stagnation requires that the returns to capital investment be permanently low everywhere, not just in the home economy. 
More specifically, as I had illustrated with a parable involving stagnating and emerging economies, the choices and demands could not have been more complementary,
Stagnation Land has the technologies, businesses, and even capital, all searching for opportunities. It also faces an aging population and resultant demand for different kinds of labor. Emerging Land has rising productivity, remunerative investment opportunities, growing consumer demand, and a large pool of labor. The complementarity could not have been any more mutually beneficial. The scope for a new growth compact between the two countries could not have been more opportune.
Is it possible that the gloom of secular stagnation could also provide the gleam of hope for more sustainable and mutually beneficial economic integration between developed and emerging economies, which alleviates stagnation in the former and promotes rapid economic growth in the latter?

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