Article 1: Is The Economy Still Threatened by Secular Stagnation? – By John Cassidy, The New Yorker, January 28th 2015

 

The Secular Stagnation thesis has partly been discredited, John Cassidy underlines in this article, published in The New Yorker. Indeed, after contracting during the first quarter of 2014, the US economy enjoyed an important surge in growth: the GDP expanded at an annual rate of 5% from April to September, which is the fastest rate of growth since the late 1990’s. The consequence was a sharp fall in unemployment and an improvement in consumer confidence, not seen since before the financial crisis erupted in 2008.

 

But this improvement does not mean that the secular-stagnation thesis has been totally discredited, the author argues. Indeed, this better situation is partly the result of the Fed’s monetary stimulus since 2008. The question now is: Can the US economy perform and have rapid growth while having higher interest rates? This is why Janet Yellen should tighten policy gently enough to preserve growth, but firmly enough to prevent the creation of a new bubble, the author argues. (Read the article)

 

 

Article 2: A Recovery Waiting to be Liberated – By John B. Taylor, The Wall Street Journal, Marche 3rd 2015

 

John B. Taylor has never been an advocate of the Secular Stagnation thesis. For him, it is only an alternative explanation to exonerate US policy from disappointing economic performance. In this recent article, he considers that the growth figures for the last quarter of 2014 were disappointing, considering that Washington has not seriously put in place pro-growth policies (by lowering tax rates for example). But going back to rapid growth is still possible if policy makers take the necessary steps. Taylor underlines that labor-force participation is now lower than at the end of the recession, and therefore, it has a lot of room to grow. The same for growth of productivity, where there is also room for acceleration.

 

If productivity growth reaches 2.5% and employment growth 2%, therefore economic growth would attain 4.5%, according to Taylor. This level, far above forecasts, could be sustained for several catch-up years before stabilizing at 3% at the long term.

 

This analysis leads him to compare the US economy to “a caged eagle ready to soar if released from the captivity of bad government policy”. By putting the right policies in place, the US economy can go back to fast growth trends quickly. (Read the article)

 

 

Article 3: “Still, not Stagnant” – The Economist, March 7th 2015

 

Although many economists argue that the US economy is stuck in Secular Stagnation, because of low long-term growth prospects, ageing population, feeble inflation and rock-bottom interest rates, a new paper published by the University of Chicago’s Booth School points out that Secular Stagnation is not the right diagnosis to the US economy problems. 

 

The authors of the paper, James Hamilton, Ethan Harris, Jan Hatzius and Kenneth West, look at central-bank interest rates, inflation and growth in 20 countries over 40 years. Their result is that there is, at best, a weak relationship between economic growth and the equilibrium rate.

 

Regarding the situation today, they find that some of the distorting forces of recent years have begun to fade slowly. Indeed, household finances are in better shape. And this is helping to power a consumer-driven recovery in the US that may lead to higher interest rates.

 

The Economist adds that according to the Chicago paper’s authors, the decline in real interest rates is smaller than many “stagnationists” believe, and that the rate is almost certainly positive. They add that a lower rate now is not a sign that growth will permanently fall below past averages.

 

Even if the risk of secular stagnation is overdone, the authors of the research paper reckon that the Fed has good reason no to raise rates too soon. (Read the article)