The idea in larrys revival of stagnation is that because Going Forward the returns to capital and Consumer Spending are likely to be weaker than theyve been in the past, that the real Interest Rate that is needed to provide full employment could be very, very low. And there are a lot of reasons as we see very low Interest Rates, and he talked about in his remarks to the association of business economics a number of reasons why the demand for capital and the demand for Consumer Spending might be unusually low Going Forward and the same ones that, essentially, you need very low Interest Rates to get the economy up to full employment. Slower growth both from population and and also from possibly slower technical change, also he notes and i think this is an interesting point that if you look at new Industries Like facebook on the one hand versus the industries that were dominant in the 50s and 60s like steel making obviously, facebook and Similar Companies have much smaller needs for capital. They dont need big factories and heavy machinery to produce their output. And so with less demand for physical capital that, again the demand for investment have been smaller and that will, again, keep down Interest Rates in the economy. Related to that is the relative price of capital has been declining over time for both capital goods and for consumer durables. So spending on capital, he argued, would be smaller. So the focus has been on the demand for capital goods, how that affects output, and hes talked about and i wont get much into this but hes talked about increasing inequality which has many implications, of course, and many causes. But he argues, and i think theres an interesting debate about this he argues that increased inequality because it puts more income in the hands of people who tend to save more the rich or the upper income people might push down the demand for consumer goods as well and, therefore, be another source of stagnation. Now, what is the implication of this view that demand for capital goods and some consumer goods may be very weak Going Forward and, therefore Interest Rate needed to restore full employment could be chronically and systematically very low. Well, one of the implications and manager that larrys talked doesnt something that larrys talked about is if the real Interest Rate you immediate to get full employment and in particular if its lower than minus the inflation target of the fed then the fed runs out of room. Because if the fed lowers Interest Rates to zero and if thats not low enough, then obviously, Monetary Policy finds it very difficult to get to full employment. He points out, he he argues that, in fact, in order for Monetary Policy to get to full employment by itself that it has to allow financial bubbles like the housing bubble, and you know, during, of course, the early 2000s he points out that the economy did not overheat even though there was all this demand coming from construction and Consumer Spending out of the housing bubble. And he argues, therefore, that thats evidence that Monetary Policy cannot get us to full employment without bubbles and, of course, we all understand that bubbles are very daylight, and we certainly dont want that very dangerous, and we certainly dont want that to be part of our policy tool kit. So whats the solution . His main solution is fiscal policy, and he argues that by bringing in fiscal policy in particular, for example, fiscal expenditure on new infrastructure that that would help solve the sag nation problem and stagnation problem and address the concern that Monetary Policy by itself is insufficient. So let me just express a couple of points of agreement here. Certainly, a better balance of monetary and fiscal policy is something weve needed for some time, and infrastructure in particular has the advantage that not only is it a source of demand puts people to work as you build bridges and roads and schools, whatever, but, of course, it also provides product ivity gains and other benefits for the economy as well. So i clearly agree you need a better mix, and the heavy reliance not just in the United States, but in other economies on the central bank is not is not desirable. And those who complain that low Interest Rates are bad for various reasons, because they create bubbles and so on, we can debate whether thats true, but the night response is not for the fed to tighten policy, the response is, well, lets have a more balanced policy between monetary and fiscal that would give you the appropriate amount of stimulus at an Interest Rate thats not necessarily is so low. So i agree with that. I also take aboard the point that hes made and that people at the fed have made which is what he calls the inverse of says law, the salacious view that supply creates its own demand and therefore, theres never any problem with having enough demand in the economy. Larry puts it cleverly as the reverse, the lack of demand creates lack of supply that if you have an economy which is persistently below full employment so that people have longterm joblessness, thats going to affect their skills, its going to affect their motivation, their connection to the labor market, its going to affect Capital Investment. So by having a weak, chronically underemployed economy youre also going to get, eventually an economy which is not as productive as otherwise would be. So thats thats roughly the, my overview and, of course larry has no responsibility for my summary of his views, of the secular stagnation hypothesis. Let me now just give a few concerns that i have or a few potential responses, you know and give it an alternative perspective. I would say, first, just a few points. First, i think the notion that the real Interest Rate that you these to get full employment has to be, actually quite negative which is what you need, because the fed can get real Interest Rates down to 2 if they have a 2 inflation target. Thats a little bit strong and most economists would argue negative real Interest Rates theres got to be things that are productive ultimately, at least in the normal growing economy. When i was on panel when larry first introduced this point about secular stagnation, and i reminded him of what his uncle, paul samuelson, taught us in school because in that world it would pay to knock down the Rocky Mountains just to save the gas that you get from driving up the grade, you know . Literally, it would. If Interest Rates were really zero. Of course, theyre not and, of course, were not going to be knocking down the Rocky Mountains, so please dont take that literally. [laughter] Interest Rates that are that negative 2 , its questionable whether thats true. And particularly when you think about the fact that investment is not just facebook, but investment involves housing and Office Buildings and consumer durables and many other types of longlived goods that pay a higher return than 2 its also questionable, i think that you need to have bubbles to get to full employment. Theres a very nice paper by jim hamilton, ethan harris and ken west that was presented recently at the u. S. Monetary policy forum, and they questioned quantitatively whether, in fact, it really was true that the housing bubble of the early 2000s was the only reason that the economy was able to get to full employment. And they point out i think correctly, that there were some offsetting factors including the big trade deficit. We had a trade deficit at that time of 6 of gdp. So that was an awful lot of demand that was going abroad rather than affecting demand in the United States. And on top of that, we had a major increase in oil prices which was also sapping consumer demand. So there were some factors working in the other direction, and they show those two things, along with the housing bubble, were more or less a wash. So that evidence and the recent evidence, of course, that were at least approaching full employment is inconsistent with the view that you need bubbles to get to full employment. Their view which i think needs to be taken seriously, is that the slow recovery that weve seen and the low Interest Rates are at least in part due to headwinds, that is transitory drags on the economy that will ultimately dissipate. And often when i was chairperson, i would talk about the headwinds facing the economy including tight fiscal policy, again, the after effects of the financial crisis which are still with us, i think although obviously dying away and also of course, the fact that the housing sector is still quite below normal in terms of its growth. So theres some objections to the second stagnation hypothesis although again i think theres a lot of merit to it and, again i agree with some of the policy implications. But i think the one concern that i would like to talk about for the rest of my remarks is the fact that secular stagnation, the way its been expressed at least, is about the u. S. Economy in isolation. It doesnt talk about the International Aspects of our economy. But, in fact trade and exports are an important source of demand for our economy. And in a world where not just you know, if the whole world has secular stagnation, thats one thing. But if theres anywhere in the world that doesnt have secular stagnation and has Investment Opportunities and growth opportunities, then the u. S. Can benefit from that by Foreign Investment and by exports to that area of the world. And i wont go into detail in the argument but, basically again i would argue that in a world of reasonably mobile capital and reasonably mobile trade, that its not enough to say that the u. S. Is in secular stagnation. You would have to argue that the whole world is in secular stagnation. I dont find that very plausible, even if the United States has reached the state where all of our new industries are facebooktype industries, i think the rest of the world is not yet in that point. So in order to think about secular stagnation and the opportunities for full employment, i think it is important to bring in at least a little bit the global aspects and ask given that the United States is an open economy, that we do have Foreign Investment, that we do have trade can that help explain give an alternative or at least a complement to sec tar stagnation secular stagnation to the basic facts that growth is less than we would like to see. So about ten years ago i made an argument as jared mentioned, called the global savings glut. And the basic idea there was that for various reasons global savings was exceeding desired global investment. And what are some of the reasons for that . Well first, i pointed out what was happening in asia. You had countries like china which had huge savings and even though they invest a lot as well, a lot of their savings was being shipped abroad in the form of acquiring International Reserves or in ems of supporting their export industry which was the big source of growth for them. And this was a policy decision. This wasnt the fact the that a there were no opportunities for investment in china. Rather, they were suppressing domestic consumption, they were keeping their Exchange Rate undervalued, and these policy discussions led to big current account surpluses and a lot of savings that was blowing into the global flowing into the Global Economy. The rest of asia, similarly following the financial crises of the 90s Capital Investment this those economies went down, but theyre high savers, so that saving went off into the Global Financial markets. Likewise, i pointed out ten years ago the Oil ProducersCommodity Prices were very high of course just before and during the crisis. And so you had countries like saudi arabia and others that were earning huge amounts of Foreign Exchange, could not spend all that effectively at home and so, again, that was money being recycled into the Global Financial markets. So you had a high amount of savings in the Global Economy, and that was having two effects basically. The first was that with lots of savings in the economy thats going to drive down Interest Rates because the supply of savings is greater than the demand for investment, thats going to push Interest Rates down. And that helped explain, as i argued at the time, what Alan Greenspan called the conone dumb. Even as the fed was tightening rates between 2004 and 2007, the longterm rates remained quite low contributing to some extent to boom many housing prices. The other effect can be that with Financial Capital flowing into the United States, that strengthened the dollar and contributed to our very large trade deficit t which i mentioned before. So in the middle of the 2000s, we had in 2006 we had a trade deficit that was more than 6 of real gdp which meant that a lot of the napped from domestic demand from domestic consumers and firms was being siphoned off into the Global Economy and this was a problem that was talked about a lot during that time. So so that loss of demand through the trade deficit could contribute to Slower Growth in the United States and to some extempt, as i mentioned before the positive effects on demand from the housing bubble. And all of those things, i think, are tied together. Well, let me just in the blog on wednesday ill provide a lot more data on this, but let me just characterize just very call tate ily how qualitatively how the world has changed in the last ten years and what the global imbalances and the global savings glut looks like today. The basic facts are as follows first, the trade deficit of the United States, as you probably know, is habit halved which is very positive. The biggest reason for that decline in the u. S. Trade deficit, of course is the fact that weve become major Oil Producers as well, so we dont have to import as much oil. Just a note that be you are an exporter but youre not an states thats actually not entirely good news for you because strength of our Oil Production and the reduction of demand for foreign oil means that the dollar is stronger than it otherwise would be, and it actually hurts nonoil exports. But thats a secondary issue. The main point is that the u. S. Has seen improvement in its trade deficit which is, which is a positive thing. The second observation i think worth making is, of course, the emerging market savings glut that i talked about ten years ago looks to be its still very large but it looks to be moderating somewhat. In particular, as you probably know china has been trying to restructure its economy so that its not completely reliant on exports and on Foreign Investment and more reliant on domestic consumption and domestic demand, and their current account surplus has accordingly come down meaningfully, and they continue to work in that direction can. So that is positive. That decline has been offset only partially by increased surpluses among other asian countries, the Southeast Asian countries in particular. And then finally in the emerging market world well two other points in the emerging market world. One is latin america has become much less of a surplus looking at brazil in particular, theres been a major swing towards deficit in latin america. And finally, of course as oil prices go down, then the current accounts of the Oil Producers will go down as well. So the emerging market surplus, global savings glut part looks to be lower and looks to be declining which is a positive thing for the Global Economy. But there is one change which is worth noting which is that ten years ago when i talked about the global savings glut the your p peen savings european savings balance was about zero. That is the net trade balance of europe was essentially, in balance. Today, since 2006 the net trade balance of europe and the eurozone has risen by more than 300 billion. So theres been a big Movement Towards surplus and imbalance in europe. Now, wheres that coming from . Part of it comes from germany which has the largest by far the largest trade balance surplus in the world despite the fact that the countrys about a quarter of the size of the United States. And thats troubling, because that looks to be structural and looks to be even rising and it will probably r