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Theories of Economic Stagnation

Introduction

In the selected article, the author indicates that markets have failed to return to normal following the end of the infamous financial crisis. The concept of secular stagnation tries to explain how such a situation has developed. It describes how an increasing susceptibility to save money and a decreasing desire to make investments result in an economic imbalance. Such saving acts affect the level of demand, force interest rates to go down, and eventually trigger slowed inflation and growth. Such a scenario was recorded in the United States from 2003 to 2007 (Summers, 2016). This model is associated with expanded or high borrowing levels within a specific period. This practice will usually translate to excess savings where different players in the economy chose to keep their money while anticipating future trends and changes. Consequently, the affected country will record investment levels that are unsustainable and unpredictable. These attributes try to capture the developments that emerged in the United States as a housing bubble (Summers, 2016). These occurrences set the stage for the infamous crisis of the year 2007.

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What evidence (arguments) does Summers put forth in support of this reason for prolonged slow economic growth in advanced economies?

Summers succeeds in putting forth several arguments in support of this reason for prolonged slow economic growth in developed economies. The first one is that excess savings in established countries trigger a new situation whereby interest rates fall significantly. The second argument is that increased savings result in slowed investments. The vice-versa is also true and it will become a new opportunity to overcome inflation and reduced economic activity. The theorist behind this model goes further to offer policy prescriptions and ideas that different organizations and government agencies could implement in an effort to deal with possible challenges that might emerge. Summers (2016) goes further to discuss some of the common frameworks that many people have been utilizing to predict and analyze the causes of slow economic growth rates. Bank reserves could play a positive role to overcome the challenges associated with reduced interest rates and increased savings. This concept would refer to the amount of money financial institutions need in an attempt to meet the minimum requirements set by the major central banks.

These arguments have unique merits that make them plausible. First, they are practical and capable of delivering meaningful observations. Second, the ideas appear to explain the situation recorded in the United States. These attributes make it relevant for describing how economic growth rates reduce significantly. The author succeeds in offering superior guidelines and ideas for addressing the current scenario and supporting economic recovery (Summers, 2016). The observations recorded in the United States go further to support the claims associated with the theory of secular stagnation. Such attributes make it superior and desirable for economic analysis.

However, the arguments identified in the selected article have specific limitations that different analysts and theorists need to take into consideration. First, the theory does not capture the developments experienced in other established economies, such as Russia, China, and Japan. Second, the ideas Summers (2016) presents fail to describe the events and developments recorded in the economy and that have the potential to affect economic performance. These considerations explain why economists should apply other models to make informed decisions and provide timely solutions to emerging challenges.

Select one of the other economist’s theories quoted in the article regarding the reasons for slow economic growth in advanced economies. Explain this theory. (utilizeBen Bernanke’s theory of a savings glut)

In the selected article, Summers (2016) offers other theories that could be useful in describing some of the leading reasons for slow economic performance, such as theory of savings glut and the liquidity trap by Paul Krugman. Under this model, the theorist indicates that the increased levels of savings in different Asian countries, such as China, and leading oil producers, including Saudi Arabia, triggered the reduced interest rates at the global scale (Farnham, 2014). With the percentage of global savings shifting into the United States, the recorded long-term interest rates reduced significantly. The high capital inflows into this country created a trade deficit, thereby setting the stage for economic stagnation. For example, the US recorded a 6 percent of its gross domestic product (GDP) in 2006. GDP refers to the financial value of the services and goods produced in a specific nation within a period of 12 months (The Federal Reserve Board, 2005). With increased savings in the US, the aggregate demand curve shifted since many people were no longer willing to invest in different sectors.

This theory has some merits that make it practical and capable of meeting the demands of economists and policymakers. The first one is that it goes further to consider some of the possible influences that foreign markets and economies could have on the United States’ interest rates. The second merit is that the model takes into consideration the power of globalization since the global society has remained connected for decades (Farnham, 2014). Consequently, a force or change experienced in one country could be replicated much faster in another and create similar economic conditions and trends. The third possible merit is that the theory appears to expand the ideas associated with the secular stagnation theory by taking it to the international level (The Federal Reserve Board, 2005). The scholar manages to consider some of the trends and experiences recorded in different parts of the world.

However, there are unique limitations that different analysts and researchers would not take lightly. First, the model appears to generalize and indicate that changes in oil prices could have significant implications on other economies and countries. However, these trends have been recorded for years without necessarily triggering slowed interest rates (The Federal Reserve Board, 2005). Second, the model does not offer evidence-based solutions or practical approaches that policymakers and nations could consider to overcome the problems of stagnation (Taylor, 2013). With these observations, it could be possible for more people to learn more about economic stagnation and combine the presented ideas with other theories (The Federal Reserve Board, 2005). Such developments will result in better ideas that can guide and empower all key stakeholders to deal with the challenge of slowed economic performance.

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Conclusion

The above descriptions have presented two unique theories that try to explain the situations and experiences recorded in the United States since 2001. The period was characterized by increased levels of savings in the country and across the globe. This trend encouraged more people to avoid making the required investments that could have created new opportunities for economic expansion and growth. With such occurrences, the recorded interest rates continued to shrink. Such changes were also associated with new developments in oil prices and similar processes in some of the leading economies across the globe, such as China. These observations, therefore, explain why the two theories could be combined in order to best explain the current American economy.

References

Farnham, P. G. (2014). Economics for managers (3rd ed.). Pearson Education Limited.

The Federal Reserve Board. (2005). The global saving glut and the U.S. current account deficit. Web.

Summers, L. H. (2016). The age of secular stagnation. Foreign Affairs. Web.

Taylor, T. (2013). Secular stagnation: Back to Alvin Hansen. Conversable Economist. Web.

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StudyCorgi. (2022) 'Theories of Economic Stagnation'. 2 September.

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