In an influential speech on November 8, 2013 at the IMF Annual Research Conference, Larry Summers suggested that slow economic growth in the years following the 2007–2008 financial crisis might be due to "secular stagnation" (a concept introduced in 1938 by Alvin Hansen in his book Full Recovery or Stagnation?). The Financial Times defines "secular stagnation" as follows:

Secular stagnation is a condition of negligible or no economic growth in a market-based economy. When per capita income stays at relatively high levels, the percentage of savings is likely to start exceeding the percentage of longer-term investments in, for example, infrastructure and education, that are necessary to sustain future economic growth. The absence of such investments (and consequently of the economic growth) leads to declining levels of per capita income (and consequently of per capita savings). With the reduced percentage savings rate converging with the reduced investment rate, economic growth comes to a standstill – ie, it stagnates. In a free economy, consumers anticipating secular stagnation, might transfer their savings to more attractive-looking foreign countries. This would lead to a devaluation of their domestic currency, which would potentially boost their exports, assuming that the country did have goods or services that could be exported.

Persistent low growth, especially in Europe, has been attributed by some to secular stagnation initiated by stronger European economies, such as Germany, in the past few years.

I think it may be useful to include a brief summary of Alvin Hansen's original secular stagnation theory. Paul Sweezy summarises the theory as follows:

Hansen’s position was best summed up in his 1938 book Full Recovery or Stagnation? [...]

[Joseph] Schumpeter labeled Hansen’s theory the “theory of vanishing investment opportunities,” and it is an apt characterization. According to this theory, the modern developed capitalist economy has an enormous capacity to save, both because of its corporate structure and because of the very unequal distribution of personal income. But if adequate profitable investment opportunities are lacking, this saving potential translates not into real capital formation and sustained growth but into lowered income, mass unemployment, and chronic depression, a condition summed up in the term stagnation. (The framework of this analysis was of course derived directly from Keynes’s General Theory, which was published in 1936, and of which Hansen was the best known interpreter and champion on this side of the Atlantic.)

To complete the theory, what was needed was an explanation of why there should be such a dearth of investment opportunities in the 1930s as compared to earlier times. Hansen’s attempt to fill this gap ran in terms of what he considered to be certain irreversible historical changes which had begun to build up in earlier decades and finally came to dominate the scene after what Schumpeter called the “world crisis” began in 1929. To oversimplify somewhat, these changes, according to Hansen, were (1) the end of geographical expansion, sometimes put in terms of the “closing of the frontier” but interpreted by Hansen in a wider global sense; (2) a decline in the rate of population growth; and (3) a tendency on the part of new technologies to be less capital-using than in earlier stages of capitalist development. In Hansen’s view, all these changes operated to restrict the demand for new capital investment and in this way transformed the system’s great capacity to save into a stagnation-producing force rather than an engine of rapid growth." (Paul M. Sweezy, "Why Stagnation?", Monthly Review, June 1982)

I think the meaning of factors 1) and 2), as described above by Paul Sweezy, is fairly clear. To clarify the meaning of factor 3), I will quote from Alvin Hansen's 1938 book Full Recovery or Stagnation?, in which he introduced the term "secular stagnation":

A capitalistic economy with a machine method of production has taken the place of a handicraft economy with its direct production processes. The transformation of a rural economy into a capitalistic one is something distinctly different from the further evolution of a society which has already reached the status of a fully-developed machine technique. It is true that we are still engaged in making labor-saving inventions. Extremely important, however, is the question: Are these new labor-saving techniques likely to be preponderantly capital-using or neutral with respect to the use of capital?

If the labor-saving inventions are used to tap potential consumer demand through a sensible price policy, a widening of capital will of course occur. The importance of a flexible price structure thus comes again to the fore.

It appears that the great advance made in the productivity of manufacturing in the United States in the decade of the twenties was made by reason of innovations in methods of production that to a large extent did not involve the use of more capital. I do not make any forecast; but it is a grave question whether inventions and innovations are not likely in the future to be less capital-using than in the nineteenth century. In contrast, while we were in process of changing over from a direct method of production to an elaborate capitalistic technique, as in the last century, innovations perforce had to be capital-using in character.

It has been asserted that an increasingly rapid rate of obsolescence is likely to absorb large amounts of capital. Unfortunately, however, the high risk incurred in an economy with a rapid obsolescence rate forces corporate officials almost of necessity to set aside abnormally large depreciation reserves. Thus we encounter a vicious circle with attendant deflationary consequences. [...]

Technical innovation may still bring about a very large increase in efficiency, even though manufacturing is not absorbing any appreciable amount of new capital. It is quite possible to have a continued rise in productivity even though there should be no material increase in producers' capital in the narrow sense of the term. Improved equipment, financed mainly out of depreciation allowances, will continue to raise the per capita output." (Alvin Hansen, Full Recovery or Stagnation?, 1938, pp. 314–316, in Chapter 19 entitled "Investment Outlets and Secular Stagnation")

In his speech at the IMF, Summers said: "Suppose that the short-term real interest rate that was consistent with full employment had fallen to -2% or -3% sometime in the middle of the last decade." Edward Lambert of Effective Demand Research explains what this means in this Youtube video.

In an interview with Chrystia Freeland on April 15, 2014 at a meeting organized by the Institute for New Economic Thinking (INET) think tank, Summers elaborated on his suggestion that recent slow economic growth is a result of secular stagnation. In particular, Summers listed several possible causes of secular stagnation. The whole interview can be watched on Youtube:


Freeland asks Summers about the causes of secular stagnation at 28 minutes, 23 seconds in the video. I have taken the liberty to transcribe Summers' answer (I added line breaks and numbers from (1) to (5) to distinguish the five possible causes mentioned by Summers).

Chrystia Freeland: Moving to causes of secular stagnation. What do you think is driving it?

Larry Summers: You know, I think this is something that there's room for a lot more research on and I certainly haven't done formal research. I think the first thing to say is that if you look at either econometric attempts to estimate the equilibrium real interest rate for the United States, or as the IMF has recently done, for the world, or you look at indexed bond yields, what you see -- and particularly forward indexed bond yields -- what you see is a clear downward trend going back fifteen to twenty-five years. So there's pretty clearly a phenomenon there, and then the question is, what's the explanation?

I can't give weights to these factors and I suspect the appropriate weight on the different factors I'm gonna mention, Chrystia, changes over time. But here would be a number of them:

(1) Greater concentration of wealth and income means lower spending propensities and more incipient saving

(2) A desire on the part of emerging markets to accumulate large amounts of reserves, and in particular by running current account surpluses, and in particular to hold those reserves in highly liquid instruments like U.S. bonds, tending to depress yields

are two major factors on the savings side.

On the investment demand side,

(3) Slower population growth and labour force growth

and possibly also

(4) Slower technological change -- though that can be very much debated -- operates to reduce investment demand.

(5) My explanation that feels right to me is that there have been structural changes in the economy that reduce the demand for investment in fundamental ways. Think about this: WhatsApp [an instant messaging app for smartphones] cost 19 billion dollars and it was 55 people working in some building in rented space. Sony is tens of thousands of people, it's capital, it's factories, it's all that stuff, and it's 18 billion dollars. Think about what the world was like when General Motors or AT&T or Exxon or IBM were iconic companies. They were issuing debt. They were investing on a massive scale to expand capacity and to build networks. Now think about iconic companies of today like Apple and Google. They have more cash flow, fundamentally, than they know what to do with. And the result of that, of course, is an excess supply of savings. Another way to approach the question is to say, what's happened to the relative price of durable equipment, either producer equipment or consumer equipment, appliances? And the answer is those prices have gone way down. Well, when those prices go way down it means a given unit of savings goes much further.

All of that, it seems to me, operates to reduce real interest rates. In just what sequence, and just which factors are most important at particular points of time, I think is very much open to question and research. But I think for now, we have to maintain a significant presumption that equilibrium real rates are lower than they have been in the past. That probably living with those low real rates... Well, pushing real rates well above equilibrium real rates, as many in the central banking community continue to advocate, and not doing anything else, is, it seems to me, a prescription for protracted stagnation. Accepting the reality of those lower real rates raises the questions that I posed before around financial stability. And what we need to be thinking about is how to do things in our economies... And I think increasing public investment where there is high-productivity public investment to be done, is the easiest and best way to do this. That will operate to raise equilibrium real rates and raise output at the same time.

Of these five possible causes of secular stagnation identified by Summers, 1) is basically the old underconsumption argument going all the way back to Simonde de Sismondi's Nouveaux principes d'économie politique in 1819. 3) and 4) are factors included in Alvin Hansen's theory of secular stagnation.

5) is similar to a factor that has been discussed before in the literature on secular stagnation. Anthony Scaperlanda, in his article "Hansen's Secular Stagnation Thesis Once Again" (Journal of Economic Issues, Vol. 11, No. 2, June 1977, pp. 223–243) notes that "a number of recent innovations have been capital saving." On page 231, he identifies the data processing industry as one industry in which this has taken place:

In summary, one can identify a number of new industries in recent decades. They, no doubt, stimulate autonomous investment. Without knowing precisely how much investment was stimulated it is easy to recognize that unless still newer industries are stimulated by technological innovation, this influence will not elicit as much autonomous investment as it has in the immediate past.

This is especially true since a number of recent innovations have been capital saving. For example, in the major new industry of data processing the technological improvements and refinements have been so rapid that total investment may have increased very little vis-à-vis what would have taken place in precomputer machines to handle data processing. Focusing only on the technological advances which have occurred in the computer-based data processing industry, one can note that "on an early vacuum tube computer the cost to the customer of performing 100,000 multiplications was 1.38 dollars; in the second or 'transistorized' stage the cost was 24 cents; and in the current microminiature-circuit stage, the cost is down to 3.5 cents or less." [John M. Blair, Economic Concentration: Structure, Behavior, and Public Policy (New York: Harcourt Brace, Jovanovich, 1972), p. 147]

One possible cause of secular stagnation which Larry Summers does not mention is increasing degree of monopoly in the economy as a whole. Josef Steindl argued in his 1952 book Maturity and Stagnation in American Capitalism that "development of monopoly ... is ... the main explanation of the decline in the rate of growth of capital which has been going on in the U.S. from the end of the last century. This is not to say that other factors have not played a role..." Other economists such as Paul Sweezy, Paul Baran, and Keith Cowling have also argued that a high degree of monopoly in the economy as a whole causes secular stagnation.

What theories have been proposed to explain secular stagnation? It might be interesting and useful to contrast alternative explanations of the phenomenon. What books or articles expound these alternative theories?

  • $\begingroup$ A very nice summary, Marko. I believe the questions you asked would need very long answers. One reason is that Summers offers informal arguments here, so it's not clear what mechanisms he suggests as an explanation. For example, if technological changes slowed down, it'd reduce growth rates per ce. But there're many debates if it's the case. So, I'd suggest to narrow this particular discussion to the review of literature on and theories of secular stagnation. $\endgroup$ Commented May 9, 2015 at 21:01
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    $\begingroup$ Thanks, Anton. Perhaps you are right that my questions were too broad. I shall edit my question as you suggested. I would also like to mention here that there is a new free ebook on secular stagnation published by VoxEU, Secular Stagnation: Facts, Causes and Cures which can be downloaded from www.voxeu.org/sites/default/files/Vox_secular_stagnation.pdf. In an essay in that book, Summers mentions other possible causes of secular stagnation, such as: "Increasing friction in financial intermediation associated with greater risk-aversion in the wake of the financial crisis" (p. 34) $\endgroup$ Commented May 9, 2015 at 21:49
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    $\begingroup$ I would suggest John A. Hobson's Imperialism: A Study, first published in 1902. Hugely influential on everyone from Lenin to Hannah Arendt. There is a famous passage where Hobson writes: "An economy that assigns to the 'possessing' classes an excess of consuming power which they cannot use, and cannot convert into really serviceable capital, is a dog-in-the-manger policy." A vivid image! Michael Bleaney's Underconsumption Theories is brilliant. He traces all the pre-Keynesian underconsumption theories back to either Sismondi or Malthus, who established the basic two types of theory. $\endgroup$ Commented May 9, 2015 at 22:34
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    $\begingroup$ There was a debate about VoxEU's eBook on the blog of The Economist: www.economist.com/blogs/freeexchange/2014/08/secular-stagnation. Eggertsson and Mehrotra sketch a formal model of secular stagnation (p. 123) and say that "there has not been an attempt to formally model this idea." That is not quite true. Benjamin Higgins presents a fairly formal model of Hansen's thesis in Chapter 7 of his book Economic Development. However, as Scaperlanda, op. cit., notes "the theory of autonomous investment which Hansen suggested [...] has not been nurtured by economists much beyond infancy." (p. 226) $\endgroup$ Commented May 15, 2015 at 16:55
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    $\begingroup$ @MarkoAmnell I think you've got enough material to write an answer actually ;) $\endgroup$
    – VicAche
    Commented May 16, 2015 at 19:55

2 Answers 2


French economist Jean-Baptiste Michau has published in 2018 a relatively simple model of secular stagnation:

To investigate secular stagnation, I add two features to a standard Ramsey model with money: (i) Households have a preference for wealth; (ii) Wages are downward rigid. In this framework, there exists a frictionless neoclassical steady state equilibrium characterized by a low natural real interest rate. In addition, if wages are sufficiently rigid and the natural real interest rate sufficiently low, then there also exists a Keynesian secular stagnation steady state characterized by under-employment, low inflation, and a binding zero lower bound on the nominal interest rate. As wages become more flexible, the Keynesian steady state diverges away from the neoclassical steady state, until wages are so flexible that it ceases to exist. If monetary policy is excessively restrictive, then the secular stagnation steady state is the unique steady state equilibrium of the economy. The optimal policy response to secular stagnation is to move the economy to the neoclassical steady state. This can either be achieved by raising the central bank's inflation ceiling or by taxing wealth and subsidizing investment in physical capital. This optimal tax policy is revenue-neutral.

A free prior version of that paper is available on HAL.

Insofar this paper of Michau doesn't have a lot of citations.

As an aside, as the US economy got better, so have the critics of secular stagnation (as applying to the US now or as relevant even during the post-2008 recovery) sharpened their criticism, e.g. Stiglitz has a 2018 piece against it, saying that secular stagnations was used as an excuse for an insufficient stimulus/reform (of the more redistributive kind Stiglitz favors). Summers has written a response to that piece.

Dutch economists van den End and Hoeberichts have published (also in 2018) an empirical assessment for some OECD countries whether low real interest rates are a driver of secular stagnation:

We empirically test whether there is a causal link between the real interest rate and the natural rate of interest, which could be a harbinger of secular stagnation if the real rate declines. Outcomes of VAR models for seven OECD countries show that a fall in the real rate indeed affects the natural rate. This causality is significant for Japan in all model specifications, for Canada, France, UK and Germany in some specifications and it is not significant for the US and Italy. The policy implication is that to avoid secular stagnation, expansionary monetary policy to reduce the real rate is less effective than policies aimed at raising the natural rate.

Acemogulu and Restrepo (2017) studied empirically whether aging population is causing secular stagnation, and they find that it didn't happen, i.e. automation compensated for population aging:

Several recent theories emphasize the negative effects of an aging population on economic growth, either because of the lower labor force participation and productivity of older workers or because aging will create an excess of savings over desired investment, leading to secular stagnation. We show that there is no such negative relationship in the data. If anything, countries experiencing more rapid aging have grown more in recent decades. We suggest that this counterintuitive finding might reflect the more rapid adoption of automation technologies in countries undergoing more pronounced demographic changes, and provide evidence and theoretical underpinnings for this argument.

Acemogulu and Restrepo seem to be using GDP per capita for their counterpoint, which may or may not be what Hansen intended (he didn't give more technical formulation, apparently).

In contrast to these last two papers, Eggertsson, Mehrotra and Robbins have an updated (2017) paper claiming that US is/was experiencing a secular stagnation (up to 2015 at least):

This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from –1:5% to –2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates.

I guess the standard comment about the dismal science applies at this point.

Also, I was curious where they break down the contribution of technological and demographic factors, but I can't seem find it explicitly in their 90-page paper. I guess they just mean the (negative coefficient for the) labor share for the former (in tables A.7-A.13).

There's also an empirical 2017 EU-focused paper:

Is secular stagnation—a period of persistently lower growth such as that seen following the financial crisis of 2008/09—a valid concern for euro-area countries? We tackle this question using the well-established Laubach-Williams model to estimate the unobservable equilibrium real interest rate and compare it to the actual real rate. In light of the considerable increase in heterogeneity among EU member countries since the beginning of the financial crisis, we apply our approach to twelve euro-area countries to provide country-level answers to the question of secular stagnation. The presence of secular stagnation in a number of euro-area countries has important implications for ECB decision-making (i.e., voting power in the Governing Council) and EU governance. Our results indicate that secular stagnation is not a significant threat to most euro-area countries, with one possible exception: Greece.

And using basically the same methodology (as the previous paper), but a different (longer) time frame, different conclusions are drawn in another 2017 paper:

U.S. estimates of the natural rate of interest – the real short-term interest rate that would prevail absent transitory disturbances – have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach–Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there into 2016. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach–Williams methodology to the United States and three other advanced economies – Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.

And an ECB economist studying the US data points out in a 2018 paper that there's additional (obvious too) reason recently, deleveraging:

I extend the model of Laubach and Williams (2003) by introducing an explicit role for the financial cycle in the joint estimation of the natural rates of interest, unemployment and output, and the sustainable growth rate of the US economy. By incorporating the financial cycle -- arguably an omitted variable from the system -- the model is able to deliver more plausible estimates of business cycle dynamics. The sustained decline in the natural rate of interest in recent decades is confirmed, but I estimate that strong and persistent headwinds due to financial deleveraging have lowered temporarily the natural rate on average by around 1 p.p. below its long-run trend over 2008-14. This may have impaired the effectiveness of interest rate cuts to stimulate the economy and lift inflation back to target in the immediate aftermath of the GFC.

The only firm conclusion I can draw from all of these is that secular stagnation is hot topic for research still/nowadays.

Another thing I've noticed is that these last two papers seem to deliberately eschew using the "secular stagnation" term explicitly; it only appears in their references. I suspect their authors might dislike it for its imprecision and/or multiple meanings (Hansen's vs Summers'); they are largely addressing/using the latter (Summers'), implicitly.

  • $\begingroup$ Thank you for your interesting answer. Larry Summers himself appears to have written a book about secular stagnation which will be published soon. I don't know what the final title will be but you can find it on Amazon under the title "Secular Stagnation" (but the book cover has the title "The Post-Widget Society"). Here is a link to the Amazon page for the book, which says it will be published on June 25, 2019: tinyurl.com/yyho2tjd $\endgroup$ Commented May 16, 2019 at 16:41
  • $\begingroup$ Regarding the contrast you draw between Hansen and Summers, in "Secular stagnation: the history of a macroeconomic heresy" tandfonline.com/doi/full/10.1080/09672567.2016.1192842 Roger Backhouse and Mauro Boianovsky show that "Summers's characterisation of Hansen's secular stagnation in terms of a negative (Wicksellian) natural rate of interest goes back in part to Lawrence Klein['s book The Keynesian Revolution], who in his turn was reacting to A.C. Pigou's interpretation of Hansen precisely on those terms [in "The classical stationary state", Economic Journal, 53, 343–51]" (p. 3) $\endgroup$ Commented Sep 20, 2019 at 2:23
  • $\begingroup$ On page 11, Backhouse and Boianovsky (op. cit.) write: "Lawrence Klein […], in a PhD thesis supervised by Samuelson, picked up the negative (Wicksellian) natural interest rate from Pigou […] and turned it into a main feature of Keynesian economics. The probability of a negative natural rate of interest depended on the interest-inelasticity of both saving and investment functions, which he considered empirically well established. The contrary view, of investment as infinitely elastic, pertained to the world of Say's law. He defended the stagnation thesis against Pigou […]" $\endgroup$ Commented Sep 20, 2019 at 15:23

I wanted to leave this as a comment but I dont have enough rep yet so I am putting this here even though it is not an answer.

The problem with the lack of investiments is due to the fact that most of the companies who have a huge part of the consumers demand are technology based companies, I am talking in this case about social networks, etc... And these companies have no need for investiment what they want is saving their money to let it grow. A solution to this problem would be a negative interest rate which might help raise investiments. Also salarys are either to low and only enough for consumption, or too high and in that case people will prefer saving what they can't consume. Another problem is the fact that people do not want to take any risks in investing and prefer saving their money. If we can make pensions higher the population will stop worrying about tomorrow thus lowering its savings and augmenting its consumption.

This is just an idea some of what I said might be wrong and sorry for bad english.

  • $\begingroup$ It might interest you to look at Eggertsson and Mehrotra's "A Model of Secular Stagnation," available at Eggertsson's webpage: econ.brown.edu/fac/Gauti_Eggertsson/cu-papers.html. You talk about pensions. They set up a model of the economy with "overlapping generations (OLG) where households go through three stages of life: young, middle-aged, and old." The model is complex but here is one key point: "The key here is that households shift from borrowing to saving over their lifecycle. If a borrower takes on less debt today (due to the deleveraging shock) then when tomorrow comes, he $\endgroup$ Commented May 22, 2015 at 12:08
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    $\begingroup$ (continued): has greater savings capacity since he has less debt to repay. This implies that deleveraging -- rather than facilitating the transition to a new steady state with a positive interest rate -- will instead reduce the real rate even further by increasing the supply of savings in the future." (p. 3) $\endgroup$ Commented May 22, 2015 at 12:13
  • $\begingroup$ @Marko when I talk about about pensions I was basing this on Modigliani's life cycle theorie on saving and consumption and thought that if we can raise pensions it can have an effect on the populations saving curve thus lowering savings and augmenting consumption $\endgroup$ Commented May 22, 2015 at 12:23
  • $\begingroup$ The post-Keynesian economist Steve Keen criticizes the orthodox view of private debt in the economy. Keen argues that in the orthodox Loanable Funds model, the aggregate level of debt is irrelevant to macroeconomics - only the distribution of debt matters. Inspired by Hyman Minsky's financial instability hypothesis and Irving Fisher's debt deflation theory, Keen argues that the growth of private debt increases aggregate demand and a halt in the growth of private debt precipitates a financial crisis. Keen criticizes the view of secular stagnation by Larry Summers and Paul Krugman. See his paper $\endgroup$ Commented May 26, 2015 at 15:05
  • $\begingroup$ (continued): "Secular stagnation and endogenous money" paecon.net/PAEReview/issue66/Keen66.pdf and the Youtube video "Bernanke and Summers don’t understand secular stagnation" youtube.com/watch?v=uAUpG02fP9E $\endgroup$ Commented May 26, 2015 at 15:07

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