Are mature economies in long-term stagnation? In the four years since the great crisis of 2007-9, the USA has grown at an annual rate of 2.2%, Germany 2%, Japan 1.6% and the UK 1%. Considering that the GDP of these countries shrunk by a total of 4-6% during the crisis, they have just about made up this lost ground - and the UK has not even achieved that. Meanwhile, the prospects for growth in 2014 and beyond look far from bright.
Some well-known economists have begun to sound very worried. Larry Summers, for instance, has claimed that long-term stagnation is the ‘new normal’. The reason is that the interest rates required for sustained, privately-led growth would actually be negative. Since nominal rates cannot fall below zero, mature economies can break out of stagnation only if they have a financial bubble. This is a bit like taking amphetamines: there is a heavy price to pay when the bubble bursts. Paul Krugman has essentially concurred, describing the current state of affairs as a ‘liquidity trap’. For both economists, the answer is decisive expansion of public spending.