Washington dissensus

What India can learn from the debate on secular stagnation in the West.

Indian readers may be forgiven for thinking that when we hear the phrase "secular stagnation," the opposite of it must be something like communal growth. But jokes aside, the bubbling debate over the idea of secular stagnation in the West may prove to have far-reaching intellectual and practical consequences for the world. The debate was given a boost recently by Larry Summers in a speech to the IMF, in which he worried about the fact that America had not been able to achieve either its potential growth or full employment despite near zero interest rates. There is a worry that a Japan-like stagnation may be in the offing if radical measures are not adopted. The radical measures being proposed turn conventional logic on its head: negative interest rates and cheap credit are good; if inflation is one way of achieving that, so be it; debt, whether public or private, is not something to worry about, especially if real interest rates can be made negative; savings would be bad at this juncture and so forth. It is, as Krugman put it, as if "normal rules" don't apply anymore.

Economists are more competent to debate the technical arguments behind the secular stagnation diagnosis and the proposed measures to combat it. But it is a fascinating moment in history and politics. Of course, the contexts are different, but there is a distinctly 19th century feel about the debates: they are deeply uncertain and take us back to some fundamental questions. This is so in four respects. First, now that the consensus around normal rules has shattered, there is just the sheer audacity of the experiments being proposed to induce negative interest rates: eliminating paper money, giving negative interests on deposits and so forth. In short, a lot of unconventional and unthinkable measures have come within the realm of possibility. This is a world that will require incredibly creative and nimble thinking, not dogmatic certainties.

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