America's secular stagnation due to unconventional monetary policies

LARRY Summers believes that the US economy has entered a period of "secular stagnation". Warren Buffett is not persuaded by the arguments of the former Treasury secretary and White House economic czar. In his widely followed letter to shareholders, the Berkshire Hathaway chairman claims that America's future has never been brighter. Mr Buffett has history on his side, and in the very long run he will probably be vindicated. The immediate prospects for both the US and global economy, however, remain blighted by the unbalanced and unsustainable nature of the post-financial-crisis recovery.

A few years ago, Robert Gordon of Northwestern University first raised the question of whether US economic growth had ground to a halt. The same arguments resurface in his recently published book, The Rise and Fall of American Growth: The US Standard of Living since the Civil War. Prof Gordon claims that the economy faces several headwinds. In particular, he argues that negative demographic trends will restrain output and that modern technology is less capable of enhancing productivity than in the past. Neither of these arguments is robust.

Long-term demographic forecasts are prone to error, especially in a country such as the United States, which has traditionally taken in large numbers of immigrants. In fact, the term "secular stagnation" was first coined in the early 1930s by Alvin Hansen of Harvard, who argued that a lack of population growth would lead to a fall in the demand for capital equipment and residential housing. Prof Hansen's demographic projection is wide off the mark. Since 1930, the American population has expanded by around 160 per cent, compounding at just over one per cent per annum.