Larry Summers Sees Risk US and Europe Will End Up Mirroring Japan

The U.S. and Europe run the risk of replicating the experience of Japan and need to undertake forceful fiscal, monetary and structural policies, former Treasury Secretary Larry Summers said in a new research report.

Co-written with Bank of England Senior Economist Lukasz Rachel, the paper argues that interest rates in advanced nations are likely to remain “very low’’ for years to come due to aging populations, elevated income inequality and slow productivity growth.

“The developed world is at risk of mirroring the experience of Japan, whereby the very low equilibrium rate of interest appears to be a semi-permanent feature,’’ Summers and Rachel wrote in a paper to be presented on Thursday at the Brookings Institution in Washington.

Policy makers “will need to engage in some combination of greater tolerance of budget deficits, unconventional monetary policies and structural measures to promote private investment,” they added.

The two economists argue that interest rates in developed countries would have been even lower than they have been if not for governments piling up debt and providing increased health insurance and pay-as-you-go pensions to their citizens.

“Fiscal policies have operated to raise real interest rates by several hundred basis points over the last generation,’’ Harvard University professor Summers and Rachel write in their report.

That means that the forces that have been pushing rates down in recent decades have been much more powerful than thought, according to the 66-page paper.

“Absent offsetting policies, mature industrial economies are prone to secular stagnation,” the economists said.