And, there is NO secular stagnation --- its just the business cycle --- predictability and confidence are key

(David, “Here’s why Larry Summers is wrong about secular stagnation,” pg online @ https://www.washingtonpost.com/news/wonk/wp/2014/07/14/heres-why-larry-summers-is-wrong-about-secular-stagnation/ //um-ef)

The question, of course, is why growth has been so sluggish. Larry Summers, for one, thinks that it's part of a longer-term trend towards what he calls "secular stagnation." The idea is that, absent a bubble, the economy can't generate enough spending anymore to get to full employment. That's supposedly because the slowdowns in productivity and labor force growth have permanently lowered the "natural interest rate" into negative territory. But since interest rates can't go below zero and the Fed is only targeting 2 percent inflation, real rates can't go low enough to keep the economy out of a protracted slump. Is secular stagnation just an illusion? But is this right? On the one hand, secular stagnation makes sense in theory, and even seems to in practice. Technological innovation—and with it, productivity—really have slowed down the past few decades, as Tyler Cowen, Robert Gordon, and John Fernald all point out. So has labor force growth now that the Boomers are starting to enter their golden years. And most telling, according to Summers, is the way that real interest rates have steadily fallen since the 1980s. But, on the other hand, there are real problems with the way we calculate real rates—problems that make it look like real rates have fallen more than they really have. And furthermore, today's techno and demographic pessimism both look overdone. In other words, there might not be any reason to think the economy is slumping into secular stagnation. Let's talk about everybody's favorite subject: measuring real interest rates. Now, when people say that inflation-adjusted rates have been falling the past few decades, most of them are just subtracting expected inflation from the nominal interest rate. Seems simple enough. But the problem is the resulting real interest rate is not the same as the natural interest rate at the heart of the secular stagnation story. That's because it still includes a risk premium. And that's particularly problematic, because the risk premium was highly elevated in the early 1980s—just when the secular stagnation story is supposed to have begun, as you can see below. The real story is about uncertainty. See, back in the early 1980s, inflation was at its most volatile and Fed Chair Paul Volcker engineered two sharp recessions to finally whip it. But at that point, it wasn't clear what the Fed was going to start using as a nominal anchor—what it was going to target. This pushed up risk premiums, because lenders demanded to be compensated for the higher levels of uncertainty and expected inflation. Now, over time these risk premiums declined as policy improved and the economy stabilized. So failing to account for this creates an artificial downward trend in the natural interest rate. Don't forget about risk! You can see this in the next few charts of the benchmark 10-year Treasury rate. The first shows the 10-year Treasury yield along with two of its key components: expected inflation and the term premium. The former measures how much annual average inflation is expected the next decade, and the latter how much the risk premium increases as a bond's duration does. (I constructed the expected inflation series using the data from the Survey of Professional Forecasters and the Livingston Survey. The term premium numbers come from the average of the Kim-Wright and Adrian, Crump, and Moench figures). As you can see, both expected inflation and the term premium started a long decline in the early 1980s. And if we subtract both from the nominal interest rate, we can see the real risk-free interest rate below. The economy is bad today, not forever Suddenly there doesn't seem to be so much secular stagnation. That's because the real risk-free rate is the same as the natural rate—and there's no evidence it's been falling. In other words, there's no evidence of secular stagnation. Instead, there's just a long-term trend around 2 percent. And, interestingly enough, the deviations around this trend seem to be explained, in part, by the business cycle. You can see this in the chart below, which plots the real risk-free rate against the CBO's estimate of the output gap. But just how does the state of the economy explain the state of the risk-free rate? Well, I scatter plotted the two against each other, going back to 1961 and 1983. In the first case, the business cycle explains about 41 percent of the risk-free rate's variation, and in the second, over 55 percent. This strong relationship is what standard finance theory tells us should be true. The 10-year real risk-free rate should be equal to the average of the expected path of short-term real risk-free rates over the same time horizon. The first five or so years of this driven by the business cycle, which explains the risk-free rate's correlation with the output gap. And the remaining years are driven by expected productivity and labor force growth.