The secular stagnation meme just got torpedoed.
Exceptionally high uncertainty over government policies around the globe is responsible for the period of sluggish growth we've seen since the financial crisis, according to new research which appears to refute the ideas of a former Treasury chief.
"The elevated levels of global policy uncertainty in the past five years compared even to the crisis years of 2008-09 is remarkable," states the October-dated paper titled "An Index of Global Economic Policy Uncertainty" by Steven Davis, professor of international business and economics at the University of Chicago Booth School of Business.
"Elevated" understates the situation. The policy uncertainty has been "60 percent higher from July 2011 to August 2016 than in the previous fourteen and one-half years."
The uncertainty is also "22 percent higher than in 2008-09," during the credit crunch and banking crisis. That was when the S&P 500 Index, and the exchange-traded fund that tracks it, the SPDR S&P 500 (SPY) - Get Report , sank to levels that made investors' eyes water.
To make his discovery, Davis created the new metric named the Global Economic Policy Uncertainty index, a GDP-weighted combination of local country policy uncertainty indices. It includes data from the U.S., Europe, Japan, China and India as well as other important economies and encompasses two-thirds of global GDP. It covers the period from January 1997 through August 2016.
Each country's Economic Policy Uncertainty index "reflects the relative frequency of own-country newspaper articles that contain a trio of terms pertaining to the economy, uncertainty and policy-related matters." Or put another way, whenever major media outlets use the key terms, the index should pick it up.
The author is clear about one thing. The increases in uncertainty "have contributed to the disappointing performance of the global economy in recent years," states the report.
The findings would appear to be at odds with what former Treasury Secretary and Harvard University emeritus president Larry Summers suggested in a Foreign Affairs article from earlier this year titled "The Age of Secular Stagnation."
He sees the world as stuck in slow growth through too much saving and too little investment.
The argument is perhaps best summed up by the following statement from the article: "The result is that excessive saving acts as a drag on demand, reducing growth and inflation, and the imbalance between savings and investment pulls down real interest rates."
He also suggested that governments have the solution to the problem. They should increase their already elevated levels of debt and use the proceeds for fiscal stimulus. This is also known as Keynesian-style government spending.
The problem is that Summers' thesis may not hold water, especially in light of the Davis research.
"Secular stagnation is not much more than a phrase to describe a situation of low growth," said David Ranson, director of Research at HCWE Worldwide Economics. "If we have secular economic policy uncertainty, then we will certainly have secular stagnation. No need for any new theories as far as I can see, indeed no need for anything I've heard Larry Summers say."
What would be far better than debt-fueled spending is for governments around the globe to stick to consistent policies, and keep consistent interpretations of regulations.
It is the uncertainty about what the government might do next that is causing businesses to hold off from investing. If, for instance, an environmental law is subject to a changeable interpretation by a bureaucrat or government-appointed official, then many businesses may not wish to commit capital to new projects. In simple terms, when the rules of the game aren't clear, why engage?
Reduce the uncertainty and growth will return.
Summers didn't immediately reply to a request for comment.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.