(Xaume Olleros/Bloomberg News)

By Lawrence H. Summers

As the cover story in this week’s Economist highlights, the rate of profitability in the United States is at a near-record-high level, as is the share of corporate revenue going to capital. The stock market is valued very highly by historical standards, as measured by Tobin’s q ratio of the market value of the non-financial corporations to the value of their tangible capital. And the ratio of the market value of equities in the corporate sector to its GDP is also unusually high.

All of this might be taken as evidence that this is a time when the return on new capital investment is unusually high.  The rate of profit under standard assumptions reflects the marginal productivity of capital. A high market value of corporations implies that “old capital” is highly valued and suggests a high payoff to investment in new capital.

This is an apparent problem for the secular stagnation hypothesis I have been advocating for some time, the idea that the U.S. economy is stuck in a period of lethargic economic growth. Secular stagnation has as a central element a decline in the propensity to invest, leading to chronic shortfalls of aggregate demand and difficulties in attaining real interest rates consistent with full employment.

Yet matters are more complex.