Larry Summers has always had a talent for stirring up a debate, and in recent weeks he has outdone himself. His argument that the United States economy may be suffering from “secular stagnation,” first made at an I.M.F. conference in November, has focussed attention on just how disappointing America’s economic performance has been over the past decade, and has raised important policy questions that deserve to be widely discussed. Writing in the Washington Post earlier this week, Summers warned that relying on low interest rates to boost the economy for long periods “virtually ensures the emergence of substantial financial bubbles,” and he called for more public and private investment.

Having written two books about bubbles, I’m sympathetic to the point that Summers is making, which is essentially a reiteration of the argument that Alvin Hansen and other American Keynesians put forward in the late nineteen-thirties and early forties. However, the way Summers framed the argument, in terms of interest rates, and, particularly, the “natural interest rate”—a concept borrowed from Knut Wicksell, a Swedish economist who lived around the turn of the twentieth century—has caused some unnecessary confusion. To try and clarify Summers’s thesis and illuminate its strengths and weaknesses, I’ll recast it in a way that should be more familiar: in terms of supply and demand.

Setting aside distributional and environmental interests, economic policy is essentially concerned with two things: making sure that there is sufficient demand to keep the economy operating at or close to full capacity, and creating an environment in which that capacity expands rapidly enough to insure rising living standards. Summers, as I understand him, is mainly focussed on the question of demand, which was also a big concern in the aftermath of the Great Depression. But his argument also applies to the supply side of the economy—the inputs that produce growth. Unless policymakers make “a commitment to structural increases in demand,” Summers argues in his article in the Post, the supply side of the economy will also suffer, and we will be “condemned to oscillating between inadequate growth and unsustainable finance”—i.e., bubbles.

The argument that the economy is currently being held back by inadequate demand isn’t controversial—at least, it shouldn’t be. Since the recovery began, in the summer of 2009, G.D.P. has expanded at an annual rate of just two per cent, which is pretty feeble compared to previous recoveries. This weak growth reflects the decisions, by households and firms, to economize on their expenditures in the wake of a big asset-price bust; at the same time, the government (federal, state, and municipal taken together) has also been trimming budgets and laying people off, after an initial burst of spending during the Obama stimulus. To be sure, the Federal Reserve has tried to speed things up by slashing interest rates and pumping money into the bond markets (otherwise known as quantitative easing), but its efforts haven’t been enough to offset the shortfall in demand. Consequently, the economy has been running at well below its full-capacity output, which is what all the businesses and workers in the country could supply if they were going full out.

Summers perhaps overstates his case when he argues that the shortfall in demand and G.D.P. growth predated the Great Recession, which would support the idea that weak growth is a secular (i.e., permanent) phenomenon rather than a cyclical one. Between 2004 and 2006, at the peak of the housing boom, G.D.P. growth averaged 3.3 per cent a year. That didn’t match the four-per-cent-plus growth rates seen in the late nineties, but it did match the economy’s performance during the so-called Golden Era of 1945 to 1972, and it was enough to bring the unemployment rate down below 4.5 per cent, an indication that the economy was operating at close to full capacity.

The immediate question is whether, given current policies, the economy can return to growth rates of three per cent or higher, which is what would be needed to bring the unemployment rate down to around 5.5 per cent. (That is the unemployment rate that the Fed believes is consistent with stable inflation.) But Summers, while acknowledging some positive signs in recent months, remains skeptical. “We have seen several false dawns—just as Japan did in the 1990s,” he warns.

On this point, I am a bit more optimistic, for a couple of reasons. The comparison with Japan, although worrying, isn’t fully persuasive. For many years after the stock-market and real-estate busts of the early nineties, stricken Japanese banks hoarded money, refusing to lend, and Japanese consumers saved more, crimping consumer spending. In this country, following the Great Recession, banks repaired their balance sheets much more rapidly and started lending again. Indeed, as Summers notes, there are already signs that credit standards are deteriorating again. Consumer spending, after an initial fall, has rebounded surprisingly well.

What has held the economy back is restrictive fiscal policy and a reluctance on the part of businesses to invest in new capacity. (For the first time in decades, gross capital investment has fallen below twenty per cent of G.D.P.) Looking ahead, there are hopeful signs in both areas. The budget deal at the start of the year modified the sequester, and investment, particularly in new home construction, appears to be picking up. Barring some unforeseen calamity, it’s quite likely that 2014 will be the first year since the housing bubble in which G.D.P. growth reaches three per cent. And with plenty of slack left in the economy, there’s no obvious reason why 2015 shouldn’t be another good year.

But what then? “Even if the economy accelerates,” Summers warned in a column last month, “this provides no assurance that it is capable of sustained growth at normal interest rates.” He listed a number of factors that could continue to restrict the economy: slower growth in the labor force, slower productivity growth, a rise in risk aversion, higher costs for financial services, and low rates of growth in consumer spending because so much income is now earned by the very rich, who have higher savings rates.

Here, too, Summers has a point, although not necessarily an original one. In recent times, a number of economists from various viewpoints have pointed out reasons for believing that the economy’s long-term capacity for expansion, which is usually referred to as its “potential growth rate,” has fallen. The two main factors are ones that Summers refers to: slower growth in the work force and a drop in productivity growth.

For decades, the labor force has been growing at about one per cent a year: as more workers come online, the economy can produce more. But now that the baby boomers are retiring, things are changing rapidly. According to a recent study by economists at the Labor Department, between 2012 and 2022 the labor force is expected to grow at an annual rate of 0.5 per cent, half the previous decades’ figure.

As the study’s authors note, “Growth in the labor force is the primary constraint on economic growth.” But it’s only part of the story. If workers produce more—if their productivity rises—G.D.P. growth won’t necessarily fall. But the harsh fact is that, in the economy as a whole, the rate of productivity growth has also fallen quite dramatically since the heady days of the Internet revolution. John Fernald, an economist at the Federal Reserve Bank of San Francisco, has crunched the figures. Between the start of 1997 and the third quarter of 2003, he reported in a recent study, output per hour in the business sector rose at an annual rate of 3.6 per cent. (No wonder Alan Greenspan and others thought they had spotted a “new economy.”) But between the third quarter of 2003 and the second quarter of 2012, the latest period for which Fernald had reliable figures, the annual rate of growth for output per hour was just 1.6 per cent.