Edward Harrison — How monetary policy entrenches secular stagnation

I believe that weak nominal growth is a policy choice in large part, rather than a destiny. Here’s why.

"Phillips Curve thinking."

Now what Dudley was implicitly saying is that he wants to tune Fed policy in order to make sure a small cadre of people stays unemployed so that inflation doesn’t take off. That’s because he thinks that, at low levels of unemployment, inflation will rise so much that the Fed will have to react violently. And so it makes sense to prevent that from happening by raising rates sooner rather than later.

That’s a policy choice, folks. Dudley is saying lower inflation is better than higher inflation. And he is also saying in no uncertain terms that he prefers some people be unemployed because their lack of employment will weaken wage-earners’ bargaining power and keep inflation lower. It’s choices like this – when nominal growth is already low – that entrench low growth. And that’s why the yield curve is flattening.

Credit Writedowns
How monetary policy entrenches secular stagnation
Edward Harrison

See also

Michael Kalecki (Michal Kalecki), Political Aspects of Full Employment, Political Quarterly, 1943

Edward Harrison — Secular stagnation is a policy choice

My conclusion on the US is that the bond markets have got this mostly right. They are betting that secular stagnation is going to continue in the US. And that’s because we’ve made policy choices that limit wage growth and increase inequality. And judging from the policy priorities in the Trump Administration and in Congress we will continue to do so.

Credit Writedowns 

Secular stagnation is a policy choice

Edward Harrison

Matias Vernengo — The “Natural” Interest Rate and Secular Stagnation

Link to a paper by Lance Taylor. Free download.

Naked Keynesianism
The “Natural” Interest Rate and Secular Stagnation
Matias Vernengo | Associate Professor of Economics, Bucknell University

Szu Ping Chan — Growth crisis threatens European social fabric, warns monetary chief

Yep. 

And fraying social fabric leads to social dysfunction and political unrest. This is not simply an economic problem and world leaders need to wake up to it. Trump, Sanders and Corbyn are just the beginning, and the Right is already rising on the Continent.

The Telegraph
Growth crisis threatens European social fabric, warns monetary chief
Szu Ping Chan, Business reporter

Bill Mitchell — There is no secular stagnation – just irresponsible fiscal policy

The latest edition of the ECB’s Economic Bulletin released on May 5, 2016 carried and – Update on economic and monetary developments – provides more evidence, as if any was needed, that the current reliance on monetary policy – standard or otherwise – to reboot the stagnant economies of Europe has failed and will continue to fail. Why? It is the wrong policy tool. Journalists are increasingly writing that policy options are exhausted because central bankers ‘have fired all their shots’ and the “more shots they fire, the less effective they become”. The implication is that the world is locked into a future of secular stagnation with elevated levels of unemployment and low productivity growth. They seem to have forgotten that fiscal policy remains effective if it is used properly. There is no secular stagnation – just irresponsible fiscal policy use.…

Bill Mitchell – billy blog
There is no secular stagnation – just irresponsible fiscal policy
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brian Romanchuk — The United States of Stagnation

It should be noted that secular stagnation is not an accident; it is exactly what the policy elites in the United States want. Inflation is under control, taxes are low, and the environment is favourable for developing strong corporations. Although politicians pay lip service to faster growth and job creation, the revealed preference is that they do not actually want such an outcome.…

Short, not wonkish, and insightful about today's US economic situation and its politics.

Bond Economics
The United States of Stagnation
Brian Romanchuk

Nick Bunker — Preparing for retirement when there’s a savings glut

Saving is all the rage — as problem. What to do?

WCEG — The Equitablog
Preparing for retirement when there’s a savings glut
Nick Bunker

Roger Backhouse, Mauro Boianovsky — Secular stagnation: The history of a heretical economic idea

Some history of economics as background for the current debate over secular stagnation initiated by Larry Summers. 

vox.eu
Secular stagnation: The history of a heretical economic idea
Roger Backhouse, Professor of the History and Philosophy of Economics, University of Birmingham, and Mauro Boianovsky, Professor of Economics, Universidade de Brasilia

Brian Romanchuk — The Debt Supercycle Versus Secular Stagnation

Kenneth Rogoff has been advancing theories that the current environment of disappointing growth rates is the result of a "debt supercycle", not "secular stagnation". He recently summarised his arguments within the article "Debt supercycle, not secular stagnation". Although would agree that some version of a "debt supercycle" theory is correct, I am unconvinced about Rogoff's description of the mechanisms. Meanwhile, I doubt that he will succeed in winning the argument - he is pushing against the unmoveable object that is the circular logic of the natural rate of interest.

Catching up with Minsky but still can't shake neoclassical assumptions.

Excellent simple summary.

Bond Economics
The Debt Supercycle Versus Secular Stagnation
Brian Romanchuk

Lars P. Syll — The Bernanke-Summers imbroglio

As no one interested in macroeconomics has failed to notice, Ben Bernanke is having a debate with Larry Summers on what’s behind the slow recovery of growth rates since the financial crisis of 2007.

To Bernanke it’s basically a question of a savings glut.

To Summers it’s basically a question of a secular decline in the level of investment.
To me the debate is actually a non-starter, since they both rely on a loanable funds theory and a Wicksellian notion of a “natural” rate of interest — ideas that have been known to be dead wrong for at least 80 years …

Lars P. Syll’s Blog
The Bernanke-Summers imbroglio
Lars P. Syll | Professor, Malmo University

Ryan Avent — The global secular savings stagnation glut

What this discussion should make clear is that secular stagnation isn't much of a puzzle. Rather, it is a dilemma. The ageing societies of the rich world want rapid income growth and low inflation and a decent return on safe investments and limited redistribution and low levels of immigration. Well you can't have all of that. And what they have decided is that what they're prepared to sacrifice is the rapid income growth. In aggregate that decision looks somewhat reasonable if not entirely right. But it is a choice with pretty significant distributional consequences. And the second era of secular stagnation will come to an end when political and demographic shifts allow the losers from this arrangement to say: enough.

The Economist
The global secular savings stagnation glut
Ryan Avent
ht Tyler Cowen

See also Brad DeLong, The Current State of the Secular Stagnation-Savings Glut Debate

They haven't figured out that the problem is stagnant wages coupled with desire/ability to borrow to finance consumption is the issue and that interest rates are not the solution to this problem. The previous model of financing consumption on the back of household debt is over unless wages rise significantly, or government provides the funding, which is out of favor politically. So in the end this "secular stagnation" is really brain stagnation at the top.

Bill Mitchell — The secular stagnation hoax

Last year, the concept of secular stagnation was reintroduced into the economics lexicon as a way of explaining the lack of growth in advanced nations. Apparently, we were facing a long-term future of low growth and elevated levels of unemployment and there was not much we could do about it. Now it seems more and more commentators and economists are jumping on the bandwagon such that the concept is said to be “taking economics by storm” – see Secular Stagnation: the scary theory that’s taking economics by storm. The only problem is that it first entered the economics debate in the late 1930s when economies were still caught up in the stagnation of the Great Depression. Then like now the hypothesis is a dud. The problem in the 1930s was dramatically overcome by the onset of World War 2 as governments on both sides of the conflict increased their net spending (fiscal deficits) substantially. The commitment to full employment in the peacetime that followed maintained growth and prosperity for decades until the neo-liberal bean counters regained dominance and started to attack fiscal activism. The cure to the slow growth and high unemployment now is the same as it was then – government deficits are way to small.

Bill Mitchell – billy blog
The secular stagnation hoax
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia

Peter Radford — Stagnation

The downscaling is said to fit with the empirical evidence, and in particular with the trends that seem to have set in since around 1980. 

In other words, a sputtering economic performance over the past few decades is seen as proof that we now live in more constrained times, where limited growth puts a cap on our latitude in dealing with economic issues. People drawing this conclusion almost inevitably then jump into discussions of how this reduced latitude implies a more austere role for government, and – naturally – that everyday folks just will have to manage on less. 

I have a slightly different perspective. 

The onset of the downward shift coincides quite neatly with another great beginning. That of an era of economic policy focused on supply side initiatives, giveaways to the rich, and of corporate welfare. Is it simply a strange coincidence that the entire post-Reagan era is exactly that we are now describing as one of lower growth? Or is it that the right of center free market policies that have dominated policy making throughout the west since the early 1980′s, are to blame?

The Radford Free Press
Stagnation
Peter Radford

Joe Weisenthal — We Just Got The Perfect Snapshot Of A Modern Economy

So this is your snapshot of the economy.

On the one hand, you have basically no inflation by historical standards.

But in terms of asset markets, particularly real estate in prime locations, prices are going up like crazy. The situation is not good, and it drives Central Bankers mad, because they don't like to see numbers like that one in London, but they don't want to choke off a recovery when inflation isn't at the levels they want.

And again, this isn't just London. The same scenario has presented itself for years in the US. There hasn't been worrisome inflation in a long time, but there have certainly been destabilizing asset booms.

As for why this is, people have all kinds of theories. Some think it's a function of central bank policies that are impotent and boosting the real economy, but are effective at blowing financial bubbles by providing cheap capital. Others talk about a "new normal" or "structural stagnation" where for structural reasons, economies are unable to grow and induce normal inflation. The view of Larry Summers is that something has changed in the economy (perhaps relating to population changes and technology) that necessitates bubbles in order to get widespread growth. Nobody has nailed it down exactly.

Buinsess Insider
We Just Got The Perfect Snapshot Of A Modern Economy
Joe Weisenthal

Robert Skidelsky — The Road to Full Investment

Robert Skidelsky analyzes secular stagnation and smells BS.

The Road to Full Investment
Robert Skidelsky

Andrew Kliman — Clarifying ‘Secular Stagnation’ and the Great Recession

Interesting analysis showing that conventional narrative is wrong.

So, what should be done to confront the prospect of secular stagnation? I wholeheartedly agree with Gindin when he writes that '[if] we don't assert that we refuse to take it anymore, the other side will simply keep demanding more from us,' and when he suggests that working people need to assert their 'independence from capital' and resist 'integration … into the neoliberal project.' Yet I would add that we also need to support and encourage working people's efforts to assert their independence from the trade-union bureaucracy and other pro-capitalist opponents of neoliberalism, whose aims and interests are quite different from theirs. An independent path is also needed because, if there is a pro-capitalist solution to the malaise other than letting it run its course, no one yet knows what it is. The system's leading economists are just now waking up to the possibility that our present predicament is not a mere after-effect of a financial crisis. Austerity policies haven't extricated the economy from the slump but, as the U.S. case shows, neither have wildly expansionary fiscal and monetary policies.

Class struggles, taking a variety of traditional and new forms, have accelerated throughout the world during the crisis, and a late 2011 Pew Research Center poll of U.S. residents found that a large majority of black people, a majority of people under 30, and almost half of low-income people and Hispanics had a positive perception of socialism. The problem is that these struggles have been derailed and confined by attempts to integrate them into the anti-neoliberal-but-pro-capitalist project, and that most of the Left, including the 'socialist' Left, has been backing these attempts instead of listening to the renewed aspiration for a socialist future.

I think a socialist way out of the crisis is a real historical possibility now, but only if the ferment from below is met halfway with a sober, rationalist politics that says, 'the solutions that have been tried to fix capitalism aren't working. We have to find a way out of this system, but we don't really know yet what must be changed in order to transcend it. So the only solution is you. It's up to you to take control of the process of figuring this out. Once you know what you’re doing, you’ll be able to do more than express your anger and appeal to leaders to help you. You can take charge.'

New Left Foundation
Clarifying ‘Secular Stagnation’ and the Great Recession
Andrew Kliman | Professor of Economics at Pace University, New York

Steve Roth — The Global “Capital” Glut

What Bain capital has to say about the global capital glut.

So what about Bain Capital, Romney’s shop? Here from their December 10, 2012 report (PDF; hat tip to the always-remarkable Izabella Kaminska, and to Climateer Investing).

World awash in nearly one quadrillion of cheap capital by end of decade, according to new Bain & Company report
Their takeaways include:

The capital glut will be accompanied by persistently low real interest rates, high volatility and thin real rates of return. 

Sound like secular stagnation to you?

 Also:

The ever-present danger of asset inflation will contribute to an overall steepening of the investment risk curve… companies will need to strengthen their bubble-detection capabilities

In short, there’s a huge amount of money floating around out there relative to income and production. (In Steve World, all financial assets embody money, and the money stock is the total value of financial assets — including dollar bills, deeds, or other formal financial claims — regardless of how currency-like those things are. Equating currency and currency-like things with money is conceptually incoherent.)

This is an excerpt. If this is your interest, read the whole thing and follow the link at the end.

Hint: it’s about what the herd does with all that money.

Asymptosis
The Global “Capital” Glut

Steve Roth

Guest Post: Ralph Musgrave — Summers the Stupid and Krugman the Konfused.

Summers the Stupid and Krugman the Konfused.

I had a go at Lawrence Summer’s daft secular stagnation idea here a few weeks ago. That’s the idea that we won’t be able to increase aggregate demand for years to come. But he repeated the idea in the Financial Times a few days ago, plus Paul Krugman has supported the idea. And that’s more serious because Krugman is a Keynsian, plus he has brains. So let’s run thru K’ arguments.

K’s article is in four sections and the first (entitled “When prudence is folly”) claims we’ve run out of useful things to spend money on, so the only way of attaining full employment is to boost demand and spend money on pointless stuff. You ever heard such drivel?

What about better health care or better infrastructure? Would they be pointless? What about better housing or longer holidays for everyone? K. must have had far too much to drink the evening before he wrote that nonsense. (He drinks white wine if you’re interested.)

In K’s second section (entitled “An economy that needs bubbles”) he argues that prior to the crisis, the economy was being driven by the housing bubble. Agreed. But he concludes that that shows that the economy is somehow now INHERENTLY short of demand, and can only be driven by bubbles. Completely inane!

It’s true that credit creation drives economies, but given a shortage of private credit creation, what’s to stop government and central bank (as advocated by Keynes and MMTers) simply printing money, and spending it into the economy (and/or cutting taxes)? Absolutely nothing!! The average cockroach understands that. Why don’t Summers and Krugman get it?

In K’s third section (called “Secular stagnation”) he argues that the population is rising more slowly than during the baby boom era, thus less investment is needed, thus there’s less demand stemming from investment. Well now if I have $X in the bank and find that there’s not much demand for it for investment purposes (i.e. interest rates are low), then I’ll probably spend it on something else: a better house or whatever.

But even if a cut in investment DOES MEAN less AD, then again, what’s wrong with the Keynes / MMT solution? Nothing!

And finally, in his fourth section, entitled “Destructive virtue”, K argues that we might need a negative interest rate to bring full employment, but that means we’ll have to abolish physical cash (else when negative rates arrive, people will avoid the loss they’d make by keeping their money in a bank by storing it under their mattress instead).

It’s true that negative rates given an inducement to spend, but people find physical cash USEFUL (despite the increased popularity of plastic cards in recent decades). Plus there’s a simple way to induce people to spend. You’ll never guess what it it is. Yep, it’s that good old Keynes / MMT solution. I.e. just feed extra money into private sector pockets. And what do people do when they find extra money in their pockets, e.g. as a result of a lottery win or tax rebate?

Summers the stupid and Krugman the Konfused can’t work it out. But the average cockroach can.
Ralph Musgrave | Ralphonomics

Guest Post: Ralph Musgrave — Paul Krugman doesn’t realise that demand can be raised by creating and spending fiat.

Paul Krugman doesn’t realise that demand can be raised by creating and spending fiat.

In this article, Krugman goes along with the newly fashionable and totally absurd idea put by Lawrence Summers, namely that we’re in for a prolonged bout of deficient demand. I don’t know whether to laugh or cry. I always held Krugman in high esteem.

And Krugman is far from the only so called “professional economist” who goes along with the Summers’s ridiculous “secular stagnation” theory. See for example Martin Wolf and Frances Coppola.

So how do we raise demand at the zero bound? Well it’s desperately simple. Every MMTer knows the answer. Warren Mosler, one of the leading lights of MMT spelled out the answer in one short sentence in the form of “Mosler’s law”, which appears in yellow at the top of his site. The law states: “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” Put another way, demand can be raise by any amount at any time simply by printing money and spending it into the economy (and/or cutting taxes).

And finally I ought to give credit where credit is due. That is, Summers does at least admit he isn't sure what he’s talking about. He said, “Now this may all be madness and I may not have this right at all.” Quite right Larry, my friend. You really are mad, and you haven’t “got it right at all”. But you’re no madder than the rest of the economics profession. But please, if you half suspect you’re mad, why not just save everyone a lot of time and keep quiet? Or to put it less politely, just belt up – put a sock in it.

For more on Krugman’s muddled thinking see this more recent article of his.

Ralph Musgrave

Mario Seccareccia — Larry Summers, Secular Stagnation, and the Crisis of the New Consensus Model

Over a week ago Lawrence Summers stunned the world of economics by the remarks he made at the IMF‘s 14th Annual Research Conference on the Economic Crisis, where he pronounced the dreaded “SS” words: “secular stagnation”. His comments seem to have shocked much of the mainstream that still believes that the economy will return to the pre-2008 potential growth. Indeed, he surprised many by stating that, after effectively preventing the complete collapse of the financial system in 2008 through the government bailout and liquidity measures undertaken by the US Fed, there is still no real evidence that there will be a restoration of “normal” growth and that the “new normal” may well be secular stagnation. According to Summers, the principal culprit is the simple fact that nominal interest rates cannot fall below zero and that this zero lower bound will remain “a chronic and systemic inhibitor” of growth. While agreeing that Western economies are headed towards long-term stagnation, in this commentary I would like to question the analysis of the cause of this problem, as well as the solution being offered to address it.

Naked Capitalism
Mario Seccareccia: Larry Summers, Secular Stagnation, and the Crisis of the New Consensus Model
Mario Seccareccia | Professor of Economics, University of Ottawa