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Secular Stagnation Bulletin, 2014

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[Dec 05, 2014] Let's not botch this growth thing we've got going…

Jared Bernstein On the Economy
Tom in MN December 5, 2014 at 10:18 pm

I keep hearing about the Fed wanting to normalize rates, but it seems to me they are already normalized. In the middle of previous business cycles Fed funds rates have been about 2 percentage points lower than 10 year rates. And 10 year rates have been steadily declining for decades, now to just above 2%. So Fed funds rates at zero are where they should be relative to 10 year rates and any increase I suspect will have a slowing effect on the economy.

So I don't share your optimism that the Fed won't mess things up, as it seems to me any increase in their funds rate will cause a slow down. I will stop worrying when I see some indication that the Fed is considering raising their inflation target, as it appears to me that is what is causing inflation expectations and long term rates to decline. And as I've said before on your favorite cause, this is what is causing real wages to stagnate as we never get to full employment with inflation capped at 2%.

I have a new analogy for you on this: As Fed Chair Yellen likes control theory, we can compare what the Fed is doing with the funds rate to the autopilot on an aircraft. It is designed to fly the plane steadily on course smoothing out the bumps. But that is the short-time (business cycle time scale) control loop. There is also the long time loop of the navigation system that points the plane in the right direction by telling the autopilot where to head for. If that direction is down then it does not matter how good the auto-pilot is, the plane will eventually hit the ground, just like our economy has hit the ZLB. So what for the economy is the equivalent of the Navigation input to the autopilot? It's the 2% inflation target - that is where the Fed wants the economy to go long term. The problem is there is no indicator for what is level flight (steady state) in terms of inflation, 2% is just a guess and it's now got us on a collision course with the ZLB and deflation. And no fiddling with the Fed funds rate can change this as aiming at 2% inflation is the problem.

We can convert this to a car analogy once we all get self-driving cars ;-)

[Dec 03, 2014] Attacking the New Normal of Secular Stagnation by George R. Tyler

January 2, 2014 The Globalist

The economies of the rich democracies today resemble patients in a persistent vegetative state where full employment is a rare bubble condition, rather than the norm. Demand is too modest for a full recovery. The prescription with fewest side effects is to raise wages.

The issue of slowing growth in the West (even after the global financial crisis had passed) was perhaps first explored by Robert Gordon, who warned in August 2012 that longer term U.S. growth was ebbing to the slowest trend in a century.

Viewed initially as purely a supply-side phenomenon, it has lately come to be perceived as a demand side phenomenon by Martin Wolf, Daniel Stelter in The Globalist, Lawrence Summers and others. Summers and Stephen King, for example, wonder how the rich democracies can escape from what has become a Japanese-style lost decades.

The new macroeconomic normal features exaggerated trade imbalances and in the West, inadequate demand portending slow growth and thus inadequate progress on public and private debts. Weak demand coupled with excessive debt has unduly raised the odds of destabilizing restructurings and defaults at both the household and national levels.

[Oct 22, 2014] The Last Days Of The Growth Story

Most of us have heard of the seven stages of grief. Shock, Denial, Anger, Bargaining, Guilt, Depression, Acceptance. Where are we in our journey through these stages when it come to the financial crisis, and to growth? There's only one stage that even remotely sounds right: Denial. We're not even close to Anger yet, not when it comes to the larger population. We simply deny that something has really changed. And even if you wish to claim that it hasn't, no-one can deny the possibility that it has. Still, that is exactly what happens. Denial, everywhere you look. Freud's ideas are (ab)used to hide reality from us (to 'sell' the message), while Keynes' ideas are abused to hide the reality that you can't buy growth with debt your children will have to pay back. Pretty simple, when you think about it.

[Oct 20, 2014] Oil Prices, Exhaustible Resources, and Economic Growth by James D. Hamilton Department of Economics, University of California, San Diego

However, my reading of the historical evidence is as follows.

  1. (1) For much of the history of the industry, oil has been priced essentially as if it were an inexhaustible resource.
  2. (2) Although technological progress and enhanced recovery techniques can temporarily boost production flows from mature fields, it is not reasonable to view these factors as the primary determinants of annual production rates from a given field.
  3. (3) The historical source of increasing global oil production is exploitation of new geographical areas, a process whose promise at the global level is obviously limited.

The combined implication of these three observations is that, at some point there will need to be a shift in how the price of oil is determined, with considerations of resource exhaustion playing a bigger role than they have historically.

A factor accelerating the date of that transition is the phenomenal growth of demand for oil from the emerging economies. Eight emerging economies- Brazil, China, Hong Kong, India, Singapore, South Korea, Taiwan, and Thailand- accounted for 43% of the increase in world petroleum consumption between 1998 and 2005 and for 135% of the increase between 2005 and 2010 (the rest of the world decreased its petroleum consumption over the latter period in response to the big increase in price). 3 And, as Hamilton (2009a) noted, one could easily imagine the growth in demand from the emerging economies continuing.

One has only to compare China's one passenger vehicle per 30 residents today with the one vehicle per 1.3 residents seen in the United States, or China's 2010 annual petroleum consumption of 2.5 barrels per person with Mexico's 6.7 or the United States' 22.4.

Even if the world sees phenomenal success in finding new sources of oil over the next decade, it could prove quite challenging to keep up with both depletion from mature fields and rapid growth in demand from the emerging economies, another reason to conclude that the era in which petroleum is regarded as an essentially unlimited resource has now ended.

... ... ...

A large empirical literature has investigated the connection between oil prices and real economic growth. Early studies documenting a statistically significant negative correlation include Rasche and Tatom (1977, 1981) and Santini (1985). Empirical analysis of dynamic forecasting regressions found that oil price changes could help improve forecasts of U.S. real output growth (Hamilton, 1983; Burbidge and Harrison, 1984; Gisser and Goodwin, 1986). However, these specifications, which were based on linear relations between the log change in oil prices and the log of real output growth, broke down when the dramatic oil price decreases of the mid-1980s were not followed by an economic boom

A negative effect of oil prices on real output has also been reported for a number of other countries, particularly when nonlinear functional forms have been employed.

Implications for future economic growth and climate change.

The increases in world petroleum production over the first 150 years of the industry have been quite impressive. But given the details behind that growth, it would be prudent to acknowledge the possibility that world production could soon peak or enter a period of rocky plateau. If we should enter such an era, what does the observed economic response to past historical oil supply disruptions and price increases suggest could be in store for the economy?

Most economists view the economic growth of the last century and a half as being fueled by ongoing technological progress. Without question, that progress has been most impressive. But there may also have been an important component of luck in terms of finding and exploiting a resource that was extremely valuable and useful but ultimately finite and exhaustible. It is not clear how easy it will be to adapt to the end of that era of good fortune.

[Oct 14, 2014] Things That Make You Go Hmmm... Like The Perfect 'Kondratieff Winter' Storm Ahead

10/08/2014 |

The following chart-heavy presentation from Grant Williams is among his best as he wends his way methodically from the 19th century to the present day (and into the future) examining "The Consequences of the Economic Peace." From Keynes to Kondratieff and from Napoleon to Nixon, Williams looks at the ramifications of several decades of easy credit and attempts to draw parallels with a time in history when the world looked remarkably similar to how it does now (as he notes "that last time didn't end so well, I'm afraid.")

The real day of reckoning (Williams notes rather ominously), when the unconscionable level of debt that has been built up during the fiat money era finally topples over under its own weight like the giant wave in The Perfect Storm, lies ahead of us.

[May 16, 2014] Clarifying "Secular Stagnation" and the Great Recession by Andrew Kliman

"...As Martin Wolf of the Financial Times wrote recently, 'Merely restoring a degree of health to the financial system or reducing the overhang of excessive pre-crisis debt is… unlikely to deliver a full recovery. The reason is that the crisis followed financial excesses, which themselves masked or, as I have argued, were even a response to pre-existing structural weaknesses' (emphasis added). In his IMF talk, Summers similarly suggested that 'sometime in the middle of the last decade'––that is, before the financial crisis––it had become impossible to achieve full employment without ridiculously-easy-money policies that push real short-term interest rates down into the –2% to –3% range. Endorsing this suggestion, Krugman opined that, 'in the absence of bubbles[,] the economy has a negative natural rate of interest. And this hasn't just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.' "
"...the 'financial excesses' that preceded the crisis were themselves 'a response to pre-existing structural weaknesses' "
May 16, 2014 |

In 'Clarifying the Crisis,' published earlier this year in Jacobin magazine, the Canadian political economist Sam Gindin reasserted his view that the global economic crisis that erupted in 2008 'needs to be understood primarily as a financial crisis.' To be sure, the U.S. financial crisis was the event that triggered the Great Recession, and Gindin is certainly correct that the recession 'turned into such a generalized and profound economic catastrophe' largely because of the size of the financial sector, global financial integration, and the securitization of mortgage loans. Yet has one really 'clarified the crisis' by saying only this and then quickly moving on, as he does?

In the U.S., the TARP bailout, 'stress tests' of financial institutions, and other actions succeeded in quelling the financial crisis by mid-2009 at latest. Yet it is now five years later, and the U.S. economy remains mired in a state of near-stagnation with no clear end in sight. Austerity policies are certainly not the culprit; U.S. fiscal and monetary policies have been wildly expansionary. The public debt has risen by 88% since the start of 2008; the extra $8.1 trillion of borrowing, which has been used for increased government spending and lower taxes, amounts to about $4400 per person per year for six straight years. The Federal Reserve has kept the federal funds rate (i.e. the overnight interbank interest rate) near zero for five full years and has bought $3.6 trillion worth of securities since Lehman Brothers collapsed in order to lower long-term rates. Nonetheless, near-stagnation persists–­long after the financial crisis ended.

Can the thesis that the crisis was primarily financial explain this? I don't think it can, and I'm not alone. Paul Krugman and Robin Wells put the point this way a few years ago: 'If the fundamental problem lay with a crisis of confidence in the banking system, why hasn't a restoration of banking confidence brought a return to strong economic growth? The likely answer is that banks were only part of the problem.'

More recently, former U.S. Treasury Secretary Lawrence Summers, speaking at an International Monetary Fund (IMF) conference, made the point by comparing the financial crisis to a power failure that causes a country to lose 80% of its electricity. Production would plummet, but once power was restored, production would quickly bounce back. Indeed, since the country would need to replenish the inventories it depleted during the power outage, production would increase at a faster-than-normal rate. 'So you'd actually expect that once things normalized, you'd get more GDP than you otherwise would have had, not that four years later, you'd still be having substantially less than you had before. So, there's something odd… if [financial] panic was our whole problem, to have continued slow growth.'

Now, if it's odd to say that persistent economic malaise is wholly a financial problem, it's only slightly less odd to say that it's primarily a financial problem. Gindin fails to grapple with this issue, and he therefore also fails to understand the 'secular stagnation' argument that has been a hot topic among mainstream economists since Summers's speech. Responding to Michal Rozworski, who linked their worries about the possibility of secular (i.e. long-term) stagnation to his own view that 'structural changes and imbalances in the economy' date back to the 1970s, Gindin writes, 'It is one thing to project a coming long period of stagnation, and another to identify this crisis as a continuation of something that has been going on for more than three decades' (first emphasis added). This suggests that the economists who are discussing secular stagnation are referring only to the post-crisis economy. Actually, they are arguing that the fundamental underlying causes of both the Great Recession and the continuing malaise are non-financial problems that preceded the financial crisis.

As Martin Wolf of the Financial Times wrote recently, 'Merely restoring a degree of health to the financial system or reducing the overhang of excessive pre-crisis debt is… unlikely to deliver a full recovery. The reason is that the crisis followed financial excesses, which themselves masked or, as I have argued, were even a response to pre-existing structural weaknesses' (emphasis added). In his IMF talk, Summers similarly suggested that 'sometime in the middle of the last decade'––that is, before the financial crisis––it had become impossible to achieve full employment without ridiculously-easy-money policies that push real short-term interest rates down into the –2% to –3% range. Endorsing this suggestion, Krugman opined that, 'in the absence of bubbles[,] the economy has a negative natural rate of interest. And this hasn't just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.'

Thus, concerns over the possibility of secular stagnation are based on two factors. One is the failure of the economy to rebound robustly from the Great Recession, even in the U.S., where economic policy has been exceptionally stimulative and the financial crisis is becoming a distant memory. But the other factor is the apparent fact that stagnation had become the new 'default' state of the economy sometime before the financial crisis. Since effects come before causes only in science fiction, this suggests that the financial crisis was not the primary underlying cause of the recession or of our current predicament, but merely a trigger and a 'propagation mechanism.'

Gindin denies that there were important underlying causes other than financial ones. There were, he says, no 'remarkable problems in what is often called the "real" economy.' Although economic growth since the economic crisis of the mid-1970s was slower than in the 'golden age of capitalism' that preceded it, the 'golden age' was 'was rather short-lived and exceptional…. It hardly qualifies as the standard for assessing economic performance.'

However, growth-rate figures aren't very good measures of underlying economic conditions when government policymakers again and again prop up growth by papering over problems––artificially stimulating the economy with government borrowing, easy money, and policies that encourage excessive private-sector debt creation. I don't think Krugman was exaggerating when he characterized former Fed chairman Alan Greenspan's legacy as 'one of replacing each bubble with another bubble.' A better measure of the true state of the economy is the fact that, even with all the bubbles and artificial credit expansion, growth slowed down substantially. What would have happened under a genuinely laissez-faire regime?

Moreover, Martin Wolf's point that the 'financial excesses' that preceded the crisis were themselves 'a response to pre-existing structural weaknesses' is especially important as a response to Gindin's failure to see 'remarkable problems in what is often called the "real" economy.' As I have discussed elsewhere,[1] the U.S. economy failed to rebound strongly after the dot-com bubble burst in 2000. Ben Bernanke, then a member of the Board of Governors of the Federal Reserve, warned at the time that the U.S. might experience deflation and a Japanese-style 'lost decade' of stagnation, and the Federal Reserve responded with an exceptionally expansionary monetary policy. After adjustment for inflation, the federal funds rate was negative from the start of 2002 through mid-2005. This policy, and the loosening of credit standards, served to prolong and further inflate bubbles in the U.S. housing market and other asset markets. In principle, the Fed could have moved to deflate the bubbles several years before the financial crisis erupted but, as Bernanke noted in testimony before the Financial Crisis Inquiry Commission, this 'was not a practical policy option.' The Fed 'likely would have had to increase interest rates quite sharply, at a time when the recovery was viewed as "jobless" and deflation was perceived as a threat.' (Apart from a passing reference to 'the acquiescence of the American state' in the build-up of debt, all this is absent from Gindin's account of the prelude to the financial crisis.)

To be sure, one will not find 'remarkable problems' in the 'real' economy during the middle of the last decade if one looks only at conventional economic indicators while ignoring the fact that exceptionally expansionary monetary policy and loose credit standards were artificially stimulating production, employment, demand, and so on. But once one takes this fact into account, the mere lack of remarkable problems is what is so remarkable. We would normally expect the economy to be booming in such a situation. Yet, as Summers pointed out, there was no such boom. 'Capacity utilization wasn't under any great pressure. Unemployment wasn't at any remarkably low level. Inflation was entirely quiescent. So, somehow, even a great bubble wasn't enough to produce any excess in aggregate demand.' Again, this suggests that stagnation had become the new default state of the economy even before the financial crisis erupted.

In his effort to portray the crisis simply as a financial matter, Gindin comes close to denying that anything at all was amiss in the 'real' economy prior to the crisis, at least from capital's perspective.

The effective crisis since the early 1980s has not been that of capitalism's weakness, but of the weakness of labour and the Left. While capital has prospered in terms of profits, accumulation and new opportunities, the devastation in workers' lives and the explosion in inequality occurred with distressingly little resistance.

According to Gindin, workers' incomes stagnated as their wages declined or grew slowly. This not only boosted profits but also contributed substantially to the growth of the financial sector as workers became 'dependent on credit' in order to keep their standard of living from falling. In particular, they 'came to depend heavily on their homes as collateral for borrowings.'

However, although Gindin cites a lot of data elsewhere in his article, almost no hard evidence accompanies this account of capitalism under 'neoliberalism,' and the hard evidence fails to support much of it. Since something like this account has become conventional wisdom among much of the Left, it is important to review the facts in detail.

Let me begin with workers' supposed dependence on credit. Figure 1 depicts trends in household borrowing (there are no data specifically for 'workers'). It shows, first, that the share of personal consumption spending funded by consumer credit––i.e. all household borrowing except for home mortgages––did not rise over time. In other words, consumption did not increasingly come to depend on consumer credit. Second, while there was a huge rise in mortgage borrowing as a percentage of consumption spending, that rise was limited to the period of the housing bubble, which began in the late 1990s.[2] It was not characteristic of the 'neoliberal period' as such. Nor does the rise in mortgage borrowing seem to have been a disproportionately working-class affair. Almost 20% of all new mortgage loans made between 2004 and 2006 were subprime, but almost all the rise in mortgage borrowing occurred before then, when the subprime share of new mortgage loans was 8% or less.[3] Finally, there is the phenomenon that Gindin highlights, that of people borrowing against their equity in their homes in order to sustain their consumption. Information on such borrowing is not regularly collected, but the data plotted in Figure 1, which come from a study of the 1991–2005 period by Alan Greenspan and James Kennedy,[4] indicate that home equity extractions to fund consumption and repay non-mortgage debt were closely tied to the housing bubble as well. They likewise did not begin to rise substantially until 1999.

Gindin 1, Fig. 1Figure 1. Household Borrowing, U.S., 1972–2007 (percentages of personal consumption expenditures)

Yet if workers did not come to depend more and more on debt to sustain their consumption (except, perhaps, during the housing bubble), why didn't consumption spending plummet as their incomes and 'wages' stagnated? The answer is that, while some parts of the working class suffered from 'wage repression,' the myth that this was true of the class as a whole is an artifact of peculiar definitions of 'income' and 'wages.' A remarkable recent study of U.S. household income by Armour, Burkhauser, and Larrimore looked at after-tax income, including transfer payments such as Social Security benefits and noncash income such as medical-insurance benefits, and adjusted for changes in household size. The authors found that the inflation-adjusted income of the middle 20% of households rose by 34% between 1979 and 2007, while incomes of the lowest and next-to-lowest 20% groups rose by 32% and 31%, respectively. And during the 1989–2007 sub-period, income inequality actually declined: these groups' income growth outpaced that of higher-income households.

A 2011 Congressional Budget Office (CBO) study found that median (middle) hourly wages of men, adjusted for inflation, rose by only 4% between 1979 and 2007, but those of women, who make up half of the U.S. workforce, rose by 34%.[5] Census Bureau data for men and women combined indicate that median earnings of workers employed full-time, year-round, rose by 22%.[6] These wage and earnings figures exclude pension and medical-insurance benefits that workers receive from their employers, as well as employers' tax contributions, on their employees' behalf, for Social Security, Medicare, and similar programs. Such 'nonwage' compensation rose more rapidly than wages during this period, so the CBO and Census figures undoubtedly understate growth of total compensation. (If we assume that median workers' total compensation rose in relation to their 'wages' at the average rate,[7] median compensation growth was 9% for males, 40% for females, and 27% for full-time, year-round workers.)

In light of these data on wage and compensation growth, what would otherwise be an unbelievable fact is much less surprising––the fact that profit did not increase at the expense of employee compensation. As Figure 2 shows, compensation did not fall as a share of net output between 1970 and the Great Recession, either in the U.S. corporate sector or in the business sector as a whole.[8] And this implies that the remaining share––the profit share––did not rise. Beginning in 1980, there was indeed a sharp rise in property owners' incomes (i.e. interest, dividends, rental income, and proprietors' income) as a share of net output, as Figure 3 shows. Yet it rose at the expense of the remaining portion of profit, the portion not paid out in dividends and interest but retained by corporations themselves. It did not rise at the expense of working-class income (i.e. compensation of employees plus the government social benefits (minus the social insurance taxes that pay for some of them) that overwhelmingly accrue to poor and low-income people).[9] Working-class income in fact trended upward. This suggests that working people as a whole, including the poor, were able to buy a bigger share of the output than before––using only their income, not additional debt.

Gindin 1, Fig. 2Figure 2. Compensation Share of Net Value Added, Corporate and Total Business Sectors, U.S., 1970–2007

Gindin 1, Fig. 3Figure 3. Percentages of Net Domestic Product, U.S., 1947–2007

In light of the failure of the profit share to rise under 'neoliberalism,' it should not be surprising that U.S. corporations' rate of profit (i.e. rate of return on investment in fixed assets) also failed to rebound. Figure 4 presents three measures of their rate of profit, based on different definitions of profit. Net operating surplus is the most inclusive; after-tax profit is the least inclusive. All three rates of profit continued to decline.[10] These figures pertain only to domestic profit and investment, but U.S. multinationals' rate of return on their foreign direct investment also trended downward between 1983 (the first year for which data are available) and the Great Recession. Their profits from abroad increased very rapidly, but their investment abroad increased even more rapidly.

Gindin 1, Fig. 4Figure 4. Rates of Profit and Capital Accumulation, U.S. Corporations, 1980–2007

Corporations' rate of accumulation––i.e. net investment in fixed assets as a percentage of accumulated investment––fell even more sharply, as Figure 4 also shows.[11] This long-term 'investment dearth,' as Martin Wolf has called it, is the key issue with which the current discussion of secular stagnation is grappling. When economists such as Summers and Krugman hypothesize that the 'natural' real short-term interest rate had become negative well before the financial crisis, what they mean is that the expected profitability of investment in production had fallen to such a low level that something approaching full employment was no longer sustainable given normal interest rates. Businesses would no longer invest at the pace needed to sustain full employment unless the interest they paid to fund investment projects was exceptionally low––low enough to offset the meagre returns they expected from such investments.

There are no data on expected profitability, but it is clear from Figure 4 that there was a close relationship between movements in the rate of profit and movements in the rate of capital accumulation. This close relationship suggests that declining realized profitability lies behind the investment dearth. We need only assume that businesses' profit expectations were more or less correct, on average, to conclude that declining expected profitability lies behind it as well.

I agree with Gindin that '[t]he world of the late 19th century or the 1930s is radically different than the world of today' and that 'each crisis demands not an already-discovered general law but an analysis sensitive to its particularities.' The problem is that his broad-brush, holistic account of the 'neoliberal' period is not sensitive enough to the details of the data. He is certainly right to warn against any effort to 'squeeze… events into the straightjacket of a trans-historical causality (such as the falling rate of profit or production as the sole site of crisis-creation),' but we should also be wary of efforts to dismiss the importance of factors such as the falling rate of profit and capitalist production in advance of careful consideration of the evidence––not to mention efforts to dismiss the evidence itself, which are unfortunately all too common. And we should be sensitive to the fact that the trade union bureaucracy that is the source of much of the Left's economic information is predisposed to claiming that corporations are always awash in profits, and that the real problem is always the unequal distribution of the fruits of capitalism's success-even in the face of the system's descent into a crisis that now seems intractable.

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.

... ... ...

Andrew Kliman is the author of The Failure of Capitalist Production: Underlying Causes of the Great Recession (Pluto Press, 2011) and Reclaiming Marx's 'Capital': A Refutation of the Myth of Inconsistency (Lexington Books, 2007). A professor of economics at Pace University (New York), he works politically with the Marxist-Humanist Initiative.

[ May 7, 2014 ] Three Charts on Secular Stagnation by Paul Krugman

May 7, 2014 |

So if you take the end of the credit boom and the slowing of potential growth together, we have something like a 7 percent of GDP anti-stimulus relative to the 2001-7 business cycle - a business cycle already characterized by low real rates and a close brush with the liquidity trap.

Predictions are hard, especially about the future - but as I see it, these charts offer very good reasons to worry that secular stagnation is indeed quite likely.

Bret Winter is a trusted commenter San Francisco, CA 10 May 2014

Krugman does not seem to notice the implications of the graphs he presents, int particular, the graph of real interest rates. Note that they have trended lower and are now negative. This is called financial repression and hurts those who invest in bonds. Of course, those are Krugman's much maligned "rentiers." But many of them are old people of moderate means, who find that a lifetime of savings does not provide the secure retirement they thought their savings would afford.

What has happened is that many old people have taken their money from "safe" bonds where it will gradually decline in value because of inflation and put their savings into stocks.

And stocks have soared, making gazillionaires of people iike Mark Zuckerbuerg who live off of stocks, as well as hedge fund managers.

But retirement has become a more elusive goal as more and more Americans work into their 70's and beyond.

Let's not shed a tear for the old, who at least are not confronted by the unemployment which afflicts the young, who find that their college degrees don't even get them jobs at McDonald's.

Instead, with Krugman we take out the pitchforks and condemn the old, who TRIED TO LIVE BY THE RULES.

Krugman suffers from the boiling frog syndrome. He doesn't notice how America is becoming poorer. Americans have mortgaged their future in order to salvage current living standards.

And each year they fall further into the Malthusian trap fostered by unrestrained population growth….

Kevin Newman, New Paltz, NY 9 May 2014

Can't the same trend be explained by lower aggregate demand? The working class has been feeling the pinch for this entire time period, and only compensated by spending borrowed money. Did they really replace ALL of their buying habits with borrowed money, or just a portion? Could they have reduced spending enough to lower aggregate demand enough to explain these dips?

lefty442, Ruthertford 8 May 2014

One of the hidden causes of the current economic problems is the fact that when wages lag too far behind, personal borrowing appears to increase, and it increases in the highest cost sectors; credit cards, payday loans and even (probably) loan sharks.

Ron Cohen, is a trusted commenter Waltham, MA 8 May 2014

Krugman has often promised us that when he is wrong, he will openly acknowledge it. Is this a stealth acknowledgment that he is wrong about demand, that it will not return after all, and with it, full employment?

Adam Smith, NY 8 May 2014

Dr. Krugman,

IT has been an interesting Blogpost and in my view the current Economic Stagnation is rooted in the triumph of a "Purely Materialistic Economic Model" lacking "Intellectual, Spiritual and Moral Character" or "Economics Without Conscience".

And that is why we need to go back to the teachings of Theodore Roosevelt, Maynard Keynes and FDR as they saw the Moral and Spiritual aspects of Economics so to sustain the Democratic System of Government in order to combat the Evils of Collectivism and Fascism.

It would be great if you could share your debate Video, if available, or the Text if possible as I am very interested in your exchanges with Lord Skidelsky, whom I respect.

Nefti, London 8 May 2014

@Jerry Fincher Hough

I agree we have crony capitalism at the moment, but progressives who demand more money and power for the public sector cronies are practising Homeopathic Economics, where the poison is mistaken for the cure.

Indeed many are cronies themselves, talking their book.

The answer is a return to free market capitalism - dry up the swamp in which the cronies lurk and make capitalists earn rewards proportionate to the value they create, rather than the political capital under their control.

Small State, low taxes.

Leaving the worker more disposable income with which to create the aggregate demand that progressive economists seem to think only comes from deficit spending.

Zzz05, Ct 8 May 2014

Putting two of those graphs together, it appears that in parallel to the average age rising, the degree of debt is rising as well, which is most definitely not the way the age to debt relationship should go, ideally.

Bruce Daniel, Palo Alto, CA 8 May 2014

Does the rise of shadow banking contribute to poor Fed traction and hence is it part of the problem

ExodusRedux, Kirkland, WA 8 May 2014

Dr. Krugman, I hope you can comment on the analysis done by Menzie Chinn of the University of Wisconsin claiming to show that so-called Republican "pro-business" policies at the state level actually produces the opposite effect.

The LA Times has an article on this:

Bill Richards, Portland, OR 8 May 2014

Something's kind of been gnawing at me the past few days...

Yes, Secular Stagnation would be bad; and substantial GDP growth (better than 2.5%) would be good; and in between would be "meh".

But has anybody considered what kind of fix we would be in if we had another recession? It's certainly not impossible, is it? I mean, if FDR was able to screw up his economic recovery in 1937 when he tried to balance the federal budget, it seems to me that a not-dissimilar wrong turn by anyone or more of the economic actors in our global economy could put is in the ditch again, so to speak. And with the anemic response to this thing from all corners (with the arguable exception of the Federal Reserve), I'm kind of thinking that we could, without overstating it, have a Great Depression to end all Great Depressions.

I'd *really* like to hear someone tell me that it can. not. happen - but I don't think I'm going to hear it.

Blue State, here 8 May 2014

I've seen some [reddish] projections of a recession beginning this second quarter/third quarter this year.

but, hey, nothing is certain, especially in the future. With a jobless recovery, not sure what could be worse about a recession.

QueenMargot, Seattle 8 May 2014

Sounds a lot like the crisis of overproduction predicted by K. Marx.

J. Highfill, Ann Arbor MI 8 May 2014

One thing I've wondered about for a long time, in reading your blog, is why you don't address (as I recall) the effects of the high dollar and the trade deficit. It seems this should be factored into any analysis of secular stagnation. Dean Baker, on the other hand, addresses the trade deficit continually, and again today, he raises it in his comment on your post. I would be interested in your response.

Pop, Baltimore 8 May 2014

Dear Dr Krugman, What if the consumers don't want to consume any more? They already have everything that is reasonably necessary? House, two cars, food, education, health care? Should we focus on inventing new needs, as long as "having a job" is required for participation in the GDP distribution? More demand? More junk?

EmpiricalWarrior, Goshen 9 May 2014

"They already have everything that is reasonably necessary? House, two cars, food, education, health care?"

Who ever they are they do not comprise a majority of the population.

[Jan 11, 2014] Does the U.S. Economy Need Bubbles to Live by Matthew O'Brien

The Atlantic
It's not just the Great Recession and the not-so-great recovery. It's the 8 years before that too. As Summers points out, even low interest rates, deficit-financed tax cuts, and nonexistent lending standards weren't enough to overheat the economy then. Sure, housing prices boomed, but nothing else did. Inflation was low, and unemployment wasn't that low. In other words, demand wasn't excessive, but it wasn't sustainable either.

Summers worries that this isn't only a story about our economic past, but about our future, too. That we won't be able to create enough jobs without bubbles, now and forever. It's a new old idea called "secular stagnation." Economist Alvin Hansen first proposed it in the late 1930s when it looked like slow population growth might slow investment, and create a permaslump. But, thankfully, the baby boom, and 16 years of pent-up consumer demand proved him wrong.

Goodnight, Sweet Sustainable Growth?

This time, though, might be different. See, there's something called the "natural rate of interest," which is the inflation-adjusted one that gets the economy to its Goldilocks state of low inflation and low unemployment. If the Fed sets rates above it, inflation should fall and unemployment should rise (though, in practice, wages and prices don't tend to fall below zero).

As Summers points out, this natural rate has been negative for most of the last decade. And that's why we've alternated between bust and boom. The Fed's 2 percent inflation target means that even if it sets rates at zero, it might not be able to generate negative enough real rates to hit the natural one. That's the bust. But these kind of persistently low rates might eventually encourage risky behavior that, well, bubbles over. That's the boom. And our economic trap.

If we're lucky, all we need is a little more inflation.

There are three ways out: more regulation, more inflation, and more spending. The first is what economists call "macroprudential policy"-which is just another way of saying that we should make it harder to borrow during a boom. Summers, though, thinks it's a "chimera" that this alone can give us the "growth benefits of easy credit ... without cost." He might be right. A recent paper by Kenneth Kuttner and Ilhyock Shim looked at 57 countries, and found that, aside from limits on debt-service-to-income ratios, these kinds of policies don't limit household credit growth all that much.

If we're lucky, all we need is a little more inflation. And maybe a little less of China manipulating its currency. A higher inflation target, say 4 percent, would let the Fed engineer more negative real rates if necessary, and recover faster from a slump. It should also push up nominal rates, and make it less likely that we stuck to begin with. That'd be even more true if China stopped sucking out demand by manipulating down its currency. That last bit would be nice, but maybe isn't necessary. Consider that Australia hasn't had a recession in over 20 years-yes, really-despite running chronic trade deficits. How? Well, it's mining boom is a large part, but even more so is its smart central bank policy that targets 2 to 3 percent inflation averaged over the business cycle. In other words, it makes up for any inflation undershooting with overshooting (and vice versa).

A Free (Fiscal) Lunch?

But we can make the Fed's job easier with some smart spending. The case is overwhelming right now. As I've pointed out before, the Fed's forward guidance is really them telling Congress how much fiscal stimulus they'll allow. See, normally there's not a strong argument for stimulus spending, because the Fed might just negate it by raising rates. But this time the Fed has told us it won't raise rates before unemployment falls to 6.5 percent (and probably not until "well past" that time). That means the "multiplier"-how much total spending a dollar of government spending creates-should be relatively high.

The case is even more overwhelming when you consider the long-term costs of a slump. It's what economists call hysteresis. For one, the long-term unemployed will eventually become unemployable in the eyes of companies that discriminate against them. For another, putting off investments today means the economy won't be able to grow as much tomorrow. So a slump begets a slump. Or at least a slower-growing economy. But if spending today prevents GDP-and tax revenue-from disappearing tomorrow, it could maybe, just maybe, finance itself. That is, we could create future tax revenue that would cover today's interest payments. That's what Larry Summers and Brad DeLong argued two years ago, and, as you'll see, that's a pretty low hurdle right now.

Whether or not stimulus is self-financing depends on three factors: the 10-year real rate, the multiplier, and hysteresis. Of course, it's easier at lower rates, but it can still work at higher ones if the multiplier and hysteresis are high enough-and both are above zero. The chart below shows you the maximum real rate that would make it work for any combination of multipliers and hysteresis effects. Each color corresponds to a different multiplier, and each group corresponds to different hysteresis levels. So, for example, the group at the far right shows you the highest rates that make it work for each multiplier assuming hysteresis knocks off 0.2 percentage points of productivity a year. In the most extreme case, with a multiplier of 2 and hysteresis of 0.2, stimulus would finance itself even if real interest rates were 41 percent; they're currently 0.7 percent.

One final note on reading this chart. Anything above the black line shows when stimulus should pay its own interest. That line shows the average real rate on 10-year bonds between 1990 and 2005-so when the economy was "normal."

Now, plenty of economists have found evidence of multipliers between 1 and 2, but hysteresis is a trickier question. We don't know as much about it. A Bank of England study found that it was 0.2 percentage points for them during the Great Recession, though that could be an extreme case. Still, as long as there's any multiplier and any hysteresis, stimulus should finance some of itself right now. Not that this is an important test for whether we should do it or not. It's just a test of how mind-numbingly obvious it is. Even if it wouldn't finance itself, there's still every reason to do more. As Evan Soltas points out, there are plenty of projects we're going to need to do eventually, so we might as well do them now when interest rates are so low, and save money. Oh, and put people back to work too.

A Secular Boom

Our early-21st-century economy was built on sand. The sand of rising home prices, rising household debt, and ever-rising incomes for the top 1 percent. Then it all fell apart. Home prices fell, households started paying down debt, and the only thing that didn't change was the top 1 percent still got most of the growth-95 percent of it, to be exact. If we want to build an economy on stronger foundations, we'll need less debt and more investment. More rules to rein in leverage, and more inflation to eat away at debt. And more public investment if the private sector won't.

Or we could just continue pointless austerity, and cross our fingers.


the Fed has made this a self fulfilling cycle:

it has been in the practice of pumping money into the system, creating an asset bubble, and then pumping money into the system again to try to recover from the aftermath

in an era with interest rates kept artificially low -- too much money is invested in things that dont drive real economic returns

maybe we should take our medicine, allow the market to clear, let interest rates go to their natural rate and grow from there


Given that Summers's legacy at Harvard consists of implementing irresponsible, multi-hundred million dollar interest rate swaps with Goldman Sachs that went south with the economy a half decade ago and nearly brought the world's wealthiest university to the financial brink,* well, I'm not sure why we are still paying attention to him.

*In conjunction with Harvard Management Company out on a limb such that the school's endowment was 105% invested, mostly in arcane and risky ventures, when the recession hit.


Unfortunately the debate we are having isn't about how to adjust the macroeconomic dials to get the best results. We have one political party that has concluded that the government should not touch any dials at all, and they have just enough power to prevent the other side from doing much of anything one way or the other.

Will Wilkin

A 1200-word article on the stagnation of our economy, plus 5 comments, and neither of the words MANUFACTURING or TRADE appear once --except the latter in reference to Australia!

Since 2000, we've lost over 54,000 factories and over 5 million manufacturing jobs. Since NAFTA's implementation, over 60,000 U.S. manufacturing facilities have closed. The USA has had a trade deficit every year since 1976. It has ballooned in the last 2 decades and, over the last 3 years, it averaged $530 Billion annually.

Free Trade offshoring and outsourcing of our manufacturing has exported our tax base and engines of wealth creation. It is the fundamental reason for the fiscal crises at the federal, state and local levels. Free Trade offshoring and outsourcing is a historic dismantling of our industrial ecosystem, drying up our skills and productive capacities in essential technologies. And of course it explains the stagnation of wages and employment opportunities, since service sector jobs do not have the multiplier-effect for other sectors to a magnitude comparable with manufacturing.

That is the real price behind our Walmarts full of cheap imports. Articles like this one show our economics writers are as clueless as our politicians. And so the meaningless ideological war will continue, as we all sink deeper into the morass of an offshored economy.

The article above describes the debate over stimulus v. austerity. But all the stimulus in the world won't fill our cup when it is leaking out the bottom of our economy through trade deficits. Until we replace Free Trade with a BALANCED TRADE POLICY, our manufacturing sector will continue to shrivel and our economic crisis get worse. A Balanced Trade policy would require the globalized corporations to invest and employ and PRODUCE in the USA if they want to sell their wares in the USA.

chrisgranner > Will Wilkin

But wages are NOT stagnant in India and China. And India and China are home for almost a third of the planet's humans. Globalization has made it hard on US labor, who enjoyed extremely favorable conditions for 30 years after WW2 with respect to the global labor pool. Globalization exposed US consumption patterns to the global labor realities -- it did not CREATE those realities.

Will Wilkin > chrisgranner

Hi Chris, I never said wages are stagnant in China or India, but in the USA real income growth has stagnated or moved backwards for most Americans. According to Paul Craig Roberts in his recent article "The Case of the Missing Recovery":


According to the official wage statistics for 2012 , forty percent of the US work force earned less than $20,000, fifty-three percent earned less than $30,000, and seventy-three percent earned less than $50,000.

The median wage or salary was $27,519. The amounts are in current dollars and they are compensation amounts subject to state and federal income taxes and to Social Security and Medicare payroll taxes. In other words, the take home pay is less.

To put these incomes into some perspective, the poverty threshold for a family of four in 2013 was $23,550.


China and India at least have governments that understand the need for a national economic strategy, and China especially has done a great job of executing one. In the USA, by contrast, we have a combination of laissez-faire ideology (not shared by our trading partners/competitors) and sell-out to the globalized corporations that have zero loyalty to our country.

That's why we need Congress to change the rules. By replacing Free Trade with a Balanced Trade policy, our trade deficits could be stopped and converted into demand for US-made products, putting millions back to work and growing the pie in a way that bubbles and unemployment compensation will never do.

Mark Cancellieri

I think it is complete nonsense that the natural rate of interest has been negative. If this was the case, then the Fed would not have had to work to keep nominal interest rates so low. The market would naturally adjust to that level.


There is no problem. The US economy is being managed perfectly. Everything is going according to plan. If you don't think so, just look at how well the class of great wealth has been doing for the past 30 years. You think it's an accident, a coincidence, that the rich have gotten rich faster than ever?


Doesn't the economy only honestly "grow" when inventions allow people to eliminate future expenditures with a single present cost at lower net present value? That is, if you can pay $500 per year to heat your house for the next 20 years ($10,000), or spend $4000 on a new boiler this year to reduce your annual heating cost to $200, you make the investment, and thus by spending more in the present, you have increased the size of the economy by $4000 in this year instead of only $500? And since you reduce next year's expenditure from $500 to $200, you need to do this again and again and again? Isn't that what causes economic growth?

Essentially, if no one thinks of anything new that delivers present value high enough to bring forward expenses from the future, how will growth occur?


"A higher inflation target, say 4 percent, would let the Fed engineer more negative real rates if necessary, and recover faster from a slump."

The effects of compounding rates are not intuitively apparent. This is why apparently trivial annual inflation rates can be so misleading - many people imagine that a small inflation percentage rate is insignificant. A more useful way at looking at inflation is to calculate the half-life of the currency at various inflation rates - the number of years that it takes a dollar to lose half of its purchasing power at some specific rate of inflation. For example: at 1% inflation it takes almost 69 years for a dollar to lose half its purchasing power. At 4% it takes less than 23 years. Assume that the Reserve Bank had been founded in the year of the American Revolution in 1776 and an unbroken succession of brilliant Reserve Bank Chairmen since then had successfully managed to maintain a target inflation rate at exactly 2%. What purchasing power of one of today's U.S. dollar be in 1776? Significantly less than one penny or $0.0083.

swampwiz > walstir

Actually, a 4% rate requires about 18 years to double. Basically for a small interest rate, the product of the interest rate and the # of years roughly corresponds to the natural logarithm of the multiplication factor (i.e., in terms of calculus, it approaches this as the interest rate approaches 0) - and because this value of the natural logarithm of 2 is about .69, and the above product increases slightly as the interest rate increases, the handy value of .72 (or 72%) is a very good rough value, with the added benefit that 72 is divisible by every natural number less than 10 except 7 (and 7 & 10 can simply use the approximate value of 70), making this a very nice rule-of-thumb.

Tom Czerniawski

Maybe your economy would be doing better if foreign nations hadn't stopped buying your tech exports almost entirely, due to them being riddled with NSA back-doors.


How many times do we have to see these "economist" and there sycophants in the media display there woefully wrong arguments. You can put a thousand economist in a room and get a thousand different opinions on how the light turn on.

It time to end the constant manipulations of macro and micro economic affairs. From monetary policy, taxes, trade, and the cohesion of induced inflation. We need regulations that control monopolies and fraud but by letting individuals and business make there own decision as to what to value and what to avoid we could get to a more natural economic state.

We need sound money that can be used as a medium of exchange but also as a store of value.

We have gone so far past the red line nobody can remember a time when governments and central banks were not the drivers of personal and business economic decisions. We need less government and less central bank involvement not more.


> For one, the long-term unemployed will eventually become unemployable in the eyes of companies that discriminate against them.

As an early middle-aged American programmer who has not had a proper job in his field for a decade, I have become "obsolete" & "unemployable" in the eyes of potential employers.


haha. "...we'll need less debt and more investment." "Investments" are never a sure thing and they add to the debt. The author may just have well said "we'll need less debt and more debt."

[Jan 10, 2014] Servaas Storm Secular Stagnation, Green Shoots or What

naked capitalism


What a relief when Servas Storm writes off "loanable funds," et al, as a side show as, "19th Century theoretical contructs." With the very dumbed down version of Keynes that I am able to hold in my mind, it has alway felt to me that the Obama stimulus was a 'band-aid for a shotgun wound.' The Obama stimulus was insufficient and thereby gave Keynes-haters ammunition to claim that 'stimulus doesn't work.' Now, we waste time waiting for the right combination of credentialed people to become sufficiently enlightened to finally act correctly. Talk about a lack of confidence.

Tom Allen

The Bush and Obama Administrations' insufficient efforts at stimulus remind me of patients who take antibiotics for only half the prescribed time, justifying their actions "because I'm feeling better already." This only results in a secondary infection that lasts much longer, as well as promoting the growth of antibiotic-resistant bacteria.


Gee, I would have described it more as Obama promised "preventative" treatment without explaining "preventative" really just means diagnosis procedures and that the actual treatment would have to be out of pocket short of it being a complete disaster. Then even if you paid for it, Obama probably allowed incompetent clowns who caused the problem in the first place to administer the treatment and then passed tort reform, so you couldn't even sue them


So can we agree that the bottom line agenda that arises after Storm's deconstruction of Summer/ Taylor comes to this:

1- Big write downs of inflated assets across the board to clear up balance sheets (corporate and household … even if this means closing or nationalizing insolvent mega-banks)

2- Five trillion or more in stimulus funds? $1 T for student debt write down… $4 T for the Fed to buy state issued infrastructure bonds.

This will work and is doable.


Has there ever been a recession that was not a balance-sheet recession?

Dan Kervick

Maybe the 70′s? Driven by rising oil prices not excessive private sector debt?


At least American and American-influenced economists are no different than the priests from priest dominated societies. They defend the religion with arcane diatribes which had nothing to do with reality or even the original establishment in an effort to be a buffer between the wealthy and the rabble, and with a few notable exceptions, mostly when the economists defend and too much attention for outright lies, economists line up to defend their profession and "rivals" as wonderful human beings despite one set calling for policies which will devastate people's lives.

Obviously, it starts as a self-selective group as 18ish year olds.

[Jan 10, 2014] The Roots of the Next Crisis, and the Dark Hallway Beyond

Jesse's Café Américain
"Those who fail to exhibit positive attitudes, no matter the external reality, are seen as maladjusted and in need of assistance. Their attitudes need correction...

Suddenly, abused and battered wives or children, the unemployed, the depressed and mentally ill, the illiterate, the lonely, those grieving for lost loved ones, those crushed by poverty, the terminally ill, those fighting with addictions, those suffering from trauma, those trapped in menial and poorly paid jobs, those whose homes are in foreclosure or who are filing for bankruptcy because they cannot pay their medical bills, are to blame for their negativity.

The ideology justifies the cruelty of unfettered capitalism, shifting the blame from the power elite to those they oppress."

Chris Hedges

Here is a recent conversation I had with a friend about the current state of the US recovery. As an accountant with a wide range of exposures, I enjoy hearing his perspective since I no longer have that sort of current insight into the corporate culture in America. I have years of background running large businesses in corporations, and some forays into large scale M&A work, so I have seen quite a bit of it. The methods rarely change, merely the guises and degrees.

Here are excerpts from his side of the conversation with only one parenthetical comment of my own.

"I don't think we're seeing profits in a traditional sense. Instead, it appears to me that we're watching a long, drawn out LBO'ing of America. It appears that companies are liquidating capital and returning it as opposed to earnings spreads on revenue.

It seems like we're seeing the final blow-off phase that started with the stock option becoming the primary form of compensation for corporate talent. By drawing out the LBO, they re-stock their options each year with a guaranteed return thanks to the Fed and their own Treasury Departments.

The problem is that you can't have systematic corporate buybacks with employment/economic growth as they create diametrically opposite outcomes. The more work I do, the more I conclude that the US economy has not expanded since 2006.

I was looking at mutual fund data the other day and it showed that people moved their fixed income money into domestic equity - $185 billion in liquidated bond funds to buy $175 billion in equity funds. This happened after the Fed announced tapering was on the table. Just like the gold market, I suspect that "someone" forced the liquidation of bond funds and herded the money into equity funds to keep the rally going. (I think it is perfectly reasonable to flee bond funds at any time that interest rates are turning higher. Bond funds often take it on the chin in such a deleveraging of a long term interest rate trend. However, I think the whole taper thing was hyped and used by the wiseguys, as are most things these days by our financial masters of the universe. - Jesse)

Coincidentally, corporations used half a trillion in cash flow on buybacks. It's a liquidity game but with limitations. What's the next asset that can be liquidated or levered? They're still working on gold but sometime soon, the price of gold will be set in the East, where the gold resides. Agricultural commodities are being liquidated but that ensures a drop in planting next year. Oil is too valuable on the geopolitical front to liquidate.

There are certainly winners in this economy but far more losers. At some point, the weight of the losers acts against the winners, many of whom are levered up with confidence. Corporations can liquidate equity capital but we all know how the LBO'd companies operated in the 1990's. In many ways, they've gotten corporations to behave like consumers did in the 2000's, only this time they're trained to buy back their own stock. Every cycle has natural limits.

We know that corporate cash flow is no longer growing and we know that it's more expensive to sell debt today than a year ago. We also know that the Fed sees the stock market as their proof of success. So how does this shakeout? If corporations are a lemon, how much juice can you squeeze out of the lemon?"

Although I do not wish to be an alarmist, I have to say that this trend of attempting to sustain the unsustainable has gone on longer than I had previously thought possible.

I am fairly sure that the next crisis will bring these things to a head and some sort of resolution. But therein also lies great danger. Philosophies that have grown time can have deep roots, and when faced with what to them is an intolerable change, can react somewhat excessively. They may even welcome the opportunity to act excessively and decisively, at least in their own minds, as the path to winning.

When a ruling subculture that has become accustomed to crushing and liquidating things for its own power and pleasure, whether it is natural resources, the environment, crops, animals, land, or social organizations, eventually runs out of things, it can become frustrated and angry in its seeming impotence to continue on, to keep expanding.

Indirectly and somewhat benignly at first, but with a growing efficiency and determination over time, it will begin with the weak and the defenseless, attacking and objectifying them, even in the most petty of ways and impositions. It will turn to its critics, and then everyone who is defined by them as 'the other.'

That is when a predatory social and economic philosophy can turn into pure fascism, and start liquidating people. And finally it liquidates and consumes itself.

But really, no one wakes up one morning and suddenly decides, 'Today I will become a monster, and wantonly kill innocent women and children.'

Otherwise ordinary people get to that point slowly, one convenient rationalization for their 'necessary and expedient' behavior at a time. After all, they are the good people, they are the strong, they are the most successful and the favored.

They are the entitled, and not these others who would seek to drain them, drag them back down. They are the champions of progress and achievement and civilisation, the hardest working, and the epitome of mankind.

What could possibly go wrong?

"He prompts you what to say, and then listens to you, and praises you, and encourages you. He bids you mount aloft. He shows you how to become as gods. Then he laughs and jokes with you, and gets intimate with you; he takes your hand, and gets his fingers between yours, and grasps them, and then you are his."

J. H. Newman, The AntiChrist

If you are one who thinks that the above 'could not possibly happen here,' and I am sure that there are many, you may wish to read the following vignette from modern US history. Alan Nasser, FDR's Response to the Plot to Overthrow Him

[Jan 03, 2014] Nate Hagens The end of growth

This is 50 min talk of Nate Hagens former editor of Oil Drum, a former Lehman Brothers executive. He mentions in EROEI. A crisis of 70th was connected EROEI reaching critical level. Switch to debt-based economy followed as a solution. Crisis of 2008 means that this path is close to the end. At this point we replaced private debt with public dent and continued. But ability to continue is much shorter. Average barrel of oil contain amount of calories which human can't produce a month.
Dec 21, 2012 | On the Earth Productions


Nate contrasts our growing realities with the standard assumptions in economic theory that underpin our social systems. Among the key points, it is the power from cheap fossil fuels, not technology or creativity, that has enabled the majority of our wages, profits and inexpensive consumer goods. Also, Nate questions how a societal pursuit of "growth in transactions" (GDP) is either possible or desirable on a full planet with brains that evolved under much different circumstances.

Nate predicts that we now face the end of global growth and although we are still incredibly rich as a society, our institutions, policies, and individual behaviors and aspirations are likely going to have to change.


Someone is going to have to define "forward" and 'sustainable" in terms "we" can "all" agree on. When i hear capitalists finally admitting that "growth" has to come to end some time, i start to worry. The global rich arent going to willingly give up any of thier wealth and privillege. They will fight with everything they have (and they have everything) to hold on to every square foot and nickle of it -NO!! they will demand more still!!!


Nate's video should go into a must-watch list. Well done. Too bad his slideshow is not visible Does anyone know where we can get a copy of his power point?

Gary Paul Moody

A good overview of our predicament. Nate covers a lot of topics, all of which are important in order to understand where we are now as a species, and how we can possibly move forward in a more sustainable way. Thanks for posting!

[Jan 02, 2014] Taylor v. Summers on Secular Stagnation

That is politics not economics and, clearly, as for Taylor, it comes down to the usual question: "are Republicans more stupid of more evil." ;-)
Economist's View

Here's the Jared Bernstein response to John Taylor that Roger Farmer is referring to:

Taylor v. Summers on Secular Stagnation: ... In a recent speech I've featured here in numerous posts, Larry Summers raised the possibility that the economy is growing below its potential, with all the ancillary problems that engenders (e.g., weak job and income growth), and not just in recession, but in recovery. Stagnation is by definition expected in recession, but not in an expansion...
Taylor argues, however, that secular stagnation is "hokem." His argument rest on two points, both of which seem obviously wrong.
First, he claims that the current recovery has been weak is not due to any underlying problems in the private sector or lousy fiscal policy, but due to "policy uncertainty, increased regulation, including through the Dodd Frank and Affordable Care Act." But the recovery began in the second half of 2009, well before either of those measures took effect. And, in fact, since they've done so, if anything, growth and jobs have accelerated. Financial markets have done particularly well...
Taylor's antipathy toward fiscal stimulus leads him to completely omit the fact of austerity in the form of fiscal drag as a factor in the weak recovery. ...
His second argument is that if secular stagnation were a real problem, we would have seen it in the 2000s expansion, yet instead we saw "boom-like conditions, especially in residential investment." ...
Yes, there was a lot-too much-residential investment, but employment growth was terribly weak...,the share of the population employed actually declined. Real GDP grew almost a point more slowly per year over the 2000s business cycle relative to the prior two cycles. Business investment grew less than half as fast in the 2000s than it did in the 1990s. In fact, after rising pretty steeply in the 1990s, CBO's estimate of potential GDP fell sharply in the 2000s..., a serious cost of the problem Summers is raising and Taylor is wrongly debunking.
It's also worth noting that middle-class incomes and poverty rates did much better in the 1990s, thanks to full employment conditions in the latter half of that cycle, than in the 2000s, when slack labor markets led to a flattening trend in real median income and increasing poverty rates.
I doubt any of this will convince Taylor and others who simply want to go after the ACA, the Fed, stimulus measures, et al. But those of us interested in blazing the path back to full employment should recognize these arguments as politically motivated distractions. ...

This post from Brad DeLong on the same topic is also worthwhile

pgl said...

If one has been reading Taylor's blog - ECONOMICS ONE - none of his latest partisan garbage in this oped would have come as a surprise. In the olden days - we would have to turn to Lawrence Kudlow and those Jerry Bowyer Fuzzcharts for such insanity. I wonder if Stanford is proud of its most famous macroeconomist. Cough, cough.

DeDude :

The thing that holds back businesses from deploying their stash of cash, is not "policy uncertainty" or "increased regulation". It is lack of demand.

If the demand is there then the product/service will be produced. When demand is not there then the cash will sit idle or be used non-productively for things like stock buybacks or takeover of competitors. Any individual business owner who fail to meet demand (because of policy uncertainty or regulation) will simply give up market share to those of his/her competitors that chose not to be held back by those things.

DeDude said in reply to Matt Young...

I am actually not talking about GDP. The issue is why do businesses not hire more people. The explanation that right wing fools and smart business people love to give is that it's because of regulations and policies that they don't like. However, as pointed out over on "calculated risk" they always complain about regulations and there is no correlation between their complaining (or not) and their actual hire of new employees. The only thing that determine whether a business will hire more people is whether the demand for its products/services is in excess of what can be delivered by its current workforce. And they will respond to such demand regardless of cumbersome regulations - or they will lose market share to competitors that are more than happy to fill the demand.

Fred C. Dobbs:

(Found out on the web.)

Definition of the term secular stagnation theory is presented. It refers to the protracted economic depression characterized by a falling population growth, low aggregate demand and a tendency to save rather than invest.

Dictionary of Theories;2002, p478


I don't think the right word for Taylor's erroneous claims as chiefly "political". It's moral prejudice. The absolute belief in totally unregulated markets is based on the belief that

1. The wealthy are more virtuous than the poor.

2. Only the strong should survive (see Abba's song "The winnner takes it all").

So it goes from a.Moral Prejudice to b. Political ideology to c. Economic chicanery.

Moral prejudices are the most deeply rooted in human beings because they don't only dictate how the world is, but how it should be.

pgl said in reply to David...

Aren't your comments better directed towards Greg Mankiw? Oh wait - they are both toadies for Mitt Romney. Sorry about my question!


Taylor isn't right or wrong. Taylor is simply irrelevant to the largest social ill of 2014- Unemployment.

If one of the basic assumptions of your model is "Assume Full Employment" then employment doesn't become a goal but a constant.

Under the Assumption of Full Employment, is secular stagnation even possible?

Taylor's model does not even look at Unemployment, and reducing unemployment is not his priority.

If as a policy maker, your goal is to reduce unemployment as quickly as possible, you should find another model that addresses unemployment directly. Once unemployment is fixed, other models may be more useful as new problems pop up.

anne said in reply to bakho...

November 30, 2008


Chapel Hill, N.C.

On Nov. 22, Hoover welcomed Roosevelt to the White House. Throughout the meeting, he treated his successor as though he were a thickheaded schoolboy who needed drilling on intransitive verbs. He sought to bully the president-elect into endorsing the administration's policies at home and abroad, especially sustaining the gold standard at whatever cost. Alert to Hoover's intent, Roosevelt smiled, nodded, smiled again, but made no commitment. A frustrated Hoover later vowed, "I'll have my way with Roosevelt yet."

Hoover returned to the attack in February. He sent the president-elect a hectoring 10-page handwritten letter that misspelled Roosevelt's name (as "Roosvelt"). As a consequence of the flight of gold and runs on banks, Hoover wrote, there was "steadily degenerating confidence in the future." His wise policies, he claimed, had brought an upturn in the summer of 1932. Since then, though, he said, there had been a sharp decline because the country was unnerved by Roosevelt's election, for it feared that the new president would embark on radical experiments. Hoover concluded by asking Roosevelt to restore confidence by stating publicly that there would be "no tampering" with the currency and that "the budget will be unquestionably balanced, even if further taxation is necessary."

Three days after writing this letter, Hoover told an archconservative senator that "if these declarations be made by the president-elect, he will have ratified the whole major program of the Republican administration; that is, it means the abandonment of 90 percent of the so-called new deal." To another Republican senator, he spelled out what he demanded that his successor renounce: aid to homeowners burdened with mortgages, public works projects and plans for a Tennessee Valley Authority. He also wanted Roosevelt to raise tariff barriers and impose a national sales tax.

Roosevelt, who regarded the letter as "cheeky," let days go by without replying, fibbing that his response had miscarried. He would not let himself be trammeled by being identified with an unpopular dying administration, so he refused to issue any statement. He would not permit Hoover to rob him of the fruits of victory. On March 4, unfettered, he announced to the nation a new beginning....

William E. Leuchtenburg is the William Rand Kenan, Jr. professor emeritus at the University of North Carolina at Chapel Hill.


I wonder if Tyler Cowen, James Hamilton, and Steve Williamson will take John Taylor to task for saying that Larry Summers and Ben Bernanke are just putting out a bunch of hokum to protect the Obama administration from its policy errors? No, I don't think so, civility and treating those who disagree with you with respect and deference is only something economists with liberal political leanings, who kind of care what happens to the rest of the American people, and not just the 1%, owe to their conservative, "scientific," betters.

It should not be forgotten that Professor Taylor was the Deputy Undersecretary of Treasury for Economics and Financial Issues from 2001-2004. That economic growth was anemic during this time is well documented.

Has he ever explained his policy errors? As to hokum, I do acknowledge that Professor Taylor has a lot of experience peddling that for his political masters.

How can Mark Thoma, Noah Smith, or Brue Bartlett have an honest argument with the likes of John Taylor. I hope he finds his bubble comfortable in side the right wing machine. I am sure he finds it lucrative.

P.S. Again, the evidence is that economic growth is picking up, just as both Dodd-Frank and the Affordable Care Act are coming into full effect. Correlation or causation? Are more likely just co-incidence?

kievite said...

This is an interesting topic which sadly attracted very few comments.

I think there are two issues not covered in comments:

  1. That is politics, not economics and, clearly, as for Taylor, it comes down to the usual question: "are Republicans more stupid or more evil" (see Robert Waldmann comment to the post from Brad DeLong ).
  2. The level of debt and the price of energy are two important variables that should probably be taken into account in any discussion of secular stagnation.

As for Taylor personal legacy, I would suggest that the underlying assumption that there is an exogenous NIARU (non-inflation-accelerating rate of unemployment) imposing an unavoidable constraint on macroeconomic possibilities is wrong on both historical and analytical grounds. From a historical standpoint, a NIARU, if it exists at all, must be regarded as highly variable over time and place.

To me it smells with the desire to enlist the fear of inflation to justify the maintenance of a "reserve army of the unemployed" in the society (which is a Marxist term, but probably is applicable here). In a way high level of unemployment is a precondition to the fast redistribution of wealth that we observed under the current neoliberal regime.

Which is another way to say that Taylor is a stooge of financial oligarchy. A Trojan horse which plays the role of an academic economist.

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