Monday, November 3, 2014

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

19 comments:

Anonymous said...

The problem isn't with the claim that the country is experiencing a longer-term "secular" - as opposed to cyclical - stagnation. The problem is with the diagnosis. Larry Summers has gotten people thinking that the whole thing is due to mysterious changes in the "natural rate of interest" or that there is for some other reason a long term "demand shortfall".

Neither of these things, even if they exist, are explanations of anything. They are just labels for symptoms.

Brian Romanchuk said...

Like Dan said, the developed countries are experiencing slow growth, and "secular stagnation" describes the symptoms.

But to be fair to the "mainstream", although a lot of people jumped on the "secstag" bandwagon, there is a diversity of opinions about it. The lower natural rate of interest is not the only story out there, although it may be the best known.

And to be honest, I am jumping on the bandwagon myself. I am writing a sequence of articles on the topic, summarising various points of view.

Matt Franko said...

"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. "

boy good thing everybody started to save in the 40's or we might all be goose stepping today.....

Tom Hickey said...

There may be some secular stagnation in developed countries due to globalization, which involves not only outsourcing and importation of embedded cheap labor but also great investment abroad to take advantage of specific opportunities in developing markets and the higher growth rate of emerging nations generally.

This could be offset through domestic policy but likely only through expanding the footprint of government, which is why it is opposed in countries where "limited government" is a political priority.

I am skeptical that the MMT JG alone or chiefly can address this problem, which is going to be with the developed countries while the rest of the world plays catch up.

The solution seems to be in considering the global economy to be a closed system and attempting to manage this transition with minimal disruption instead of making global growth the highest priority and accepting "collateral damage" as unfortunately necessary on the way to achieving global equilibrium. I don' think this is possible without serious social disruption erupting in conflict or being repressed politically. Neoliberals think otherwise, however.

Anonymous said...

Secular Stagnation. Isn't that another term for Long Depression?

BTW, people were predicting secular stagnation in the 1990s. I took that as propaganda to get people to accept a lower standard of living.

Brian Romanchuk said...

I am not sure that the issue is globalisation, rather it is the lack of desire to hire people. A lot of manufacturing is not labour-intensive any more. And it is unclear whether there is a whole lot of stomach for "onshoring" things like garment manufacturing.

Additionally, how willing are politicians to accept wage inflation? My view on the stock-flow relationships is that the only way to reduce the ratio of assets to income - which is a core attribute of "secular stagnation" - is to get nominalincomes rising a lot faster.

Anonymous said...

Dan Kervick: "Larry Summers has gotten people thinking that the whole thing is due to mysterious changes in the "natural rate of interest" or that there is for some other reason a long term "demand shortfall"."

Hmmm. I thought that the reason for a long term demand shortfall was Larry Summers pushing for an inadequate economic stimulus in '09.

Anonymous said...

Brian Romanchuk: "Additionally, how willing are politicians to accept wage inflation?"

Well, considering the recent and probably continuing raises in the minimum wage, and assuming that the benefits become obvious, the politicians are likely to play along, even if their paymasters are not so happy.

Anonymous said...

The stagnation the west is facing goes way beyond a cyclical demand shortfall and inadequate stimulus, I think. The extreme concentration of the means of production and economic control in a few hands, held by people who are so rich they have no inherent need or desire for growth, change and social progress, means we have a whole economy organized around the extraction of returns to capital at the lowest possible risk. Plutocracy seeks stability, consistency and control - not growth and progress. The more concentrated wealth becomes, the more stagnant society gets.

I would also say that the aging western world (Japan included) is choking in the miasma of a miserable generation of fretful dystopians who lack the right stuff, and who have a predilection toward apocalyptic philosophies of hopelessness, gloom, paranoia, fear and self-obsessed fear of their own deaths. This is a right-left phenomenon. If a critical mass of people thinks growth and progress are evil and that the world needs to approach a "steady-state" where nobody builds anything really new for the future, and nothing really changes, then of course there will be stagnant growth. The disposition to invest for the long term and make some expanded use of unemployed resources depends on a general faith in forward socioeconomic movement.

Matt Franko said...

"a miserable generation of fretful dystopians who lack the right stuff, and who have a predilection toward apocalyptic philosophies of hopelessness, gloom, paranoia, fear and self-obsessed fear of their own deaths."

Dan,

starting to see trailers for 'Hunger Games 3' already.... and another film "Interstellar" where we have to leave earth for another planet, etc...

then there was 'Elysium' last year....

Far from the good old days of Star Trek:

"Space: The final frontier
These are the voyages of the Starship, Enterprise
Its 5 year mission
To explore strange new worlds
To seek out new life and new civilizations
To boldly go where no man has gone before..."

Could be some sort of evidence in the pop culture of perceived 'hopelessness' due to years of bad policy or maybe it is a self-fulfilling prophecy thru brain washing via these pop culture productions by depressed people who run the arts industry....

Which is the cause and which is the effect?

Good points you have here about the popular culture....

rsp,

Matt Franko said...

I think cannabis is generally looked upon by the medical people as a depressant...

Left libertarians are all about illegal pharma like cannabis (has been)...

Maybe this is all a result of the cannabis generation taking over...

Anonymous said...

Actually, Elysium had a very hopeful ending. The same as Blogkamps's earlier film District 9.

Anonymous said...

Cannabis is more of a depressant than alcohol? I don't think so.

circuit said...

Bill M: "The growth would have returned more or less as usual after the downturn if governments had have expanded their deficits sufficiently and not tried to reduce them prematurely."

It seems to me that Bill may be giving a false or misleading account of the 'mainstream's' view.

Isn't Summers's point that secular stagnation may have been around for a while (not just since the crisis), but that it's impact since the early 90s has been subdued by a series of bubbles? The late Bill Vickrey also had a similar view in that the US was facing a chronic spending shortfall.

David said...

The late Bill Vickrey also had a similar view in that the US was facing a chronic spending shortfall.

Except Summers doesn't really believe in spending. If he did he's had plenty of opportunities to advocate that as policy.

Ignacio said...

Why the hell don't economist take demography into account NEVER, when historically has been the strongest driver of growth (along the easily obtainable energy reserves that help that demographic growth).

Mainstream (and a big part of heterodox) economists are so clueless that is beyond what is comprehensible how clueless they are, they never take into account what really matters: stuff like real resources, real physics, technological trends (no, not every technological advance has to increase real or nominal growth econoclueless are so enamoured with) or demography.

All these old fart economists live in an other reality, they drain value off the system, they destroy knowledge with their stupid ideas. Academe, central bankers, bureaucrats, big biz corporate economists. All hopeless "technocrats" who can't understand reality from their ivory towers of ignorance and are everything but (self-claimed) 'technocrats'.

P.S: on some comments, why you equate growth (nominal most likely) with progress? there is no link between both things, confusing correlation with causality. progress (technological most likely, social maybe although the second is more unlikely/slower) has happened before without significant nominal growth.

Brian Romanchuk said...

circuit:
"Isn't Summers's point that secular stagnation may have been around for a while (not just since the crisis), but that it's impact since the early 90s has been subdued by a series of bubbles?"

In Summers' article which was published in a CEPR eBook recently, that is what he argued. (I cannot remember what he wrote in his initial article a year ago.)

Also in the CEPR book, there were other articles (generally from the "mainstream", I believe), and there was a diversity of views on what "secstag" was about. For example, Robert Gordon argued that it is the result of demographics and productivity growth returning to "normal" after being elevated in the 1940s-1960s.

Tom Hickey said...

The reason for bubblaciousness and stagnation is obvious from capital-labor share, including much high-end labor income that is not taxed as ordinary earnings for various reasons that have been engineered to protect these earnings from taxation.

The result is either unsustainable private debt or economic stagnation to the degree that government deficits don't offset the saving at the top.

The only viable way to address this is by addressing workers's share. Obvious unsustainable private debt can't work in the long run, and perpetual outsized fiscal deficits to support saving by the wealthy for no good reason other than greed is probably not viable socially and politically even in oligarchic democracy without political repression.

The way to address this is through taxing away economic rents and disincentivizing rent-seeking behavior.

circuit said...

"The way to address this is through taxing away economic rents and disincentivizing rent-seeking behavior."

Amen