Secular Stagnation and Sacred Neoliberal Dogma

By Dan Kervick

Brad DeLong doesn’t like what Clive Crook is saying about Larry Summers. According to DeLong:

When Larry Summers said:

Even a great bubble [first in high-tech and then in housing] wasn’t enough to produce any excess of aggregate demand…. Even with artificial stimulus to demand, coming from all this financial imprudence, you wouldn’t see any excess…

He wasn’t calling for more bubbles. He was pointing out that an economy that can only attain anything like full employment with stable inflation in a bubble is an economy with something deeply and structurally wrong with it–something that needs to be fixed.

DeLong then proceeds to lambaste Crook for his intellectual dishonesty. But Crook does not actually say Summers advocates bubbles. This is the relevant passage from Crook’s piece.

But Summers then asks, what if this isn’t temporary? Maybe there’s a chronic shortfall of demand, beyond what’s due to the crash. Maybe we face an age of secular stagnation, in which the zero lower bound is normal. If so, short-term fiscal easing can’t be the answer. Permanent fiscal stimulus may be necessary to maintain demand. And if that can’t be done because politics makes it impossible, what’s left? Bubbles. Summers doesn’t advocate them, mind you, he just poses the question.

So what did Summers actually say at the IMF Research Conference talk to which both Delong and Crook are referring? Summers’s grand concluding lesson in that talk is about the importance of the zero nominal interest rate barrier, and the need to think about how to make policy for an economy in which the zero bound persistently inhibits growth. However, just prior to getting to that point, Summers expresses doubts about an emerging regulatory policy agenda that might inhibit the expansion of credit. Summers says:

One has to be concerned about a policy agenda that is doing less with monetary policy than was done before; doing less with fiscal policy than has been done; and taking steps whose basic purpose is to cause there to be less lending, borrowing and inflated asset prices than there was before.

These concerns are tied into his earlier observation that in the pre-crisis environment high levels of private sector credit and debt were needed just to support demand at the non-inflationary level needed to buy up the output of the economy. He earlier described that extremely high volume of credit – which he acknowledges just about everyone now deplores – by using the term “bubble.”

So that sounds to me like a qualified defense of the advisability of permitting bubbles to form under current economic conditions.

Now DeLong is correct in suggesting that the upshot of the full discussion is an implied dilemma: either we do something creative about dealing with the zero bound, or we accept the need for bubbles. But Summers doesn’t at all reject the first horn of that dilemma. So it is not right to suggest that it is some kind of slander on Summers to say that he speaks kindly of bubbles in his talk. In fact, part of the message of the talk seems to be to defend his own legacy as a top economic policy maker during the dot-com bubble.

Summers’s speech – vaunted as daring and radical by the kinds of people whose thoughts move inside the tiny constipated circles permitted by the global plutocracy, its court academics and its approved ministers of the faith – is actually quite boring and conventional, and offers nothing that anybody who follows these discussions hasn’t heard many times before.  The talk is more notable for the large territory of ideas that are excluded from discussion, rather than for the topics that are broached.

For one thing, there is a complete absence of thoughtfulness in Summers’s talk about what could account for the fact that the financial sector needs to loan households vast amounts of money just so that they can afford to buy all of the output they produce. That reality seems passing strange, doesn’t it? Why rising household debt instead of rising household income? Someone who wasn’t bound by the brain-crushing taboos and dogmas of the High Church Neoliberals at an IMF conclave might have asked some tough questions about incomes, power, distribution and exploitation.

Like most macroeconomists, Summers is loathe to look deeply at economic society and its many self-destructive pathologies. He prefers to pin the problem on an inexplicable fall in the probably bogus “natural rate of interest” – which he and others seem to regard as just some kind of brute cosmological constant. The natural rate hypothesis is built on a loanable funds model of credit via financial intermedition, a model which is completely inadequate to the institutional facts of an economic world in which new financial capital is generated by banks in the process of making loans, and where banks do not simply act as intermediaries for contracts involving already-existing capital.

For mainstream macroeconomists, Summers’s kind of thinking counts as “radical”. But these sentiments must be seen against the background of an extremely conservative economics profession and global financial hierarchy whose prime imperative is the protection of private property and established concentrations of wealth, and whose commissioners are ideologically committed to the preservation of autonomous private enterprise capitalism as the driver of economic development and the principle of social order.

Are we facing secular stagnation? It sure looks like it. But stagnation is a social choice, and it is a choice we can reverse. If we have the fundamental potential to make social and economic progress; if making that progress requires the expansion of human enterprise and the employment of unemployed human and material resources; and if the private sector seems persistently incapable of fostering that expansion of human enterprise either at the levels we need or of the kinds we need – then we are perfectly capable of mobilizing our citizenries into public enterprises that can carry out the necessary tasks directly. There is no need to sit around and wait for capitalist firms to get the magic interest rate that will set the tumblers of the vault of economic prosperity into place, and unlock our golden future. Nor is there a need to finance household purchases of the output they, themselves produce through the gaming in a plutocratic casino that generates crushing and destabilizing debts that can’t be repaid. Nor is there any reason to think that without an expansion of public enterprise and the active intervention of democratic government, the future that private firms alone would build is the one we actually need.

The 21st century challenges facing the nation and the globe are vast and daunting, and the social choice we have made in favor of stagnation is a crime against future generations. We have moved well beyond the point where these challenges can be met merely by twiddling further with interest rates, by further indebting households, or by pumping up more predatory financial froth and fluff.

Cross-posted from Rugged Egalitarianism

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9 responses to “Secular Stagnation and Sacred Neoliberal Dogma

  1. “..vaunted as daring and radical by the kinds of people whose thoughts move inside the tiny constipated circles permitted by the global plutocracy”

    Hah! Good one.

  2. Justin Cheasty

    Larry Summers is reiterating Keynes in a later chapter in General Theory. Put another way:

    There’s a full employment ceiling which takes permanent deficits. There’s a bottomed out economy which is where the rate of capital depreciation and the threat of starvation of equivalent economic motivator forces minimum investment levels, promoting a minimum of employment and growth.

    Because interest rates cannot go negative in our economy, we can’t achieve the upper limit of an austerity economy using monetary policy alone (which has been our policy since the Volcker interest rate reset). So inevitably we slide into the zero lower bound “deflationary death spiral” as David Romer lectured it. That death spiral only ends when machines break, cars rust, clothes become threadbare, and people have no choice but to start spending, even at an expected loss.

    Now, Keynes takes to task two people in this chapter. Since I don’t want to lose my current place in my kindle, I’m not going to find it right now. First is the people who are against government correcting for the market’s inability to reach true full employment by itself.

    But the second he takes to task are those who, absent government and choosing between repeated bubbles and not bubbles choose not bubbles. Krugman articulates Keynes in your link: there’s a lot of displeasure with the crashes but ultimately with bubbles there’s simply just more wealth and growth in the short and long runs even if the method is highly, highly suboptimal and causes its own harms. Keynes states that the argument against bubbles in that economy hold only if a completely bottomed out steady state was actually over all better than the damage from the inconsistency of the trade cycle swings. Keynes doubts this, Summers doubts this, Krugman doubts this, DeLong doubts this, and knowing the difference between booms and busts, lower end stagnation (ala Japan), and the theoretical implications of the deflationary death spiral, I doubt this as well.

    Basically Summers is saying that it’s better to suffer economic booms and busts than solve that problem by staying in a perpetual bust. But he’s not saying booms and busts are good, he’s saying we need to solve the problem by attacking low investment (i.e. high unemployment, small deficits) so first things first, let’s not replace bubbles with super-austerity because that’s the wrong direction.

    Or: if you want liquid, fill up the bucket. Bubbles spread are used to spread little bit of liquid far too thin and cause turmoil, but it’s better to have a little liquid spread to the population-bucket in bubbles than it is to get rid of the liquid entirely. (Remember, actual price deflation is not an option).

  3. “what could account for the fact that the financial sector needs to loan households vast amounts of money just so that they can afford to buy all of the output they produce.”

    The financial sector market debt in the form of credit as their product and is in competition with those that sell goods and services. It is a form of social mal-investment of money.

    I am not sure how the natural rate of interest is calculated but it probably is related to the output of land when farmed pre-industrial revolution, about 5-6%. At this rate, the rentier can live comfortably and securely knowing he will be paid back, with the farmer doing the work. We know that NY bankers lent money to plantation owners at a rate of 9%. Jefferson used the cost of money at 6% to determine if his plantation was winning or losing. He kept a keen eye on banks.

    • The natural rate of interest, as that concept is understood by contemporary economists has nothing to some kind of historical or primordial rate of interest, and is understood to fluctuate over time. The way Krugman uses the term, as I understand it, is to refer to the rate of interest in a stable equilibrium condition between the supply of funds available to be loaned and the demand for funds to be borrowed.

      Granted that if there is a financial bubble, that means that some people are engaged in the malinvestment of their money. But what Summers doesn’t explain – but seems to accept is true – is that there can be a situation in which the economy cannot achieve sufficient demand to buy all the products that are produced unless there is a bubble. That seems strange, and needs an explanation.

  4. With respect to bubbles, we can never “demand” our way to full employment; the Chinese can make it faster than we can consume it. During the housing bubble, people were spending borrowed money like crazy with their HELOC. There was no inflation; the Greenspan Conundrum.

  5. Are bubbles then, a la Summers, just overheated sectors (or vortexes) within an economy? If so, why can’t he go macro and see the larger sectors in balance as as they relate to the US place in the world?

    Nice piece, Dan.

    • I was also wondering about how Summers would define “bubble”. I take it that people generally use the term “bubble” to refer to a market in which the assets sold in that market are systematically overpriced, i.e. priced at an unsustainable level above that which the fundamentals of the asset will ultimately support, and in which the price of the asset continues to rise in a way that is driven by speculation, rather than by mere ignorance or rationally derived misinformation. A financial bubble or credit bubble would then be a bubble in which the asset in question is a financial asset.

  6. I don’t think Summers is advocating bubbles. In the aftermatch of GFC there is drive in some circles to rein in financial sector, usually unnecesserily it seems to me. For example Anat Admati is proposing raising capital requirements on banks up to 30%, which means in practice that banks would have to raise tens of trillions of dollars of additional capital. So he is warning us about that drive, because finance is, like it or not, essential part of economic growth.

    In fact, if only you could control asset prices like housing prices there would be no speculative credit money coming in to chase after windfall capital gains. That would be all you would have to do to prevent bubbles, this is Steve Keen’s idea.

  7. Good post Dan

    One thing I think is that not all bubbles are alike. At least the housing bubble involved lots of real activity. You had many people learning and honing building skills. Lots of people remodeling to modernize their homes to keep up with the latest styles (we did our kitchen and bath in a 5 year span) . This was not bad in that lots of people were doing lots of real work. The bad part comes from all the financial stuff that went along with it. The tech bubble of the 90s and other stock market bubbles are very bad unproductive bubbles in my view and can only end in pain. A new housing bubble, if it could simply be translated to a massive Habitat for Humanity type program, without all the Wall St gimmicks that blew up, might be a real positive thing.