Belmont Club

Bewitched, becalmed, bewildered

Try burying the car and digging it up again

In the first decade of the 21st century Western economic growth entered the doldrums. The question was why.  Former Harvard president Larry Summers noticed that something changed after the 2008 financial meltdown.  The economic spring which had always bounced back had lost its elasticity.  He diagnosed it as secular stagnation.

As surprising as the recent financial crisis and recession were, the behavior of the world’s industrialized economies and financial markets during the recovery has been even more so.

Most observers expected the unusually deep recession to be followed by an unusually rapid recovery …. Had the American economy performed as the Congressional Budget Office fore­cast in August 2009—after the stimulus had been passed and the recovery had started—U.S. GDP today would be about $1.3 trillion higher than it is.

Almost no one in 2009 imagined that U.S. interest rates would stay near zero for six years, that key interest rates in Europe would turn negative, and that central banks in the G-7 would collectively expand their balance sheets by more than $5 trillion. Had economists been told such monetary policies lay ahead, moreover, they would have confidently predicted that inflation would become a serious problem—and would have been shocked to find out that across the United States, Europe, and Japan, it has generally remained well below two percent.

The existence of this beast had been mooted for some time.  But many economists doubted the animal actually existed.  Paul Krugman, whose solution to low growth is government spending was disturbed by Summers thesis that stimulus spending was not working this time.  Krugman wrote “the radical part of Larry’s presentation [is] his suggestion that this may not be a temporary state of affairs.” To a man who believed that economies could be stimulated by burying money in coal mines or defending against fake invasions by space aliens this was a shattering possibility.

This is the kind of environment in which Keynes’s hypothetical policy of burying currency in coalmines and letting the private sector dig it up – or my version, which involves faking a threat from nonexistent space aliens – becomes a good thing; spending is good, and while productive spending is best, unproductive spending is still better than nothing….

[But] Larry explicitly invokes the notion of secular stagnation, associated in particular with Alvin Hansen … Think of it this way: during the period 1960-85, when the U.S. economy seemed able to achieve full employment without bubbles, our labor force grew an average 2.1 percent annually. In part this reflected the maturing of the baby boomers, in part the move of women into the labor force. …

Now look forward. The Census projects that the population aged 18 to 64 will grow at an annual rate of only 0.2 percent between 2015 and 2025. Unless labor force participation not only stops declining but starts rising rapidly again, this means a slower-growth economy, and thanks to the accelerator effect, lower investment demand. …

Back in the day, Hansen stressed demographic factors: he thought slowing population growth would mean low investment demand. Then came the baby boom. But this time around the slowdown is here, and looks real.

Intrigued, Krugman asked why all five trillions didn’t produce inflation, which would surely occur if supply did not rise to meet demand. He realized it was because consumers perversely saved it, something he calls “destructive virtue”, instead of splurging it all at the store in constructive vice, thus keeping it out of circulation. It’s a situation that cried out for rectification, either by penalizing savings or hoping for profligacy.  “One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits.” The other way might be to avoiding discouraging “irresponsible lending and borrowing at a time when more spending of any kind is good for the economy.”

This may sound outrageous to the layman but it is all in a days work in a discipline where burying currency in coalmines and faking threats from space aliens is good policy.  “There may be other factors,” he admits, “– a Bob Gordonesque decline in innovation, etc..” but that remote possibility is off the beaten track.  Robert Gordon is a Northwestern University economist who argues factors other than those considered by Krugman might be responsible for secular stagnation, namely demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt.

Summers and I are talking about different aspects of the current US growth dilemma. His analysis concerns the demand side, “about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential”. In contrast, my version of slow future growth refers to potential output itself. …

The sources of slow growth do not involve technological change, which I assume will continue at a rate similar to that of the last four decades. Instead, the source of the
growth slowdown is a set of four headwinds, already blowing their gale-force to slow economic progress to that of the turtle. These four barriers to growth are demographics, education, inequality, and government debt. These will reduce growth for real GDP per capita from the 2.0% per year that prevailed during 1891-2007 to 0.9% per year from 2007 to 2032. Growth in the real disposable income of the bottom 99% of the income distribution is projected at an even lower 0.2% per year.

The most striking feature of Gordon’s analysis is his prediction growth in the real disposable income of the bottom 99% will only be 0.2% per year.  If this proves true it means the saga of rebels against the elite, of flyover country contra Wall Street far from ending has only just begun.  While the secular stagnation debate lines do not neatly correspond with the boundaries of Republican vs Democrat, they do explain the political rebellion of 2016 uncommonly well.  Both political parties are designed to address the problem of social redistribution in an era where the unacknowledged crisis may be stagnation.

The Economist’s special report suggesting those who hope politics will “return to normal” soon after Donald Trump “will have a long wait” is a belated acknowledgement that more than mass hallucination and collective insanity was responsible for the last presidential election shock results.  If real underlying factors are driving discontent and the old nostrums — as Larry Summers astutely notes — no longer operate as they once did the quickie fixes of the liberal project, especially its drift to the left will not only be ineffective but doomed.

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Support the Belmont Club by purchasing from Amazon through the links below.


Moonwalking with Einstein: The Art and Science of Remembering Everything, by Joshua Foer. This book recounts Foer’s year-long quest to improve his memory under the tutelage of top “mental athletes.” He draws on cutting-edge research, a surprising cultural history of remembering, and venerable tricks of the mentalist’s trade to transform our understanding of human memory. From the United States Memory Championship to deep within the author’s own mind, his journey reminds us that, in every way that matters, we are the sum of our memories.

Magnum! The Wild Weasels in Desert Storm: The Elimination of Iraq’s Air Defence, by Brick Eisel and James Schreiner. This book is based upon a journal Schreiner kept during his deployment to the Persian Gulf region for Operations Desert Shield and Desert Storm. Building on that record and the recollections of other F-4G Wild Weasel aircrew, the authors show a slice of what life and war was like during that time.

Make: Electronics – Learning Through Discovery (2nd edition), by Charles Platt. This book is billed as a “hands-on primer for the new electronics enthusiast”. Second-edition additions include: photographically precise diagrams of breadboarded components, to help you build circuits with speed and precision; a new shopping guide and a simplified range of components to minimize your investment in parts for the projects; a completely new section on the Arduino that shows readers how to write properly structured programs instead of just downloading other people’s code. Full color is used throughout.

For a list of books most frequently purchased by readers, visit my homepage.

Did you know that you can purchase some of these books and pamphlets by Richard Fernandez and share them with your friends? They will receive a link in their email and it will automatically give them access to a Kindle reader on their smartphone, computer or even as a web-readable document.
The War of the Words, Understanding the crisis of the early 21st century in terms of information corruption in the financial, security and political spheres
Rebranding Christianity, or why the truth shall make you free
The Three Conjectures, reflections on terrorism and the nuclear age
Storming the Castle, why government should get small
No Way In at Amazon Kindle. Fiction. A flight into peril, flashbacks to underground action.
Storm Over the South China Sea, how China is restarting history in the Pacific
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