Secular Stagnation, Coalmines, Bubbles, and Larry Summers - Paul Krugman - NYTimes.com


Krugman parses Larry Summers recent IMF talk, and finds at the core the hard paradoxes of the postnormal: Secular Stagnation, where the liquidity trap inverts the order of the economic universe.

If you take a secular stagnation view seriously, it has some radical implications – and Larry goes there.

Currently, even policymakers who are willing to concede that the liquidity trap makes nonsense of conventional notions of policy prudence are busy preparing for the time when normality returns. This means that they are preoccupied with the idea that they must act now to head off future crises. Yet this crisis isn’t over – and as Larry says, “Most of what would be done under the aegis of preventing a future crisis would be counterproductive.”

He goes on to say that the officially respectable policy agenda involves “doing less with monetary policy than was done before and doing less with fiscal policy than was done before,” even though the economy remains deeply depressed. And he says, a bit fuzzily but bravely all the same, that even improved financial regulation is not necessarily a good thing – that it may discourage irresponsible lending and borrowing at a time when more spending of any kind is good for the economy.

Amazing stuff – and if we really are looking at secular stagnation, he’s right.

Of course, the underlying problem in all of this is simply that real interest rates are too high. But, you say, they’re negative – zero nominal rates minus at least some expected inflation. To which the answer is, so? If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.

One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits. Another way would be to take advantage of the next boom – whether it’s a bubble or driven by expansionary fiscal policy – to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go theKrugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations.

Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? It’s tyranny!

But in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver – it’s like farm price supports, except for rentiers.

Oh, and one last point. If we’re going to have persistently negative real interest rates along with at least somewhat positive overall economic growth, the panic over public debt looks even more foolish than people like me have been saying: servicing the debt in the sense of stabilizing the ratio of debt to GDP has no cost, in fact negative cost.

I could go on, but by now I hope you’ve gotten the point. What Larry did at the IMF wasn’t just give an interesting speech. He laid down what amounts to a very radical manifesto. And I very much fear that he may be right.

Modern conservatism has become a sort of cult, very much given to conspiracy theorizing when confronted with inconvenient facts. Liberal policies were supposed to cause hyperinflation, so low measured inflation must reflect statistical fraud; the threat of climate change implies the need for public action, so global warming must be a gigantic scientific hoax. Oh, and Mitt Romney would have won if only he had been a real conservative.

It’s all kind of funny, in a way. Unfortunately, however, this runaway cult controls the House, which gives it immense destructive power — the power, for example, to wreak havoc on the economy by refusing to raise the debt ceiling. And it’s disturbing to realize that this power rests in the hands of men who, thanks to the wonk gap, quite literally have no idea what they’re doing.

Paul Krugman, The Wonk Gap

Years of Tragic Waste - Paul Krugman


Krugman isn’t trying to get the Democrats to push hard for additional stimulus, although the logical extension of his ‘back of the envelope calculation’ would lead to that position. Krugman seems totally resigned to a continued stalemate in Washington: where the GOP tells outright lies and the Democrats respond with half truths.

Paul Krugman:

Set aside the politics for a moment, and ask what the past five years would have looked like if the U.S. government had actually been able and willing to do what textbook macroeconomics says it should have done — namely, make a big enough push for job creation to offset the effects of the financial crunch and the housing bust, postponing fiscal austerity and tax increases until the private sector was ready to take up the slack.I’ve done a back-of-the-envelope calculation of what such a program would have entailed: It would have been about three times as big as the stimulus we actually got, and would have been much more focused on spending rather than tax cuts.

'By any objective standard, U.S. economic policy since Lehman has been an astonishing, horrifying failure.'

Would such a policy have worked? All the evidence of the past five years says yes. The Obama stimulus, inadequate as it was, stopped the economy’s plunge in 2009Europe’s experiment in anti-stimulus — the harsh spending cuts imposed on debtor nations — didn’t produce the promised surge in private-sector confidence. Instead, it produced severe economic contraction, just as textbook economics predicted. Government spending on job creation would, indeed, have created jobs.

But wouldn’t the kind of spending program I’m suggesting have meant more debt? Yes — according to my rough calculation, at this point federal debt held by the public would have been about $1 trillion more than it actually is. But alarmist warnings about the dangers of modestly higher debt have proved false. Meanwhile, the economy would also have been stronger, so that the ratio of debt to G.D.P. — the usual measure of a country’s fiscal position — would have been only a few points higher. Does anyone seriously think that this difference would have provoked a fiscal crisis?

And, on the other side of the ledger, we would be a richer nation, with a brighter future — not a nation where millions of discouraged Americans have probably dropped permanently out of the labor force, where millions of young Americans have probably seen their lifetime career prospects permanently damaged, where cuts in public investment have inflicted long-term damage on our infrastructure and our educational system.

Look, I know that as a political matter an adequate job-creation program was never a real possibility. And it’s not just the politicians who fell short: Many economists, instead of pointing the way toward a solution of the jobs crisis, became part of the problem, fueling exaggerated fears of inflation and debt.

Still, I think it’s important to realize how badly policy failed and continues to fail. Right now, Washington seems divided between Republicans who denounce any kind of government action — who insist that all the policies and programs that mitigated the crisis actually made it worse — and Obama loyalists who insist that they did a great job because the world didn’t totally melt down.

Obviously, the Obama people are less wrong than the Republicans. But, by any objective standard, U.S. economic policy since Lehman has been an astonishing, horrifying failure.

And appointing the anti-regulatory Summers as chair of the Federal Reserve would be a perfect capstone for this litany of stupid missteps.

The Myth Of Libertarian Populism, The Dream Of Fluidarity

The GOP is spinning a hopeful tale about a return to dominance in the US, but the demographics are against them in profound ways. They have become — for all intents and purposes — a party divided amongst itself, one that has chased away all the moderates, and has no one in a position to appeal to the center.

Paul Krugman weighs in against their newest fantasy — libertarian populism — which is an effort to sugarcoat the same old pill they have been peddling for years, and somehow use that to pull the so-called “missing white voters” — downscale, rural whites from the North — to come back to the polls and vote Republican. One of the biggest problems is that those missing whites are missing their food stamps, which the GOP is taking away. 

Paul Krugman, Delusions of Populism

More than 60 percent of those benefiting from unemployment insurance are white. Slightly less than half of food stamp beneficiaries are white, but in swing states the proportion is much higher. For example, in Ohio, 65 percent of households receiving food stamps are white. Nationally, 42 percent of Medicaid recipients are non-Hispanic whites, but, in Ohio, the number is 61 percent.

So when Republicans engineer sharp cuts in unemployment benefits, block the expansion of Medicaid and seek deep cuts in food stamp funding — all of which they have, in fact, done — they may be disproportionately hurting Those People; but they are also inflicting a lot of harm on the struggling Northern white families they are supposedly going to mobilize.

Which brings us back to why libertarian populism is, as I said, bunk. You could, I suppose, argue that destroying the safety net is a libertarian act — maybe freedom’s just another word for nothing left to lose. But populist it isn’t.

The true issue is a deep cultural divide between the extreme right GOP and the rest of the country, which ranges from libertarian to liberal. 

The Earth and its resources are treated as spoils by the powerful, who will use all the powers they have to continue the ruinous policies of the past. But the Earth must be reconsidered as a shared commons, and our principal purpose must be to move from the shambles of our current economic and geopolitic systems to a new order, based on sustainability and universal human rights.

However, we are unlikely to see a populist movement, today, in the US, especially among poor whites. One of the impacts of the modern paradox is that most people self-identify with the rich. The American mystique is that we are all middle class, only a few steps away from being a millionaire. This thinking persists in spite of 30 years of increasing inequality and the largest stratification of wealth in the advanced economies of the world. Upward mobility is increasingly a myth.

As a result of craning their necks to look up at the lifestyles of the rich and famous, which fill the magazine covers in the supermarket check-out lines, poor people avoid looking at the people standing beside them, in their neighborhoods. Instead they buy some lottery tickets and dream about what they’d do with a few million. We have no solidarity because we don’t see ourselves as ‘we’. Each American sees themself as an individual, outside of any demographics, ‘temporarily unwealthy’, a future millionaire.

So we aren’t marching, chanting, or demanding work, action, justice.

My hope is that something else, something new could happen. In the industrial age the solidarity of the working class opposed the oligarchy of capitalists. So, in a post-industrial era, can the fluidarity of the precariat oppose those who have made our lives precarious?

We aren’t in a time when class, race, and sex are forgotten. Far from it. But we may find ourselves in circumstances where the foundation of our life on Earth pushes other considerations to one side.

The Earth and its resources are treated as spoils by the powerful, who will use all the powers they have to continue the ruinous policies of the past. But the Earth must be reconsidered as a shared commons, and our principal purpose must be to move from the shambles of our current economic and geopolitic systems to a new order, based on sustainability and universal human rights.

The GOP — even with libertarian populist mumbo-jumbo — are not going to take us there. I am not sure I am hearing that from any Democrats, either. We are hearing only small-bore arguments about divisive issues, and that satisfies the stalling of progress, and that stall is what the powers-that-be are after.

It’s kind of funny, actually: right-wingers love to praise the power of free markets and declare that the private sector can deal with any problem, but then turn around and insist that the private sector will just throw up its hands in despair and collapse in the face of new environmental rules.

Paul Krugman, Invest, Divest and Prosper

Krugman boils down the GOP argument against President Obama’s EPA plans: they have no deep-seated philosophic beliefs other than the powerful should be unfettered by considerations of what is good for the people as a whole. To that end, they wield their ‘conservative’ ideology as a blunt instrument, with no intention of conserving anything aside from the spoils they have stolen from us.

Can innovation and progress really hurt large numbers of workers, maybe even workers in general? I often encounter assertions that this can’t happen. But the truth is that it can, and serious economists have been aware of this possibility for almost two centuries. The early-19th-century economist David Ricardo is best known for the theory of comparative advantage, which makes the case for free trade; but the same 1817 book in which he presented that theory also included a chapter on how the new, capital-intensive technologies of the Industrial Revolution could actually make workers worse off, at least for a while — which modern scholarship suggests may indeed have happened for several decades.

What about robber barons? We don’t talk much about monopoly power these days; antitrust enforcement largely collapsed during the Reagan years and has never really recovered. Yet Barry Lynn and Phillip Longman of the New America Foundation argue, persuasively in my view, that increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.

I don’t know how much of the devaluation of labor either technology or monopoly explains, in part because there has been so little discussion of what’s going on. I think it’s fair to say that the shift of income from labor to capital has not yet made it into our national discourse.

Yet that shift is happening — and it has major implications. For example, there is a big, lavishly financed push to reduce corporate tax rates; is this really what we want to be doing at a time when profits are surging at workers’ expense? Or what about the push to reduce or eliminate inheritance taxes; if we’re moving back to a world in which financial capital, not skill or education, determines income, do we really want to make it even easier to inherit wealth?

Pauk Krugman, Robots and Robber Barons

Krugman is making the economic argument for society demanding more from the corporations on behalf of people. He refers back to this post in his piece today, Sympathy for the Luddites, in which he takes this several steps farther, arguing that more education may not be the answer for the work force being pushed from highly skilled jobs.

Paul Krugman

A much darker picture of the effects of technology on labor is emerging. In this picture, highly educated workers are as likely as less educated workers to find themselves displaced and devalued, and pushing for more education may create as many problems as it solves.

I’ve noted before that the nature of rising inequality in America changed around 2000. Until then, it was all about worker versus worker; the distribution of income between labor and capital — between wages and profits, if you like — had been stable for decades. Since then, however, labor’s share of the pie has fallen sharply. As it turns out, this is not a uniquely American phenomenon. A new report from the International Labor Organization points out that the same thing has been happening in many other countries, which is what you’d expect to see if global technological trends were turning against workers.

And some of those turns may well be sudden. The McKinsey Global Institute recently released a report on a dozen major new technologies that it considers likely to be “disruptive,” upsetting existing market and social arrangements. Even a quick scan of the report’s list suggests that some of the victims of disruption will be workers who are currently considered highly skilled, and who invested a lot of time and money in acquiring those skills. For example, the report suggests that we’re going to be seeing a lot of “automation of knowledge work,” with software doing things that used to require college graduates. Advanced robotics could further diminish employment in manufacturing, but it could also replace some medical professionals.

So should workers simply be prepared to acquire new skills? The woolworkers of 18th-century Leeds addressed this issue back in 1786: “Who will maintain our families, whilst we undertake the arduous task” of learning a new trade? Also, they asked, what will happen if the new trade, in turn, gets devalued by further technological advance?

And the modern counterparts of those woolworkers might well ask further, what will happen to us if, like so many students, we go deep into debt to acquire the skills we’re told we need, only to learn that the economy no longer wants those skills?

Education, then, is no longer the answer to rising inequality, if it ever was (which I doubt).

So what is the answer? If the picture I’ve drawn is at all right, the only way we could have anything resembling a middle-class society — a society in which ordinary citizens have a reasonable assurance of maintaining a decent life as long as they work hard and play by the rules — would be by having a strong social safety net, one that guarantees not just health care but a minimum income, too. And with an ever-rising share of income going to capital rather than labor, that safety net would have to be paid for to an important extent via taxes on profits and/or investment income.

I can already hear conservatives shouting about the evils of “redistribution.” But what, exactly, would they propose instead?

They won’t propose something new: they will — through their actions — set the stage for neo-feudalism, in which the dispossessed become the wards of the nation state, and treated like the mentally-ill or refugees. Meanwhile, corporations will seek to become extranational, outside of national obligations to be taxed or otherwise support any non-globalist economic system. And, or course, they will publicly argue that they aren’t actively doing anything to carve the world into corporate spoils, but if they were such as system is inexorable, beneficial, and inescapable. And in private, they will advance social Darwinist arguments that explicitly state that the elite deserve the status they have earned, and that those dispossessed by this transition deserve their fate. 

Everyone loves a morality play. “For the wages of sin is death” is a much more satisfying message than “Shit happens.” We all want events to have meaning.

When applied to macroeconomics, this urge to find moral meaning creates in all of us a predisposition toward believing stories that attribute the pain of a slump to the excesses of the boom that precedes it—and, perhaps, also makes it natural to see the pain as necessary, part of an inevitable cleansing process. When Andrew Mellon told Herbert Hoover to let the Depression run its course, so as to “purge the rottenness” from the system, he was offering advice that, however bad it was as economics, resonated psychologically with many people (and still does).

By contrast, Keynesian economics rests fundamentally on the proposition that macroeconomics isn’t a morality play—that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that “we have magneto trouble”—i.e., the economy’s troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem. Keynes’s masterwork, The General Theory of Employment, Interest and Money, is noteworthy—and revolutionary—for saying almost nothing about what happens in economic booms. Pre-Keynesian business cycle theorists loved to dwell on the lurid excesses that take place in good times, while having relatively little to say about exactly why these give rise to bad times or what you should do when they do. Keynes reversed this priority; almost all his focus was on how economies stay depressed, and what can be done to make them less depressed.

I’d argue that Keynes was overwhelmingly right in his approach, but there’s no question that it’s an approach many people find deeply unsatisfying as an emotional matter. And so we shouldn’t find it surprising that many popular interpretations of our current troubles return, whether the authors know it or not, to the instinctive, pre-Keynesian style of dwelling on the excesses of the boom rather than on the failures of the slump.

Paul Krugman, How the Case for Austerity Has Crumbled

Real Conservative Reform Would Be Based On Reality, Instead Of Folklore

There’s a great deal of talk about reform in the conservative world, as the GOP scrambles to fight the war on demographics. Paul Krugman sums up the core issue: the abiding unwillingness of the GOP and conservatives to accept reality.

Paul Krugman, The Closing Of The Conservative Mind

Start with the proposition that there is a legitimate left-right divide in U.S. politics, built around a real issue: how extensive should be make our social safety net, and (hence) how much do we need to raise in taxes? This is ultimately a values issue, with no right answer.

There are, however, a lot of largely empirical questions whose answers need not, in principle, be associated with one’s position on this left-right divide but, in practice, are. A partial list:

1.The existence of anthropogenic climate change
2.The effects of fiscal stimulus/austerity
3.The effects of monetary expansion, and the risks of inflation
4.The revenue effects of tax cuts
5.The workability of universal health care

I’ve deliberately chosen a list here where the evidence is, in each case, pretty much overwhelming. There is a real scientific consensus on 1; the evidence of the past few years has been very strong on 2 and 3; there are no serious studies supporting the view that we’re on the wrong side of the Laffer curve; one form or another of UHC [universal health care] operates all across the advanced world, with lower costs than the US system.

So? You could, as I said, take the “liberal” position on each of these issues while still being conservative in the sense that you want a smaller government. But what the “reformish” conservatives Ryan Cooper lists do, in almost all cases, is either (a) to follow the party line on these issues or (b) to hint at some flexibility – and thereby cultivate an image of being open-minded — as long as the issues don’t get close to an actual policy decision, but to always find a way to support the Republican position whenever it actually matters.


being a good liberal doesn’t require that you believe, or pretend to believe, lots of things that almost certainly aren’t true; being a good conservative does.

Today’s conservatives seem like misanthropes: they want to regulate women’s bodies, deny climate change, tell lies about universal health care in other advanced economies, and advocate austerity while we have unsupportably high unemployment and poverty. So, until that crowd ambles off the stage, and a new crop of reality-based conservatives show up to argue the size and scope of the safety net (and related issues, like the size of the military), there is no reform. There is only the cheap marketing trick of slapping a ‘new, improved’ label on the old box of laundry detergent.

And it’s not fooling anyone.

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