has contributed to a new book with others on the topic of secular stagnation that is free to download on VoxEU.org. Here’s the list of contributors:
Laurence H Summers
Robert J Gordon
Edward L Glaeser
Olivier Blanchard, Davide Furceri and Andrea Pescatori
Ricardo J Caballero and Emmanuel Farhi
Gauti B. Eggertsson and Neil Mehrotra
Richard C Koo
Guntram B Wolff
Juan F. Jimeno, Frank Smets and Jonathan Yiangou
I just heard about it and haven’t gotten to the details of it. I did see this brief quote from the section by Guntram B. Wolff (Page 157), however, that was provided in the comments section of Scott Sumner’s blog by Patrick Sullivan (link to the book is included therein – emphasis is mine):
The persistence of low Eurozone inflation undermines private and public debt sustainability – especially in the periphery where the overhang is greatest. However, since bubbles and unsustainable borrowing supported demand before the Global Crisis, this chapter argues that higher inflation cannot be a permanent cure for secular stagnation. Instead, a targeted quantitative easing programme and increased public investment would help rebalance Eurozone demand. At the global level, population growth in Asia and Africa will provide ample investment opportunities if they can be
fully integrated into the world economy.
I used to think that Keynesians just had a different language for communicating ideas that we have in common. But this paragraph seems more problematic than just a language barrier. Because if bubbles and unsustainable borrowing are really the problem, then why the laser-beam-like focus on interest rates when credit aggregates are only one half of the monetary policy formula, and maybe not even deserving of that much weight? I don’t get it.
At a high level I agree that higher inflation is not what we really want for a permanent cure for secular stagnation. What we really need is stable nominal income growth. But I find the entire sentence in bold face rather peculiar because I am not sure what borrowing and bubbles have to do with inflation, especially after the graph I made of the FF rate and growth in consumer debt since 2000 showing that the Fed rate tracks growth or attenuation of consumer debt, not the other way around. Match that to core PCE for the same time frame and the sentence makes absolutely no sense. Sustainability of debt is an open question given that nominal instability has a lot to do with creating the appearance of unsustainable debt.
So if we have this crazy situation that monetary aggregates are neglected in favor of credit aggregate management only along with a rather zealous inflation targeting regime that bakes reasoning from a price change as THE guiding principle into policy formation, then we’re bound to have what looks like unsustainable debt as inevitable negative supply shocks hit the economy – a non-monetary problem. If we expect to have the fractional reserve system provide liquidity (people borrowing money) and also have incoherent monetary policy responses to negative supply shocks, we’re just asking for very frequent bust cycles – bust cycles sans the boom because policy becomes tighter as prices are rising, not looser as they are falling. After several decades of this, we’ll be quite far behind in income growth from where we thought we were heading because there is no makeup. We’re talking permanent loss with no reasonable way of forecasting when they will happen.
This stuff, what disinflation does to the burden of debt and nominal incomes is not rocket science. If you have a contract to repay a bank $10, you still have to pay them $10 regardless of whether the value of the dollar has appreciated 100% since you made the contract. And of course, your pay check adjusts to the new reality (at least somewhat, you don’t get the raises you thought you would and you have the same bills to pay), but the contract doesn’t adjust and you have to pay the equivalent of $20 at the new value. That smarts. But it is the essence, I think, of what these guys label “secular stagnation” as the use of credit aggregate management to provide liquidity services comes back to pretty much suck up some percentage of liquidity provided in the years before the disinflation due to nominally rigid contracts against a backdrop of central banks with inflation-o-phobia.
It’s particularly puzzling why I can see that the current monetary policy framework is unworkable and unlivable and these guys don’t. If the monetary policy framework is the culprit, the kingpin in “secular stagnation,” rationalizing the framework, from my point of view, would be the primary solution to majority of the problems. It’s sad that these guys just simply dismiss the solution that is hiding in plain sight.
TravisV caught me being sloppy. It wasn’t my intent to attribute the quote in this post to Krugman. I knew from the comment on Sumner’s blog page where I got the information that the book is a collective effort, but I did not know who wrote the quote in question. I’ve gone back and downloaded the book to take a look.
It’s correct that Krugman did not write it. And while still don’t intended to assume guilt by association, the introduction of the section that was actually written by Krugman goes like this:
I was very annoyed when Larry Summers made a big splash talking about secular stagnation at the IMF’s 2013 Annual Research Conference – annoyed not at Larry but at myself. You see, I had been groping toward more or less the same idea, and had blogged in that general direction (Krugman 2013) – but it wasn’t forceful, and Larry rightly gets credit for making the topic a front-burner issue.
The larger point, of course, is that if you’re following events and looking at the data it’s actually quite natural to raise once again the concerns Alvin Hansen raised 65 years ago, when he worried that low population growth would produce a situation of persistently inadequate demand. In what follows, I’ll lay out four reasons why secular stagnation deserves the buzz it’s now getting.
And the next quote from observation 4:
Start with monetary policy. The most persuasive story about how monetary policy can work at the zero lower bound is that it can gain traction if you can convince the public that there has been a regime change, that the central bank will maintain expansionary monetary policy even after the economy recovers, in order to generate high demand and some inflation. As I put it a long time ago (Krugman 1998), the central bank must “credibly promise to be irresponsible”.
But if we are talking about Japan, exactly when do we imagine that this period of
high demand, when the zero lower bound is no longer binding, is going to begin?
And now we are talking seriously about secular stagnation in Europe and the US as well, which means that it could be a very long time before ‘normal’ monetary policy resumes. Now, even in this case you can get traction if you can credibly promise higher inflation, which reduces real interest rates. But what does it take to credibly promise inflation? It has to involve a strong element of self-fulfilling prophecy: people have to believe in higher inflation, which produces an economic boom, which yields the promised inflation. A necessary (though not sufficient) condition for this to work is that the promised inflation be high enough that it will indeed produce an economic boom if people believe the promise will be kept. If it is not high enough, then the actual rate of inflation will fall short of the promise even if people do believe in the promise, which means that they will stop believing after a while, and the whole effort will fail.
This is a bit weird given that the “liquidity trap” isn’t real, and I’m surprised that after the results of QE3 and fiscal tightening of 2013 are in, Krugman is still talking about it.
All in all, I’d say that it probably doesn’t matter if the quote that was the topic of this post was attributed to Krugman or not. He says almost nothing to dispell the substance of it and what he does write about monetary policy is on the nebulous side of iffy.