Stephen Williamson on secular stagnation

Well, Eggertsson and Mehrotra have fleshed out a theory that they think captures what Summers and Krugman are trying to get at. The Eggertsson and Mehrotra chapter in this volume is a summary of a formal academic paper that I discussed in this post. The gist of that blog post is that Eggertsson and Mehrotra – as with Eggertsson/Krugman, which is closely related – focus on the wrong problem. The key inefficiency in their model arises from a credit friction, but they are focusing their attention on the secondary zero-lower-bound inefficiency that the credit friction creates. Basically, the problem is insufficient government debt, and the solution is straightforward.

There is more here, interesting throughout, for those who find this interesting that is.

Addendum: Scott Sumner has some more practical comments.


"Basically, the problem is insufficient government debt, and the solution is straightforward."

Proof by contradiction?

Yes, that sentence does stand out; but one must admit that governments have indeed found the solution to be straightforward.

"the problem is insufficient government debt": I'd have spluttered my coffee if I'd had any.

Next: the benefits of a huge volcanic explosion in the western US.

"insufficient government debt", and, no doubt, insufficient QEternity, inflation and taxation . . .

I think this is a problem: bubbles are discovered only when they burst.

Ya'll need to read some MMT, and get with the program.

Nope. Sumner.

It's not the shortage of "safe assets" that is so worrying, but the preference for speculation and risk in the quest for higher rates of return that lead to financial instability and crisis. Is there a sweet spot where an adequate supply of "safe assets" will serve as a sufficient incentive to discourage speculation and risk? I'm not convinced. I suspect that it's no better remedy that more education. Williamson says that technological change has caused the increase in the "dispersion of income" (I suppose he can't bring himself to say "inequality") by creating outsized rewards for "innovators". Who are those innovators" of which you speak? Bankers? Hedge fund managers? Quants? Hucksters? Economists? Anyway, increasing "safe assets" is just another way of saying that the concentration of income and wealth is incompatible with robust rates of return on capital and economic growth, that governments must spend more to offset the lackluster output (demand) in the private sector, that governments must borrow to do so because there's no political will for imposing taxes on those with high incomes and wealth in order to mitigate the inequality that is the root cause of "secular stagnation" or whatever one wishes to call it..

"I suspect that it’s no better remedy that more education." Typo?

No! the better remedy is more economists that agree with Kruggie.

Must be great to have all the answers. Why is it you're not rich? Oh right, you're an idiot.

The size of government has nothing to do with the usefulness of government borrowing during an economic downturn. In an economic downturn, government receipts will generally go down. However, increasing taxes or cutting spending both have very negative consequences. Both will reduce spending in the general economy so as to further contract the economy. This can produce Debt-Deflation and/or a prolonged slump as investors will be wary of investing since spenders are wary of spending and/or haven't a whole lot to spend.

A permanent helicopter drop monetary policy will help imply future inflation. This should incentivize investors to risk more now in order not to lose money due to inflation. Remember, doing nothing when the Fed does this is an investment decision, and one that can lose you money if you don't respond well.

Government borrowing can also imply future inflation as government's borrowing can lead to paying higher yields in the future as the debt rises and investors do indeed get more iffy about the safety of their investment. In is in this sense, and in this sense only, that it does not matter what government does with the money. The main benefit of the government borrowing is to reinforce the future implication of inflation brought about by the Fed's policy.

With the borrowed funds, the govt. can:
Give aid to the needy.
Have a payroll tax holiday.
Have a sales tax holiday through aid to the states.
Give tax incentives for more risky borrowing, such as corporate bonds ( investing in businesses )
Hand out a dated credit.
Spend money on infrastructure
Some combination of these policies and more.

Some of these possibilities, such as helping the needy, you are going to do anyway, so the debt will increase no matter what. Better to put it to use reinforcing the monetary plan. As the future unfolds, nothing stops the government from paying it's debt down through taxes and a bit of inflating away the debt. In any case, indefinitely hobbling the economy is a much worse alternative.

The plan I've just outlined was part of the Chicago Plan of 1933, the supporters of which were Keynes (by implication ), Irving Fisher, Henry Simons, Frank Knight, Jacob Viner, and Aaron Director, among others. The Chicago students of these Chicago economists who later praised this plan, if I'm not mistaken, were Milton Friedman, Hyman Minsky, Paul Samuelson, James Buchanan, and Herbert Stein. This is hardly a list of fools.

In 1948, Milton Friedman summarized the plan in "A Monetary and Fiscal Framework for Economic Stability", a paper I hold to still be the best plan we could have. I also believe this plan largely coincides with what Keynes proposed. Now, I can certainly be wrong, unclear, or not reputable enough in what I propose, but I think I have shown that government borrowing during an economic downturn is possibly useful.

This is not obvious. Hoover, etc., who found the idea of borrowing more money when people are already in debt iffy were not silly. It took the economists above to show why government borrowing in a downturn made sense. Thank G-d we had them, because this part of the Chicago Plan was basically adopted and worked.

Donald, the problem I have with Keynesians is that, according to them, we are perpetually in an 'economic downturn'.

Are you aware of any Keynesian economist ever who once said "now would be a good time to cut government spending."? Ever?

Ultimately, this is about the size of government, the main source of 'stagnation' in the first place.

If that's the case, Brian, then I think they are wrong. I also think that they disagree with Keynes.

If you are willing to call Paul Krugman a Keynesian economist - which is surely true - then before the crisis hit he was vocal about the dangers of continued government deficits while the economy was growing strongly.

And one generally finds economists calling for a reduction in the growth rate of spending, rather than absolute cuts. I think that's called a soft landing.

The dude's a politician who never missed a chance to rail against Bush. Also, cutting, or even moderating, government spending was not what he was talking about- he wanted higher taxes and continued growth in government.

Now, Krugman happened to be correct in his critique of Bush, though his motivation was dubious. Today, he is both dubious and incorrect.

It was not "Keynesians" who opposed the Clinton surpasses or pushed for the GWB deficits.

Clinton plus a Republican Congress. Clinton who said he governed farther to the right than he would have preferred. Clinton, who pulled the Democratic Party away from the precipice of irrelevance. Clinton, who said "the era of big government is over." I miss that guy.

Again, y'all are jumping on deficits. The underlying issue is the size of government, and I've never met a Keynesian who didn't think more government would be a bad idea, certainly during a recession, definitely during a 'fragile' or 'weak' recovery, and when things are ticking along nicely, well shrinking government is just plain mean then.

You mean Gingrich, right?
Clinton never submitted a budget that was balanced.

OK, smartass. Let's see what you've got.

Detail, for me, a libertarian minarchist economic plan that salvages and sustains the American middle class, restores breadwinner-level job opportunity across the board (and not just for under-25s, but for all those 35-65s who've learned the hard way in the last decade that their skills and experience are obsolete), and can realistically be accomplished within American political constraints. That is, no bullshit fairy-tale handwaves where the majority of the electorate magically accepts such things as complete entitlement privatization, the philosophy of Ayn Rand in toto, major Constitutional changes such as the repeal of universal suffrage, and/or a long-term drop in living standards to developing world levels.

Why on earth am I asked to sketch out the libertarian vision? I suspect most commenters here consider me some kind of RINO. Like I said above, I liked the Clinton/Gingrich combo. I also liked the Reagan/O'Neill combo. I even kinda liked the Obama/Boehner 2013 combo, despite the wailing and cantankerousness.

As far as what you're asking for, you don't want a libertarian, you want a time machine.

Because you said: "Ultimately, this is about the size of government, the main source of ‘stagnation’ in the first place." That is a libertarian sentiment.

Regardless of the ideological bucket you put it in, I'm not convinced the small government agenda is realistic or achievable under American political constraints. Americans hate government, but they love what it does for them (i.e. entitlements, badass military, etc.). More importantly, most of them don't know how to function without it.

Relatedly, I'm not convinced shrinking government would solve or even significantly mitigate our ongoing economic problems. Provide some desirable efficiencies at the margin? Sure. Scratch the itch of the Rick Santellis of the world? Sure. Restore breadwinner-level job opportunity? Nope. Salvage the middle class? Nope. I've yet to see anyone from the right side of the spectrum convincingly connect the dots between liquidating the U.S. government--gutting DoD, privatizing entitlements, privatizing education, and so on--and a better, more stable and prosperous life for the median American. It boils down to mood affiliation, fairy-tale handwaves, and "get rid of the government, and everything will be awesome because MARKETS!".

You're right I don't want a libertarian. They're too naive and unrealistic. For my part, I'm an American nativist. What I want is results. Until something in the current power structure breaks and breaks completely, I doubt I'll see any.

One last point. To the extent that the monetary policy works, the less money the government will have to borrow for a reinforcing stimulus.

The Secular Stagnation thesis is closely tied to the thesis (that Paul Krugman no less has endorsed) that Japan is not doing so badly, on a per capita basis, when you adjust for their declining population. Governments should stop trying to prop up GDP according to one variant of this story, see R. Koo of Nomura in this excellent slideshow:

To the extent that I understood Koo's presentation, these two posts came immediately to mind:

Great link Donald. Love Sadowski.

I was not impressed by Mark Sadowski's parsing. Sadowski parses Koo's data in a way Koo does not, then concludes, based on this new parsing,that "there’s no obvious relationship between non-financial corporate net worth and non-financial corporate financial surplus". Seems like he's putting words in Koo's mouth, though Mark could be overall correct. Also Sadoski's attempt to say the six cities index cited by Koo, including Tokyo, are not representative of Japan real estate (and the bust) is like saying if Peoria or Milwaukee is not included in a six city US index that includes DC, NYC, LA, CHI, SF, etc then the index is bogus. Not persuasive.

I have not been able to understand if the "Keynesian" (Summers-Krugman) type of stagnation is based on the assumption that faced with the ZLB for short term interest rates monetary authorities are unwilling to provide monetary stimulus in the appropriate amounts by purchasing something other than short term government paper or on the assumption that governments, faced with low interest rates and shadow prices for inputs that are less than market prices will not invest in projects with positive NPV's? Given the experience of the US since 2008 and even more the experience of the Euro zone, both of these assumptions about policy are not unreasonable, but do these models give "secular stagnation" under different policy regimes?

The safe asset shortage story misses one important thing, the thirst for yield driven, not by greedy speculators, but by pension plans that are required to generate annual irrs far in excess of what any developed economy can generate, while at the same time being constrained by regulation to hold largely assets deemed safe. The safety of assets is only part of the story. The other part is the liability side and the structures that transfer value to non- workers and the impact the transfer has on consumption, investment and labor force participation.

What Williamson misses is that pension promises and other non-working entitlements are government debt, directly or indirectly through government insurance (e.g.,PBGC). There is no shortage of government debt when these are reckoned with. The problem is that the growth in this other type of government debt is so much larger than the growth of the productive sector of the economy that its demand for funding crowds out other uses of government debt given the constraint that the productive sector can only service so much government debt.

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