It's good to see Larry Summers continue to press the case on secular stagnation. There are three points worth adding to his account.

First, dealing with bubbles really should not be that hard. The sort of bubbles that actually pose threats to the real economy (e.g. not the bubble in bitcoin prices) are easy to spot. Bubbles like the stock bubble in the 1990s and the housing bubble in the 2000s actually move the economy. It was easy to recognize this fact at the time and it would be easy to recognize the same about future bubbles. For this reason, we should watch for bubbles and be prepared to take steps to stop them before they grow dangerously large, but this is not the impossible task that Summers seems to believe.

Second, one obvious way to help generate demand is through a smaller trade deficit. The route to a lower deficit is a lower valued dollar. This can be done. It was done in the late 1980s with the Plaza Accord leading to a lower valued dollar and a lower trade deficit. The dollar actually has fallen sharply since 2002 leading to the trade deficit being cut almost in half as a share of GDP. We just need to do more of the same.

The third point is that one obvious way to reduce a gap between potential GDP and actual GDP is to reduce potential. If that sounds strange, it speaks to the narrowness of the debate in the United States. On average, workers in the United States put in 20 percent more hours a year than their counterparts in West Europe. The difference primarily takes the form of paid family leave, paid sick days, and paid vacation (six weeks a year is the norm in some countries).

There is no reason that the government can't have policies to promote reductions in work time as a way to address excess potential output. Unemployment is a problem because it leaves many people unable to support themselves and their families. There is nothing obviously wrong with workers enjoying longer vacations or shorter workweeks.

In short, it's great to see an economist with Larry Summers' stature finally recognizing the problem of secular stagnation. It will be more helpful if he can think more broadly about the issue.

 

Note: typo corrected, thanks Joe.

Leave your comments

Post comment as a guest

0
  • No comments found

GuideStar Exchange Gold charity navigator LERA cfc IFPTE

contact us

1611 Connecticut Ave., NW
Suite 400
Washington, DC 20009
(202) 293-5380
info@cepr.net

let's talk about it

Follow us on Twitter Like us on Facebook Follow us on Tumbler Connect with us on Linkedin Watch us on YouTube Google+ feed cepr.net rss feed