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Home Publications Blogs Beat the Press Krugman, Greider, and the Continuing Saga of Sustained Secular Stagnation

Krugman, Greider, and the Continuing Saga of Sustained Secular Stagnation

Wednesday, 09 April 2014 12:50

Paul Krugman continues to delve into the depths of sustained secular stagnation asking about the possibility of a prolonged period where the economy does not self-correct to full employment. In the process he takes a sidestep to tell readers that this is not the secular stagnation story of Bill Greider from the 1990s. This one is worth a moment's thought. (Just to be clear, I consider both Krugman and Greider friends, so I don't have a particular ax to grind in this story.)

Greider hit on a number of themes in this book, but at least part of the story was one of the U.S. trade deficit creating a deficiency in aggregate demand. In properly behaved macro models, trade deficits are supposed to be self-correcting as the value of the deficit nation's currency falls and the values of the surplus nations' currencies rise. This makes imports more expensive to the deficit nation and their exports cheaper to people living in other countries. This leads to fewer imports and more exports and therefore more balanced trade.

But this adjustment has not happened, or certainly has not happened quickly. We can blame evil doers at central banks in other countries who are manipulating their currencies or frightened foreigner investors who think dollar denominated assets are the only safe place to store their wealth. The actual cause does not matter, the point is that the dollar has not fallen to correct the imbalance.

As a result, the trade deficit continued to expand through the late 1990s and into the last decade, eventually peaking at almost 6.0 percent of GDP in 2005. It has fallen back somewhat due to the drop in the value of the dollar, decreased energy imports, and the continuing weakness of the economy reducing the demand for imports. However it is still close to 3.0 percent of GDP. Applying a multiplier of 1.5 this implies a loss of demand equal to 4.5 percent of GDP, or close to $700 billion a year in today's economy.

It is worth comparing the size of this demand loss with the amount that can be plausibly attributed to productivity and labor force growth slowdown in Krugman's secular stagnation story. In that story, we are seeing lower investment than if productivity and labor force growth had continued on their prior track. But how large could that effect plausibly be? Would investment be three percentage points higher as a share of GDP if productivity and the labor force had continued on their prior pace? That would put the investment share above the peak it hit during the dot.com bubble and the Y2K scare. That doesn't seem like a very plausible counter-factual.

In other words, it seems that the trade deficit has to be pretty central in any serious story of long-term secular stagnation, at least as applies to the United States. It has been and is a very big deal.

(As an aside, Krugman asks if we can deal with sustained secular stagnation by running ever larger government deficits. If we are destined to be forever below potential GDP, it's hard to see why not. Aftar all, it's not as though there is any reason to believe that printing the money to finance the deficits would create inflation.)

Comments (16)Add Comment
written by joe, April 09, 2014 2:36
What's your opinion on tariffs? Protecting domestic industry is how all developed countries developed after all... Thomas "suck on this" Friedman's ears would be bleeding if he heard that.

Higher deficits would of course help restore aggregate demand, provided the extra money goes to people with a high propensity to spend. It's not like the govt can run out of money or anything. It all comes back to that accounting identity thing..
written by Chris E, April 09, 2014 2:42
The current account deficit isn't going anywhere as long as the dollar is the world reserve currency.

And a larger budget deficit is precisely what is needed to reach full employment, and the Fed can use any bank it wants to intermediate whatever funding is needed at whatever price is acceptable to "finance" the deficit.

Japan already knows that national debt doesn't matter for monetary sovereigns, it is about time the West learn as it becomes Japanese.
Trade Deficit = Credit Exports = Bubble Feature
written by Sustainable Gains, April 09, 2014 5:49
The U.S. trade deficit is a key link in the global credit bubble. The "trade deficit" is identically viewed as the "exporting of credit" in the form of U.S. dollars. As the supply of dollars overseas has increased, major trading partners have chosen to join the U.S. in creating large credit bubbles of their own. They prefer that rather than having their currencies appreciate vs. the U.S. dollar. Most major economies now have aggregate credit-to-GDP ratios well above historical norms.

The U.S. could take policy steps to suppress the trade deficit by better balancing the domestic accounts (e.g. reduce the federal deficit, tighten credit production in other ways), but these would also reduce corporate profits and are therefore politically unpalatable.

However, the trade deficit numbers themselves are highly suspect, since the values being reported are gamed by corporations seeking to avoid taxes by sheltering profits (credit, dollars…) overseas. So another approach to balancing out the trade deficit and reducing the international credit imbalance would be to simply fix the corporate tax code to repatriate the dollars…
written by bobs, April 09, 2014 6:08
I know name-calling comes naturally to economists, but when Krugman called Greider the writer of a "thoroughly silly book," my confidence in economists plummets. Instead of latter-day Newton and Einstein, I find they are just schoolyard bullies (with the notable exception of Dean Baker).

And now we find that the Nobel laureate was essentially wrong and Greider essentially right. So much for the "science" of economics...
Royal Majesty
written by Blase, April 09, 2014 7:20
Krugman was in favor of globalism. But of course, so conveniently, he now says he's not in favor of the outcomes of globalism because it wasn't done right. He should have been more specific. He was in favor of the fantasy globalism that was pure la la land. Where as, those contentious towards globalism objected to the reality of it. So the Nobel Laureate just came out in favor of it without specifying which one he was in favor of. Was he paid by the globalists to perpetrate this conflation? I'm sure the Princeton Trust Fund made a lot of money off globalism.

But hey. Some millions of Chinese were lifted out of poverty. That's what's fueling global climate change. But hey.
global inequality
written by Ken Schulz, April 10, 2014 12:09
Certainly some part of the problem is that too large a share of our expenditures on imports goes to oil sheikhs, oligarchs, and 'princelings' who stash too much of it in unproductive assets. If foreign workers received their fair share of the value they produce, they might otherwise be buying goods and exportable services from us (higher propensity to consume). Millions of Chinese may have been lifted out of abject poverty, but millions still work 60-hour weeks for a pittance, and are denied representation by independent unions.
Give Main St money to spend.
written by Ralph Musgrave, April 10, 2014 5:47
Dean says "it's not as though there is any reason to believe that printing the money to finance the deficits would create inflation". True, but try explaining that to a politician. You'd have more luck explaining the theory of relativity to snail.
written by Kat, April 10, 2014 6:15
he now says he's not in favor of the outcomes of globalism because it wasn't done right

Isn't this stock -in -trade of NYT opinion writers? Substitute fracking, charter schools, or invading nations-- all fine and good if "done right". (Also fine and good if you don't suffer any of the consequences.)
Deficient Demand on a Global Scale
written by sherparick, April 10, 2014 6:26
I agree with you as far as the United States is concern that it would be better to have a nice 20% decline in the dollar, which would encourage both exports and import substitution, and in doing so encourage domestic investment in industries and services. But for the overall global economy (and Krugman, who cut his chops as an International and Trade economist still thinks in his bones along those lines), the U.S. would be doing what China, Germany, and Japan do, exporting their unemployment by importing part of another country's aggregate demand. Someone, somewhere, either through private consumption or public consumption, or through private investment or public investment, has to soak up the surpluses of capital, labor, and production that currently glut the global economy and which as slowed the velocity of money to a crawl. If we did not have an insane Republican Party in this country, along with a generally insane global Conservative movement, I could think of a large number of projects and areas where the return on public investment (with spin off private investment) would be large. Instead, our children and grand-children, and great-grandchildren will be dealing with both an increasing ecological catastrophe and infrastructure built in the 19th and 20th century going to ruin, as Rome's did when the barbarians took over. the s' .
written by jamz, April 10, 2014 9:58
as a non-economist i am puzzled by the term "secular" stagnation

i understand the word secular as "denoting attitudes, activities, or other things that have no religious or spiritual basis."

with synonyms such as: nonreligious, areligious, lay, temporal, worldly, earthly, profane;

how did the word "secular" get attached to stagnation and what does it connote...
written by skeptonomist, April 10, 2014 10:19
The situation in the early 90's was that China among other countries was suddenly opened up to capitalism and there were vast new reservoirs of cheap labor. This is not exactly what textbooks' "properly behaved macro models" describe - they are usually set up for fairly similar countries. Dean does not seem to realize that if currency revaluation could instantly wipe out the trade imbalances it would tend to instantly wipe out real wage differentials, dropping US workers toward the standard of living of Chinese workers (of course other factors besides wage costs are involved). Currency valuation is a means of carrying out real-wage and other adjustments, not a means of avoiding them.

US workers want to be able to preserve their own standard of living while not preventing the developing nations from improving their standard of living - they don't want world-wide real wages to be instantly flattened. This preservation is quite possible because overall productivity increases, but it is not something that occurs automatically through currency adjustment.
Secular Stagnation
written by Tyler Healey, April 10, 2014 11:09
Secular stagnation occurs in America when 50 million Americans are living in poverty. Moving said Americans out of poverty would end secular stagnation.
What is secular about stagnation?
written by Golfer1john, April 10, 2014 11:37
In this context, secular refers to economic trends that span multiple cycles. Secular stagnation says that GDP is basically flat over the course of several boom and bust cycles.
Is this a joke?
written by Auburn Parks, April 10, 2014 7:13
"Paul Krugman continues to delve into the depths of sustained secular stagnation asking about the possibility of a prolonged period where the economy does not self-correct to full employment."

In what universe would one delve in secular stagnation and not see the most obvious truth there is, the economy's natural state is not full employment, so there is no such things as self-correct. This is a mainstream neo-liberal fantasy.

Since 1980 (33 yrs) only 10 have coincided with unemployment near or below 5%, thats less than 30% of the time at what is a right wing conservatives notion of full employment. 5%...thats just embarrassing. Furthermore, all three of these peaks in the cycle have come at the tops of giant private debt bubbles. And now that private debt levels have gone from 50% to 300% of GDP, where is the next bubble going to come from.

How can you be a so-called liberal and make such ridiculous statements?
Devaluing Our Currency Cannot Possibly Lower our Wages to Chinese Levels
written by Dean, April 12, 2014 9:55

we still produce 84 percent of what we consume here. Suppose that the price of the dollar fell by 50 percent, so that all our imports now cost twice as much. If there were no other changes in the U.S. economy (there would be -- we would have full employment -- also import prices would not double as companies cut profit margins to preserve market share), then real wages would have declined by around 16 percent. They are still hugely higher than China's.

As long as we have an economy that is far more productive than China's there is no remotely plausible devaluation of our currency that is going to bring our real wages down to Chinese levels.
Cause of the trade deficit
written by Pete Murphy, April 13, 2014 7:50
The U.S. trade deficit has not self-corrected as economists predicted because global trade imbalances have nothing to do with currency valuations. They are driven almost entirely by the inverse relationship between population density and per capita consumption - a relationship yet to be acknowledged by the field of economics.

People living in overcrowded conditions consume less because of a lack of space available to utilize space-intensive products. They live in smaller dwellings because there is no room for anything larger. (Think Japan.) They eschew automobiles in favor of mass transit because their roads are choked with traffic and there is nowhere to park. Their smaller homes have room for less furniture and appliances. Apartment-dwellers have no need for lawn and garden equipment. And so on.

When two nations grossly disparate in population density attempt to trade freely with each other, the work of manufacturing is spread evenly across the combined labor force. But the disparity in per capita consumption remains. The result is inescapable - a trade deficit and loss of jobs for the less densely populated nation. This is precisely why the U.S. suffers persistent trade deficits with badly overpopulated nations like Japan, Germany, China, South Korea, Taiwan and a host of others. The problem is that such nations consume far too little and are utterly dependent on manufacturing for export in order to sustain their bloated labor forces.

Our trade deficit will persist forever unless we reclaim the right to manage trade in our own best self-interest and return to the use of tariffs to assure a balance of trade.

Pete Murphy
Author, "Five Short Blasts"

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.