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Home Publications Blogs Beat the Press Krugman on Bubbles and Secular Stagnation

Krugman on Bubbles and Secular Stagnation

Thursday, 26 September 2013 04:49

Paul Krugman has some interesting thoughts on the possibility that the U.S. economy might have a serious problem with secular stagnation that has been remedied in large part over the last two decades by bubble generated demand. This is old hat to some of us, but it's great to see Krugman pursuing this line of thought.

There are two points worth adding on the topic. One important component of demand that has been big-time in the negative category in the last 15 years is net exports. This represents a serious failure of the international financial system. The old textbook story is that capital is supposed to flow from slow growing rich countries to fast growing poor countries where it can receive a higher rate of return and assist these countries in their development. 

The textbook story has never fit the data very well (net capital flows have often been in the opposite direction), but the flows from poor to rich have been especially large in the years following the East Asian financial crisis. The harsh treatment by the I.M.F. of the countries in the region (yes, this was the bailout led by the Committee to Save the World) led to a sharp increase in the accumulation of foreign exchange reserves (i.e. dollars) by developing countries. Countries in Latin America, Asia, and Africa suddenly began to accumulate as much reserves as possible with the idea that this would protect them against ever being in the situation of the East Asian countries.

That led to a large rise in the value of the dollar and a big increase in the size of the U.S. trade deficit. The trade deficit in turn led to a big gap in demand that was filled at the end of the 1990s by the stock bubble and in the last decade by the housing bubble. (A trade deficit means that income generated in the United States is being spent in other countries instead of the United States.) There may well be a problem of secular stagnation even if trade were closer to balanced, but the huge expansion of the trade deficit in the last 15 years clearly aggravated the problem considerably.

The other factor that should be kept in mind is that potential GDP or full employment is not exactly a fixed point in space. One of the big factors that determines the potential level of output is the average number of hours worked per worker. In places like Germany, the Netherlands, and France, the average work year has roughly 20 percent fewer hours than in the United States. This means that to produce the same output, these countries would need  20 percent more workers. (That assumes equal productivity per hour, which is pretty close to being the case.) 

There is both a short-term and long-term story here. In the short-term we can employ more workers to produce the same amount of output by promoting work sharing type policies to encourage companies to reduce work hours rather than lay off workers in response to a decline in demand. Such policies have been pursued aggressively by Germany which is the main reason that its unemployment rate has fallen by 2.5 percentage points since the beginning of the downturn while the U.S. unemployment rate has risen by almost 3.0 percentage points even though growth in the two countries has been almost identical. (Germany has slower labor force growth, which is another big factor.) 

The United States has a work sharing option in the unemployment insurance system in more than half of the states, but the take-up rate is very low, largely because employers don't know about it. This is unfortunate, especially since the federal government will pick up the tab for state work sharing programs through 2014.

While the short-term story can be thought of as redistributing unemployment, the longer term picture is more interesting. Over the last three decades, workers in most European countries have taken much of the gains of productivity growth in the form of more leisure. This means 4-6 weeks a year of paid vacation, paid family leave and sick days, and in at least one country, 35 hour work weeks.

These forms of leisure have been integrated into these countries' social structures in the same way as the weekend is taken for granted in the United States. People in Europe do not think of themselves as being partially unemployed because they work less than 1500 hours a year. In addition to creating a situation where more people are employed at the same levels of output, these types of leisure also allow for better work-family balances and more environmental-friendly life styles.

In principle, secular stagnation is a story of wealth, not poverty. It means that we are capable of producing more goods and services than we are actually using. It is an incredible indictment of our economic system that it can lead to the sort of suffering we saw in the Great Depression and are seeing again today.


Comments (13)Add Comment
Is Secular Stagnation a self-fulfilling prophecy for America?
written by Robert Salzberg, September 26, 2013 6:41
Dr. Krugman was stuck on a train from NYC to Boston this week due to a power line problem that is now reported to requiring weeks to repair. The Boston to NYC train line is one of the most used in America.

Clearly there is greater need for investment in railways in the NYC to Boston line yet our trains lag behind decades behind the rest of the world. China's high speed rail now carries more passengers than our airlines do.

Here in Florida, our governor rejected billions in Federal funds to build high speed rail. The system would have eventually connected Tampa, Orlando and Miami in a triangle. More tourists from the EU and Asia would come if the lines were built and businesses around the train stations would multiply.

If you build it, they will come. I'm taking the auto train in a couple of weeks from Lorton (outside of DC) to Sanford (outside of Orlando) which is the longest running auto train on the planet.

We have a $2 trillion infrastructure deficit. We have trillions more in underinvestment in education from pre-K to graduate school in this country. We have job shortages throughout the medical field with many medical professionals working many more hours than they would like. We have too few colleges and universities producing too few medical professionals at a time when the field is expanding and adding access to healthcare to millions more due to Obamacare.

We also have trillions that need to spent to save the planet by building a space weapons program to deflect the asteroid that will inevitably destroy our civilization unless we stop it. We need trillions more to develop nuclear fusion.

We don't have lack of good investment opportunities but we do have a political system that has been starving investment from floor to ceiling in America for decades that has created wealth disparities that create a lack of demand.

Our poor infrastructure also repels international investment that is being spent more productively elsewhere.

More Vacation!!!!!
written by bakho, September 26, 2013 7:02
Some employers offer new employees only 10 days which increases with length of employment.
written by Squeezed Turnip, September 26, 2013 7:49
To add to Robert's comment, here in Texas the state has decided to stop paving some roads. Don't let Rick Perry's glasses fool: you he's not smart, just short sighted, like the rest of the Tea Party.
written by LSTB, September 26, 2013 8:37
Krugman's post was odd because two years ago he said that the trade deficit falsified secular stagnation theory (http://krugman.blogs.nytimes.c...tagnation/):

(W)hy do we find it so hard to achieve full employment even with saving somewhat low by historical standards(?) (T)he answer seems clear: it’s the trade deficit. America in the 70s and 80s could have high savings, not hugely strong investment, but still have full employment because trade deficits weren’t as large compared with the economy as they are now.

And this in turn means that the savings glut possibly making the natural real rate negative is actually originating abroad, not at home.

Do you sort of see why I’m a hawk on China policy?
written by skeptonomist, September 26, 2013 8:47
As a long-time supporter of "free" international trade, Krugman is blind to the problems it has caused for the US, and Dean is right to bring these up. The decline of the US position from what it was after WW II is partly natural and inevitable, as formerly third-world countries industrialize. Manufacturing in the US has steadily declined since the 50's


This is not something that was caused by currency valuation (note that the decline precedes the breakup of Bretton Woods), nor could it be counteracted completely by it. US government policies have permitted US capitalists to take advantage of cheap world labor, bringing US workers in competition with those whose standard of living is much lower. Other governments take better care of their workers - they are not so dominated by the profits of capitalists.

Eventually there should be a slowdown of this international readjustment. Wages in China anyway have increased tremendously, and China and other countries will be less reliant on US demand.
Great Post, Just One Quibble: It's Sectarian, Not Secular
written by Last Mover, September 26, 2013 9:10
In principle, secular stagnation is a story of wealth, not poverty. It means that we are capable of producing more goods and services than we are actually using. It is an incredible indictment of our economic system that it can lead to the sort of suffering we saw in the Great Depression and are seeing again today.

This is a well written blogpost by Dean Baker which captures in a few paragraphs seemingly unrelated economic forces into one seamless explanation of how they (can) work together to produce full employment.

There is only one quibble. The word "secular" is misspelled. It should be "sectarian stagnation" to reflect the United States of America suffers from sectarian stagnation, not secular stagnation.

In America, in contrast to other developed nations, economics has been transformed into a religion. Not a science, not a hard science or soft science, not a social science.

A religion of sectarian believers in Darwinian socialism and economic predators who keep screaming America is marching down the same path of serfdom European socialism like Germany, which produces full employment, more leisure time and high productivity all at the same time.

Yes the sectarians will say, America is capable of producing more goods and services than it is consuming. But it sure as hell has nothing to do with negative net exports, burst asset bubbles and concentrated wealth does it. No sireee, it's those goddamn entitlement programs and exploding debt isn't it.

And for such venal economic sins America, it is perfectly appropriate to take the Lord's name in vain, isn't it.
written by Joe, September 26, 2013 9:56
Why the export fetish? In real terms, net exports are bad. Why should we labor to produce stuff we don't get to consume. Doesn't make sense.
What about Australia?
written by Frank, September 26, 2013 10:02
Great piece Dean; this is an interesting topic to explore.

Counter-example to your thinking though: Australia has run trade deficits forever, but no one ever brings it up as a society going through secular stagnation...

Profits From Speculation
written by Ellis, September 26, 2013 10:03
What economists argue about is how to control the incredible flow of speculative money. For example, five trillion dollars are traded every day just on currency exchanges. That is about 100 times larger than actual world trade. What economists never bother to ask is why the financial sector has grown to be so large in the first place.

That is, economists never call into question how absolutely irrational capitalism has become.
written by AlanInAZ, September 26, 2013 10:19
Building on Robert Salzburg's post I would like to add expansion of our wind and solar power generation as worthy investments to spur employment. Brad Plumer had a piece today in the WaPO on the feasibilty of going as high as 35% from wind and solar in the western US.

written by AlanInAZ, September 26, 2013 11:39
Some thoughts on the virtues of more idleness, from the Economist (and Bertrand Russell).

written by watermelonpunch, September 26, 2013 12:40
@ bakho Many employers offer new employees NO paid vacation days nor sick days... Even some employees employed by states' government have to wait 6 months to get a paid sick day or a paid national holiday.

There are also many public & private employers who require employees work EVERY weekend.
Only well off people would take "weekends" as a given in the U.S.

I think it's much worse than Dean Baker realizes in that sense. We're so far from the luxuries ordinary Germans enjoy you can't even compare the 2 countries, IMHO.
written by bentsn, September 27, 2013 10:13
In the longer term trade deficits are exacerbated by low productivity making countries less competitive. In the US very high medical costs and inefficient transportation systems certainly contribute to our trade deficits by increasing the cost of doing business here in the US. Single payer health care and high speech rail could do wonders for US competitiveness and the the trade deficit.

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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.