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Home Publications Blogs Beat the Press Larry Summers versus John Taylor Should Not Be a He Said, She Says

Larry Summers versus John Taylor Should Not Be a He Said, She Says

Monday, 06 January 2014 08:36

That's because Larry Summers is right and John Taylor is just obscuring reality. The NYT did a disservice when it reported on Larry Summers' concern for a period of secular stagnation that predated the downturn and then gave Taylor's response:

"If Mr. Summers’s theory is accurate, said John B. Taylor, a Stanford economist who served in Republican presidential administrations, 'You would have expected the economy to not have been working so well before the crisis. He says it wasn’t. I say it was.'

"Mr. Taylor said that such measures as inflation, housing investment and unemployment showed a strong economy leading up to the crisis."

Actually the story of secular stagnation is totally consistent with one where growth can be temporarily spurred by a housing bubble. The growth created by the bubble can bring down unemployment and raise output to near capacity, but it is not sustainable. There is nothing that Taylor said that is in anyway inconsistent with a story of secular stagnation.

Comments (17)Add Comment
Why is it called a "financial crisis"?
written by Ellen1910, January 06, 2014 9:56
Shouldn't it be called a "debt crisis"?
written by TK421, January 06, 2014 10:24
If only there had been something Larry Summers could do to stop the economy from stagnating.
I don't think so, ellen1910
written by ifthethunderdontgetya™³²®©, January 06, 2014 10:52
How did we get all that debt?

My answer is, "Too Big To Fail banks blew up the economy." What we had was a failure of the 'free market economy' as pushed by supply-siders, opponents of government, and other propagandists for the plutocrat class.

Now these same mouthpieces are pointing at the debt and pushing austerity. It's as if your parents responded to a worsening financial position and decided the answer was to stop spending money on the gas needed to get to work.
written by howard, January 06, 2014 11:16
it's perfectly clear that taylor didn't bother even to read what summers has to say.

i am told that there was a time when taylor was a respected economist, but all i've ever seen him write is moronic piffle.
written by Last Mover, January 06, 2014 11:20

John Taylor is channeling Alan Greenspan. So what?

Not only was the economy working well before the crisis, it is and has been working well after the crisis as well ... particularly considering the massive drag of debt and government interference that had to be overcome ... what resilience, eh?
written by kharris, January 06, 2014 12:06

Why shouldn't the financial crisis be called a debt crisis? Well, for starters, the yield on 10-year year treasuries is now just about 3%, lower than just before Lehman's crash. When Lehman went down, repo finance became unavailable, while sovereign debt borrowing costs fell. The symptoms clearly how a financial problem, not a problem with excess debt.

Hope that helps you understand the difference between the two.
NYT: per capita we're doing great now (if you ignore enough measures)
written by jaaaaayceeeee, January 06, 2014 3:08

Everyone in the USA is doing great now. At least, if you ignore post war recoveries, and ignore employment levels and other measurements for which we don't have two centuries of detailed data (wage stagnation, high unemployment, how our taxes are redistributed away from those who pay them, and ignore who is affected by our output and trade gap). Germany and the United States have done right, although in a couple of centuries, we'll know if secular stagnation in the USA was a problem that could have used some Keynesian infrastructure spending.

And if you want to look at how much better recoveries have been since WWII compared to this jobless recovery, you should not blame any of the things that have made this recovery so inequitable, because John Taylor says bubble and busts that socialize losses are fine, except that any threat like regulation or tax reform reduces job makers' incentive to create jobs.

It would be morning in America if we just reduce taxes and regulation and wait a couple of hundred years to see if we should have done New New Deal policies, according to the most progressive mainstream news (NYT) analysis?
Secular Stagnation began under Clinton anyway (if not sooner)
written by Sustainable Gains, January 06, 2014 3:22
I think a very good case can be made that the secular stagnation (which Summers wants to pin on the Bush Administration) clearly began sooner. Ex debt growth, the U.S. economy's growth rate has been abysmal for decades, a tale told in many ways including stagnating real median income, real median household income levels, and rising per-capita private-sector debt burdens. The economic boom during the Clinton administration was fueled by unsustainable financial practices. The Administration's economic team included Summers and all the other Rubinites at Treasury and so on, and was complicit in both the creation of both the huge stock market bubble and the evisceration of Glass-Steagall and other sound, but restrictive financial regulations (CFMA comes to mind as well…). The deficit of financial prudence created a tremendous boom while it lasted, but left Bush II facing a bust of historical proportions.

Unfortunately the deficit of financial prudence has persisted longer than the boom did. Feeling snarky, I might even say that the deficit persists even today, among folks such as kharris who claim that there isn't a debt crisis, when the glut of credit creation (which leads to the low interest rates which she says are okay) IS the problem and WILL BE the source of the next crisis, already brewing. This is not to say that within the credit bubble, there wasn't also a mass financial mania as she illustrates with Lehman's demise.

The secular stagnation issue is aggravated by the reality that neither individuals nor economies thrive when total debt burdens (private, corporate and public) are three or more times the annual production rate… although such conditions are ideal for the rentiers collecting the interest and other rents without needing to be productive. At least until the low interest rates run into high default rates and force rentiers back to work… and then the eventual deleveraging (reduction of debt) punishes everyone because growth in credit slows, and no longer fuels growth in spending or production the way that it previously did.

The best we can hope for at this point is a "beautiful deleveraging", consisting (per Ray Dalio at Bridgewater) of a combination of debt restructuring, austerity, money-printing and other transfers of wealth from rentiers and savers to debtors and wasters. Where "beauty" is simply that the deflationary side (restructuring and austerity) are balanced by the inflationary money printing.

But far more beautiful would the world be, if the Clinton and Bush administrations' economics teams had done more to help keep the ugliness of high debt out of the economy in the first place.
Link to Dalio on deleveraging
written by Sustainable Gains, January 06, 2014 3:42
Sorry, meant to include this above.

Financial prudence for financial prudes
written by Squeezed Turnip, January 06, 2014 9:10
… neither individuals nor economies thrive when total debt burdens (private, corporate and public) are three or more times the annual production rate. …

Ah, the magic number 3. Reference, please. Or is it just chicken innards?

There is evidence that stagnation began in the Reagan era (at the flowering of creative finance). For example, this hint:
Food for the Turnip
written by Sustainable Gains, January 07, 2014 2:16
There's nothing magical about 3 as a threshold. A certain amount of credit is essential, but we appear to be well into the "more is worse" range. I am inclined to agree that overfinancialization began during the Reagan years. One might well find that there was secular stagnation starting about 1982, if one were to subtract off the unsustainable effects of credit growth in excess of GDP growth.

BTW, CMDEBT is only the household and nonprofit part of the total debt picture. I think TCMDO/GDP is more comprehensive:

Proper Chart for TCMDO/GDP
written by Sustainable Gains, January 07, 2014 2:25
I pasted the wrong image into the previous post, and of course we cannot edit. So here in full glory is Total Credit Market Debt Outstanding relative to GDP:

Testing links with this system
written by Sustainable Gains, January 07, 2014 2:53
Testing Links continued
written by Sustainable Gains, January 07, 2014 2:58
Take three
written by Sustainable Gains, January 07, 2014 3:05
more link fun
written by Squeezed Turnip, January 07, 2014 7:55
trying it out myself
SG link
Another interesting graph regarding leverage
written by Squeezed Turnip, January 07, 2014 8:21
household (+ nonprofit) credit market debt over personal income

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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.