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Home Publications Blogs Beat the Press Summers on Secular Stagnation

Summers on Secular Stagnation

Monday, 06 January 2014 05:11

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.

Comments (8)Add Comment
written by JSeydl, January 06, 2014 4:40
"not the impossible *task* that Summers…"
written by Dryly 42, January 06, 2014 5:58
The first step in a sustainable economy is to restore a safe and sound financial system. The collapse of the financial system after Lehman Bros. filed for bankruptcy had a role in where are today. While Dodd-Frank is probably better than nothing it doesn't come close to ensuring financial stability.
Anti-Keynesian Keynesians Strike Back with Austerian Solution to Secular Stagnation
written by Last Mover, January 06, 2014 7:33
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.

Exactly. It's an anti-Keynesian solution to appease the Austerians, an outright admission that America is living beyond its means.

If you can't be with the economy you love, then love the economy you are with.

Share less output below potential with shared jobs America. The new normal potential is now secular stagnation.

Don't be all you can be America. Be less. Small is beautiful when it's shared.

It's the Austerian way.
written by Matt, January 06, 2014 7:59
There is nothing obviously wrong with workers enjoying longer vacations or shorter workweeks.

Except the "paid" part - what's the point of spending the last three decades turning the political establishment into a desperate-worker creation machine if you're just going to start handing out paid vacations?
The conundrum of left economics
written by root_e, January 06, 2014 8:14
Summers main proposals are (1) increase government spending and (2) force private investment in green energy/carbon reduction via environmental regulations. And Dean, supposedly to Summers "left", dismisses these ideas and proposes more holidays. Dean's argument is based on mainstream econ theory that the magical capital market will figure out where to invest. Summer's proposal is based on reality.
Secular stagnation ...
written by kay, January 06, 2014 10:56
I am truly amazed that the notion of income inequality via job displacement has not been broached in Baker's comments as well as those of Krugman-Summers (or vice-versa). The globalization of manufacturing and now services when added to technological change has vastly increased the number of low-income workers, who whenever the opportunity presents -- low/zero interest rates -- --load up with goods and services, otherwise called a "boom". But to call it secular stagnation is to confuse cause with effect. There are contributing factors of course, ie, Chinese/Emerging economies transfer of capital to the U.S./Europe which lowers interest rates.

There are several ways of ameliorating the situation by 1/ Increasing the minimum wage; 2/ Free university and college education; 3/ Investing in infrastructure, especially Solar and Wind Power, light- rail transportation, better electric-grid structures, cleaning up air and water in rivers, canals and lakes and higher quality water supply, improved roads and brides, etc. There is an endless list of social needs and life-time employment.

The right way to grow is not to tinker with the Dollar and "increase aggregate demand," on wasteful rubbish but to be a true Keynsian and ecologically and spiritually sound. Formulaic economic prescription have proved to be non-sensical and the German and Nordic examples of managing economies is pretty much the right way.
written by skeptonomist, January 06, 2014 11:11
Working hours is an important point, which Dean mentions from time to time. The basic work week has not really changed much since around 1937; people still need to put in nearly 40 hours to get the benefits which are mandated for "full-time" workers. Obviously productivity has increased enormously since 1937, so one answer to the supposed "threat" of automation is reduction of hours. This is not really reducing real potential, it is just allocating the results of production more equitably among workers, reducing or eliminating unemployment. This is not a simple direct solution to the massive inequality between workers and capital/management, which is a different problem, although that would presumably be reduced somewhat by reducing unemployment.

To put it another way, defining "potential" in terms of a specific work week is arbitrary - it would be presumably be considered absurd to define potential and employment in terms of the 12-hour, 6-day work weeks which were normal in the 19th century.
Government Direct Job Creation
written by Ben Leet, January 07, 2014 3:57
cpeg.org proposes a $900 billion direct job program. Secular stagnation is caused by most of the income and wealth isolated in the top echelons, not circulating where demand and hiring are created. Since 2001 private sector employment has increased by 1.6%, I looked it up. But the "working age population" increased by 16%. That's stagnation. It's ruinous. My blog, http://benL8.blogspot.com with an essay The Real Unemployment Rate Is 11.9%, not 7.0%.

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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.