Krugman on Bubbles and Secular Stagnation by Dean Baker
Bubbles, Regulation, and Secular Stagnation by Krugman
But it is, I think worthwhile – or at any rate soothing – to think about the longer-term future for monetary and fiscal policy. I recently talked about some of these issues with Adair Turner, and I thought I might write up my version of the story so far (just to be clear, Adair bears no responsibility for any errors or confusion in what follows). In brief, there is a case for believing that the problem of maintaining adequate aggregate demand is going to be very persistent – that we may face something like the “secular stagnation” many economists feared after World War II.Yes. Paul Samuelson and most economists expect the economy to tank after WWII. Instead we had the Golden Age of upper mobility American social democracy and the creation of the middle class and a consumer society.
Part of it was inflation as Krugman knows.
This meant that monetary policy could no longer do the job of stabilizing the economy: Central banks found themselves up against the zero lower bound. Fiscal policy could and should have helped, and automatic stabilizers did help mitigate the slump. But fiscal discourse went completely off the rails, and overall we had unprecedented austerity when we should have had stimulus.They could target a higher rate of inflation and signal an NGDP level target and do more QE. The problem is political in that the creditors would push back. Of course it would be better if there was fiscal stimulus with aid to the states, etc. and work sharing etc. Deficit problems? Tax the excess leverage in the financial sector.
Our current episode of deleveraging will eventually end, which will shift the IS curve back to the right. But if we have effective financial regulation, as we should, it won’t shift all the way back to where it was before the crisis. Or to put it in plainer English, during the good old days demand was supported by an ever-growing burden of private debt, which we neither can nor should expect to resume; as a result, demand is going to be lower even once the crisis fades.Depends on fiscal and currency policy which could be changed. Even monetary policy could be changed.
And here’s the worrisome thing: what if it turns out that we need ever-growing debt to stay out of a liquidity trap? What if the economy looks like Figure 4 even after deleveraging is over? Then what?
This is not a new fear: worries about secular stagnation, about a persistent shortfall of demand even at low interest rates, were very widespread just after World War II. At the time, those fears proved unfounded. But they weren’t irrational, and second time could be the charm.