Secular Stagnation Solutions
Larry Summers has been writing about Secular Stagnation for Two Years. This is the post which triggered the trialogue
It is an excellent and important post, but I will just take the non technical definition of Secular Stagnation
The core idea behind secular stagnation was that the neutral real rate had for a variety of reasons fallen and might well be below zero a substantial part of the time going forward. The inference was that economies might be doomed to oscillate between sluggish growth and growth like that of the 2003-2007 period that rested on an unstable financial foundation.
And click the link to Summers’s discussion of Lukasz Rachel and Thomas Smith’s recent research.
in which he wrote
they attempt to quantify most of the factors that I and others have enumerated in accounting for declining real rates. They note that since the global saving and investment rate has not changed much even as real rates have fallen sharply there must have been major changes in both the supply of saving and demand for investment. They present thoughtful calculations assigning roles to rising inequality and growing reserve accumulation on the saving side and lower priced capital goods and slower labor force growth on the investment side. They also note the importance of rising risk premia associated in part with an increase financial frictions. Rachel and Smith’s work is not the last word but it is the first important word on decomposing the causal factors behind declining real rates.
Here I note that the role of rising inequality in causing secular stagnation provides a new argument for increased progressivity of taxation. I have advocated increased progressivity for 35 years and did so when I thought the resulting reduction of savings rates was a drawback not an advantage. But the case is even stronger if it is a feature not a bug.
Second, secular stagnation can make risk premia which did not cause huge problems in the past extremely costly. If a risky rate required for full employment is much higher than the risk premium minus the rate of inflation, then full employment is not consistent with the lower bound on safe nominal interest rates. This means that a low neutral real rate is another reason why governments should bear (or hide) risk. This means that the risk of secular stagnation increases the strength of a case for a sovereign wealth fund through which the US Federal Government purchases risky assets. I have been arguing for one for 10 years, but the case is even stronger if secular stagnation is a risk. It is not necessary that risk premia have increased. The formerly
Summers made this argument here.
The central banks of Europe and Japan need to be clear that their biggest risk is a further slowdown. They must indicate a willingness to be creative in the use of the tools at their disposal. With bond yields well below 1 per cent it is very doubtful that traditional QE will have much stimulative effect. They must be prepared to consider support for assets that carry risk premiums that can be meaningfully reduced.
For political reasons, the possible public purchasers of risky assets currently commonly considered* are central banks and not the Social Security Administration but the substance is the same.
*”real rate required” was an alliteration I tried to avoid, but I added the two in this sentence as jokes.
Let me add another cause low population growth rates which means demand does not grow fast for basic necessities. The Japanese experience would suggest there is at a minimum a correlation and possibly a causation here. Was the vast economic growth of the last two centuries at least in part due to the rapid population growth at the time?
It seems to me that economists need to consider demography among the causes of secular stagnation, with fewer births and an older population meaning less demand for goods and services (except perhaps in the medical area)
What does the word SECULAR mean in this context.
In the context I am familiar with, there is RELIGIOUS and there is SECULAR. I don’t think that applies here.
What good does it do the rich if their share of ownership of the economy goes up by 1% while the productive output of that economy declines by 2%. That may well be the trend in play for the foreseeable future. If so , some years from now the 1% may enjoy complete ownership of what is , effectively , an economy of basket-weavers. Is that what they want ?
Eccles made this point in 1933 and , judging by subsequent events , it was an effective argument :
https://pbs.twimg.com/media/CYlgA-XWMAAr_9L.jpg
If Eccles were alive today and you gave him a prime venue to promote his viewpoint – like , say , a NYT opinion column – would he have a similar impact ?
Haha. That was a trick question. Everyone knows that someone like Eccles would never be given such access. He’d be bleating – unheard – from some marginalized post-Keynesian journal , at best.
I have mine now you get yours.
Gee if only there were some horribly neglected and under-maintained infrastructure we could invest in.
And okay if the “political reasons” change and the suggestion that SSA may eventually end up buying some of the ahem riskier assets isn’t actually snarky sarcasm… why can’t the SSA at least buy infrastructure bonds that put people to work?
“Gee if only there were some horribly neglected and under-maintained infrastructure we could invest in.”
Indeed. As a “Constitutional Conservative”, one of the things that pisses me off is the “conservative” who is just thoughtlessly anti-government. There is no question in my mind that the Interstate Highway System, the FAA, maintenance of navigable waters, etc., provide for the general welfare of the states. In fact, it is one of the few areas where government spending can have a positive return by facilitating “commerce with foreign Nations, and among the several states.”
We have a lot of able-bodied people out of the labor force, and good work they could be put to.
Warren, the word secular comes from Latin meaning of a generation or of an age.
So in economics, secular means something that lasts a generation or a very long time, in contrast to cyclical, which means a few years in the business cycle, like a boom or recession.
The Catholic Church appropriated the Latin word to mean of an age and time, that is, worldly, in contrast to out of time or spiritual.
Increasing top marginal rates will not close the inequality gap. Clinton increased taxes inequality went up, same recently under Obama. Inequality as Jamie Galbraith has shown is tied to rising equity prices, and a move to a more credit focused economy.
The only thing that will close the gap is an increase in the federal fiscal position, with programs targeted to lower classes – things like a buffer stock employment program, higher social security benefits, much higher infrastructure spending probably running deficits of 15% of GDP for a few years. Tax hikes in, and of itself will not close the gap.
https://www.washingtonpost.com/blogs/ezra-klein/post/how-economists-have-misunderstood-inequality/2012/05/03/gIQAOZf5yT_blog.html
Matt:
Why didn’t you look to the late seventies for the answer? There was one incident which changed the entire banking industry and led to the establishment of two states being the corporation states for banks.
“BP” asked the right question.
“JG” danced around it.
Everyone else describes the symptoms. Usury laws were struck down. No longer could states set limits as to what interest rates could be charged for out-of-state banks incorporated in one state and establishing credit cards in another state. 1978 SCOTUS Decision: Marquette National Bank of Minneapolis v. First of Omaha Service Corp.
Brennan later said: “But the protection of state usury laws is an issue of legislative policy, and any plea to alter [the law] to further that end is better addressed to the wisdom of Congress than to the judgment of this Court.” Yea, as if there is any wisdom there? Brennan actually thought Congress would change the National Banking Act to allow states again to set Usury Laws. It was the start of one disappointment after another as Congress turned the tables on constituents to favor business. Wiki should be sufficient to explain it: https://en.wikipedia.org/wiki/Marquette_National_Bank_of_Minneapolis_v._First_of_Omaha_Service_Corp.
An opposing view: “George Mason University School of Law professor Todd Zywicki. ‘Rather, by eliminating archaic and largely ineffective usury restrictions, Marquette increased efficiency and competition in the credit card industry, made the market more responsive to consumer demand, and provided large benefits to consumers.'” Yep, large benefits in this Libertarian’s mind. Yes of course it did all of this and ignited the downward progression of income in the US. And Matt your question was about income inequality?
Thanks, BillB.
Run I don’t disagree. Banks create credit, a power granted by government, and thus should have some more sensible parameters around them. Warren Mosler’s banking proposal is pretty spot on:
http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html
The other side of the ledger is proper fiscal policy (via increased spending, FICA reduction, per-capita credits back to states, etc) targeted to lower classes, but that is in no way tied to raising marginal rates. The latter, in and of itself will do nothing, and will probably increase pressure for austerity like we witnessed in the last round of tax hikes.
Matt:
I am really citing just a turning point which corresponds with what we (older people) have seen and also experienced. I can remember have a line of credit locked in at 10% with Continental Bank and then it blew up afterwards. A word of caution, don’t get sucked in by Warren as it is a never ending stream. My patience is starting to run thin.
“Banks create credit, a power granted by government….”
Picking nits, but banks were creating credit before governments decided to regulate it. Individual banks would create their own gold or silver certificates, which were redeemable for the metal and so were treated as such by the people. A bank would have a hundred pounds of silver in its vaults (for which they charged a fee for rental), then lent out a thousand “pounds” of silver certificates, figuring they had enough metal on hand to cover redemptions. They charged interest on the notes, too, so they had people paying to deposit money and to borrow it!
Only later did the government step in to regulate that. Not that that is a bad thing. It was necessary after repeated “runs” on banks. I just want to be clear that, in the absence of government, the power to create credit still exists.
Warren very fair nit.
Very interesting set of proposals. Only a couple will I take issue with.
Proposal 3 for the Federal Reserve: “[Make] the current zero interest rate policy permanent.”
The low interest rate is very hard on retirees who are trying to live off dividends from “safe” investments.
Proposal 1 for the Treasury: “[Cease] all issuance of Treasury securities. Instead any deficit spending would accumulate as excess reserve balances at the Fed.”
Isn’t most US government debt owned by the Fed already? Would this change things much? Where would the above-mentioned retirees put their money?
Warren. The fed is a big owner right now, but not the only large one. Historically, and to date, treasuries are issued to drain the reserves added from federal spending so the Fed can hit their target rate – otherwise no treasury issuance pushes the fed funds rate to zero. When at zero the Fed manages short rates through interest on reserves, and they could use that mechanism at whatever rate they want to target. There are other methods too.
The retiree/saver question is a good one, an the other Warren has actually addressed this as well here:
http://www.usnews.com/debate-club/should-the-federal-reserve-keep-interest-rates-low/federal-reserve-interest-rates-should-be-at-zero-forever
Hoo, boy, there’s a lot I don’t like in that article. Let’s start with this:
“[For] every dollar borrowed from the banks, there’s only a dollar saved.”
Uh, no. First of all, banks can issue up to $15.2million with no deposits at all. For over $110.2million in loans, banks only need an additional ten cents for each additional dollar lent out. So for every dollar borrowed from banks, the amount saved approaches ten cents.
http://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1
Then there’s this: “[When] government spends a dollar, there are only two possibilities. Either that dollar is used to pay taxes and is lost to the economy, or it remains in the economy as what we call ‘monetary savings.’ And so the government deficit – dollars spent by the government and not yet used to pay taxes – is in fact our monetary savings.”
A dollar that goes to the government is not “lost to the economy.” Are government employees not part of the economy? Are welfare recipients not part of the economy? Are government infrastructure projects not part of the economy?
What is “lost to the economy” is the productive work that people could be doing to earn that money.
Our “monetary savings”, in this regard, is only what we buy in T-bills and Savings Bonds. When the government cannot get enough of our savings that way (and it can’t) it borrows from the Fed, which creates money out of thin air (must be nice!) to buy those bonds, or from foreigners.
“When the Fed lower rates, the Treasury pays less interest to the economy on its debt, and that means less income for the economy.”
No, because the Treasury will have to borrow and tax us less to pay that interest.
“Lower rates hurt savers, which weakens the economy.”
It hurts savers, but helps borrows. So lower rates punish the prudent and reward the dissolute. As others here have pointed out, artificially low interest rates allow less efficient companies to continue. Higher interest rates would weed out those poor-performing businesses.