Secular Stagnation: A Three-Decade Overcorrection

Larry Summers’ recent speech (and Paul Krugman’s paean to it) have brought the issue of secular, decades-long stagnation to the front of the econoblogosphere agenda. Tyler Cowen, of course, made it prominent some time ago. But he posited a tech cause: we’ve picked the low-hanging innovation fruit. Summers, Krugman, et. al. suggest that policies and institutions (fiscal and monetary) are much more central.

I’m with them. In the 70s we saw an economic correction for arguably overvalued labor wages, a painful correction the economy enforced via inflation and (with Volcker’s help) unemployment — driving down labor compensation both nominal and especially real. (Even Ed Lambert, commie pinko that he is, has found real compensation per hour was overvalued given the state of the economy back then.)

And just about the time that that imbalance was clearing out in the 80s, we saw the rise of policies and politics systematically designed and deployed to destroy and restrict real labor wages and compensation. Those policies have achieved exactly that proximate goal, brilliantly. They have not, of course achieved their purported ultimate goal: bigger pie, rising boats, city on the hill. All that rot.

Instead we’ve gotten thirty years of secular stagnation.

The eternal economic justification for those policies? The imbalance that existed, briefly, thirty years ago, and which mostly corrected itself.

But those policies and politics have continued for three decades, always justified by resort to “70s-stagflation” hysteria.

It doesn’t take long before a stopped clock is very, very wrong.

Cross-posted at Asymptosis.