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« Institutions Matter, But Fixing Economics Requires More Than Just Saying That | Main | The Importance of the Endless Pursuit of Knowledge »


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Thanks for posting that video, Pete, and drawing our attention to it. A hardy "hear, hear!" to taking Summers seriously. As we think about this stuff, let's remember that his empirical puzzle is seeming stagnation. The idea that the full-employment interest rate might be negative is Summers' conjectured explanation of the puzzle. It's his answer, not his question. My bias is to think that we should not go on about negative interest rates. Rather we should EITHER offer an alternative and more compelling explanation of the puzzle OR show empirically that there was no stagnation before the crash.

If you just look at real GDP growth per capita, I don't see pre-crisis stagnation. I took data from this graph:[1][id]=USARGDPC&s[1][transformation]=pc1

I then did 4, 5, and 10 year averages of them. I don't see a secular decline until after the crisis. Now, Summers is saying that we should have seen a crazy boom in the run-up to the crisis, so my little averaging exercise does not settle things. But personally it reinforces my a priori doubts that we had stagnation before the crisis.

If we can show that stagnation applies only after the crisis, then it might be that the right place to go is something about confidence, Big Players, and regime uncertainty. And mainstream macroeconomics is very much moving in that direction with the literature on "uncertainty shocks." And that literature is mostly attributable to the index created by Baker, Bloom, and Davis.

Note, BTW, their two calls for papers. Those calls might represent an opportunity for some more or less "Austrian" followers of this blog.

An anecdote. Stan Fischer is from Rhodesia (Zimbabwe), which is to South Africa (my country of origin) as Canada to the US. He rose to greatness as a macroeconomic modeler in the Keynesian mold, skills which he honed at MIT. As far as I can tell his talents focus on his technical prowess. I met him when I was in the Ph.D. program at Chicago and he was a visiting professor. I took a course of his in monetary theory. The whole course was an in-depth examination of a macro-model of Dale Mortenson's. It boggles my mind to see how revered he has become (albeit that he is an honorable man). A technician with very limited understanding of and insight into history and social dynamics.

I doubt there is any way to counter this in a way that Keynesians would accept. If interest rates were depressed to -2%, and the expected result of full employment didn't appear, it would be conjectured that the rate must be even lower. 5%? 10%?

However, thinking people might be swayed by suggesting that -2% would consume capital through dissaving (maybe the implosion of the money supply, as people converted their rapidly-depreciating bank balances into hard or financial assets, would make Keynesians take notice). But I don't think Summers thinks that capital consumption is necessarily bad, as in his mind consumption drives growth, not capital accumulation.

Again, as I mentioned in my fb comment, I am interested in approaches to this problem. Countering people with different assumptions about how the world works seems like a big issue.

Paul Krugman took up the case for secular stagnation in his NYT column yesterday (11/17), flagging the same speech by Summers.

It looks very much as if Pete to see Summers' talk as representing a new and important view in mainstream macroeconomics. To echo Pete: What are we going to do about it?

. . . as if Pete *was right* to see . . .

Heck, Stan Fischer did not do too bad of a job as Israeli central bank head, and I saw Larry White say he preferred Fischer to Yellen for Fed Chair, given that there will be a Fed Chair.

As for the stagnation thesis, Tyler Cowen is also pushing it. I am not quite as pessimistic as all those folks myself, however, although could come to pass.

On Krugman, I can only say "wow" (subdued and lower case). More than 4 years since the financial crisis with little or no improvement, so continue the same policies. For God's sake don't ever, ever question our assumptions and reasoning.

BTW, what is a sign of demand running ahead of supply? Rising prices? The housing market was not a sign of demand running ahead of supply?

Not sure what your Fischer remark is about, Barkley, but at one point Summers said that in his class Fischer did not accept the idea of secular stagnation. And maybe we should note that Tyler's stagnation thesis is nothing about a negative equilibrium interest rate. It is a different stagnation thesis.

Brian Gladish - What?!? I think the last thing Krugman wants is continuing the same policies!

On stagnation - I take Keynes's position on this. More optimistic, like Barkley, and less radical or deterministic than say Hansen. That is, I think economies can sit in a stagnated state for an extended period of time (the negative equilibrium interest rate is a CONSEQUENCE of this state, not a cause), but not that it is doomed to be in that condition. Barring underlying demographic factors like Japan's, I don't expect stagnation to be an extended affair. Market economies have incredible capacity for growth - it's just what they do. But that doesn't mean there couldn't be a "secular" stagnation for a painful length of time. Hell, five years is a painful length of time as it is.

Daniel Kuehn - I take these sentences as a call to continue ZIRP indefinitely and to spend like crazy:

Why does all of this matter? One answer is that central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt, which run along the lines of “It may not be a problem now, but just wait until interest rates rise.”

Don't they describe the current policy?

Brian you've just furnished a quote where he is explicitly saying that monetary policy should be conducted differently, and implicitly references how we've been doing fiscal policy that he thinks should change.

Doesn't this very quote prove my case?

Monetary policy is obviously in better shape than fiscal policy - the difference of opinion there is on future guidance sorts of concerns.

Daniel, I guess we read Krugman differently. He says they should "stop talking about 'exit strategies'" -- they are just talking and he says they shouldn't act. Then he says to "forget all those scare stories" that would make them change the current policy -- so, continue on with the increasing debt and spending. But I would guess that we both agree that he favors ZIRP (if he can't get negative) and spending (of course, there is never enough of that!).

But none of this addresses Pete's original question of how to counter Summers' claims, which is a topic that interests me, and on which I hope Pete will comment.

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