Summers and Krugman’s “Secular Stagnation.” Signs of Good Times Ahead?

Not sure how much of this post it I really believe, but always worthwhile questioning the consensus.  A strong view, lightly held if you will.

Larry Summers gave a widely referenced speech at the IMF (link below) exploring whether the current economy “needs bubbles” to achieve full employment and if we are in an age of “secular stagnation.”  Underlying is a “crisis of demand” as consumption seems to be permanently depressed.  Krugman picked those themes and ran with it himself in his blog.  Meanwhile other economists are getting air time on NPR and elsewhere explaining that technological change is causing a shortage of gainful employment.  This idea has been well refuted (e.g. study noted below), but has gained widespread conversational currency regardless.

With tongue only partly in cheek, the above probably suggests we are looking at a decade or so of major consumption-led growth globally.  Krugman and Summers are smart fellows.  But a reliable indicator of a turning point in human affairs is usually “experts” increasing confidence that current trends are set to continue indefinitely.

  • This is particularly true if the experts involved were previously out-of-consensus predictor of the last turning point (as Krugman was and Summers less so).  There is a natural human tendency to bask in the glow of recent success.
  • It also tends to be a sign that the conventional wisdom has become particularly broad and deep.  Through some sort of perverse societal rule, this usually means an upset is on the horizon.
  • It also reflects a human tendency to (falsely) extrapolate future trajectories as a smooth curve from existing trends.  Even though the facts usually reflect jagged lines and unforeseen circumstance.

I do agree that an aging US population is a headwind for US domestic consumption.   But consider possible counter-balancing trends – some more likely than others.

  • China’s shift to a consumption-led growth model:  China’s leadership has been talking about this for a while, but the 3rd Plenum seems to be a real effort to do something about it.  Most important rural land ownership reform and loosening urban household registration rules (hukou).  That frees up trapped capital (rural land), puts it in the hands of individuals (not local officials – the reform part) and sends them off to the cities to spend spend spend!  This flywheel will take time to crank up and a lot of that demand will be domestically sourced (especially services).  But will be consumption nonetheless.  And a whole lot of it.
  • Slowing Productivity Gains: As I’ve noted in a prior post, this recession has brought a MASSIVE leap in productivity.  But companies have exhausted their ability to wring further production from their (equally exhausted) workers.  That means more hiring, and more confidence, and more consumption.      (
  • Reversal of US Income Inequality Trends:  No-one seems to be predicting this, which is reason enough to look for it.  Slowing productivity will help shrink the “Reserve Army of the Unemployed.”  Although I am otherwise not sure how this shift might happen.  But it sure feels like the pendulum almost has to start swinging away from the plutocracy.    The political mood has certainly shifted.  Even the Tea Party’s anti-plutocratic rhetoric has veered pretty close to what would have been called “socialism” just a few years ago.  Moreover, “the 1%” vs. 99% narrative is accepted to the point it no incites argument.  Acceptance is the 5th “Stage of Grieving.” After which you move on…
  • Africa:  The continent is clearly starting to crank to life.  That is a whole lot of incremental consumption.  But Africa barely registers on most mental radar screens (outside of famine and chaos).
  • Growth in Japan:  Japan does seem to be making a legitimate, real effort to shake off two lost decades.  Demographics will still hobble them, but any growth is a net contributor that has been absent for most living memory.
  • Growth in Europe?  OK, I am not sure I believe this either.  But Europe’s ongoing crises might just resolve into a less rentier-friendly, more consumer-oriented model.  Hey, we a dreaming big dreams here right?

I wouldn’t want to argue this case in any formal setting.  Certainly not against Mr Summers or Krugman.  They have real skills (and a Nobel) where I barely dabble.  But its worth considering, of only to amuse if we are sliding into “secular stagnation.”   In that case, just go watch the Hunger Games sequel coming out for a taste of the future.  Although the fact such a politically pointed movie is a blockbuster is another sign of a change ahead.  But that is for another post.

Don’t Blame the Robots  We demonstrate that this newer version—the task framework, or job polarization analysis—fails to explain the key wage patterns in the 1990s it intended to explain, and provides no insights into wage patterns in the 2000s. We conclude that there is no currently available technology-based story that can adequately explain the wage trends of the last three decades.

Summers Speech:

Krugman Blog on Summers:

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