Stagnant economic thought

This is Paul Kelly writing on Staying smart in dangerous post-GFC world. Doesn’t look all that smart to me, but this is what he writes:

The world suffers from what former US Treasury secretary Larry Summers brands “The Age of Secular Stagnation”, the failure of economies to recover from the 2008-09 global financial crisis, the upshot being weak growth, low or negative interest rates, rising asset prices, more inequality and poor investment.

That is, the failure to recover has been caused by the failure to recover. Hard to argue with, but also not much guidance either. Secular stagnation is the ultra-version of Keynesian economics – as Alvin Hansen said, “secular stagnation is just another name for Keynes’s underemployment equilibrium”. We are all so satisfied with our living standards or something that no one wants to spend on anything any more. So the economy just vegetates. Here’s the Summers’ version:

Secular stagnation may be a reason that US growth is insufficient to reach full employment: “Suppose then that the short term real interest rate that was consistent with full employment . . . had fallen to negative two or negative three percent.”

And then Kelly quotes something else:

The former governor of the Bank of England during the crisis, Mervyn King, in his recent book The End of Alchemy, argues that while the 1930s Depression produced a robust policy response this has not been replicated in the years since the GFC.

“Without reform of the financial system, another crisis is certain and the failure to tackle the disequilibrium in the world economy makes it likely that it will come sooner rather than later,” King says. “Since the end of the immediate banking crisis in 2009 recovery has been anaemic at best. There was a continuing shortfall of demand and output from the pre-crisis trend path of close to 15 per cent.” . . .

There is, moreover, no sign of any substantial recovery, with King warning that “markets do not expect interest rates to return to normal for many years”.

Actually quite scary. More on Summers, and just as scary:

Summers fears a recession, after a weak post-GFC recovery, “would strongly suggest that the current stagnation is secular — that is, indefinite — rather than merely cyclical or temporary”. That is, instead of moving ahead to a period of normalisation the world might be only part way through a slow growth era “shaped by previously unthinkable and far-fetched policies” like negative real interest rates.

The idea is that there is an interest-rate policy that will get us out of this mess is probably the most far-fetched idea of the lot. But what makes this such an interesting column is how Kelly is able to sum up in a single para where we stand and what we urgently need to do.

The core need is for policies that recognise the real problems and priorities, making the 2016 election a plus, not a minus, for the nation and keeping the destructive populists at bay.

The destructive populists are Donald Trump and Jeremy Corbyn. Corbyn wouldn’t know one end of a balance sheet from the other. Trump, however, is the only person running for high office anywhere who has actually run a productive value-adding business for many many years. Why you would trust him to get an economy going when we have Hillary or Bernie Sanders sitting in the wings instead is completely beyond me.

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