Policy Research in Macroeconomics

Secular stagnation is the outcome of deliberate policy; it can (still) be reversed

Pond of Stagnant Water, 1973,  U.S. National Archives and Records Administration

Pond of Stagnant Water, 1973, U.S. National Archives and Records Administration

Martin Wolf in the FT  today strikes a  different direction from those secular stagnaters shepherded by Larry Summers towards the cliff-edge of endless doom.  (Larry Summers devised and popularised the term, “secular stagnation”. He has a lot to answer for. His misjudgements, poor advice to the Obama administration, and flawed analysis have been catastrophic for the global economy. Given his record, he should be silenced or ignored, and barred from shepherding anyone, including economists and other naifs, in any direction.  For more on his grave weaknesses see this Forbes article.)

Secular stagnation within a deflationary context, let us be clear, is the outcome of deliberate policy choices. It has not come about by accident. It has not come about for lack of economic understanding, learning or analysis. It has not come about for lack of economic tools – both fiscal and monetary, or indeed for lack of human agency. Instead secular stagnation is the deliberate outcome of policy choices made by those dominant in the world’s most powerful policy-making institutions, including the IMF.

Calculated choices, including the following, have led to stagnation:

  • policies to liberalise/de-regulate finance, and in particular debt creation – and a deliberate refusal to manage the very unstable, and de-stabilising global financial system.
  • a policy to allow the potentially dangerous shadow banking system to expand, without rigorous micro-prudential regulation or oversight. (According to the IMF “the global shadow system peaked at $62 trillion in 2007, declined to $59 trillion during the crisis, and rebounded to $67 trillion at the end of 2011.”)
  • policies to use taxpayer resources to rescue the private finance sector from its own fraudulent and anti-free market conduct – without imposing and carrying through severe conditionalities.
  •  policy to leave the banking system pretty much as it operated before the crisis: with deliberate decisions not to re-structure too-big-to-fail banks, and separate retail from the speculative arms of banks.
  • A refusal to write off, re-structure or manage the repayment of vast debts owed by, and to the private banking system.
  • A deliberate decision to allow effectively insolvent banks to carry on speculative activities – but this time with taxpayer backed-guarantees, and with resources obtained at very low, central bank rates.
  • policies to lower wages (through globalisation/liberalisation/attacks on trade unionism).
  • policies for liberalising trade, without policies for managing and transitioning the complex impacts of what is often wrongly defined as “free” trade.
  • A deliberate refusal to act to re-balance the unbalanced global economy – away from speculative, rentier activity and towards full and meaningful investment and employment of both human and other (finite) resources.
  • A deliberate refusal by powerful leaders and policy-makers to co-operate at an international level to fix imbalances (trade, financial and ecological) between surplus and deficit countries.

Debt-deflationary policies which lead to stagnation are the policies of choice of institutions dominated by creditors.

This is because deflation has one great macroeconomic upside: it inflates the value and the cost of debt. Just as inflation erodes the value of debt.

For indebted individuals deflation – falling prices –  inflates debt in a clandestine, macroeconomic way. (My young hairdresser, who has a mortgage and charges high prices for his superb skills, was unconvinced when I tried to explain the process to him. “What’s wrong with falling prices?” he said. “I like falling prices”.)

In a deflationary environment, the value of debt and the cost of servicing debts rises inexorably relative to falling prices at small and large firms (think Tesco) – and even, at some point, at hairdressers.

The cost of debt rises relative to the the falling wages of workers and incomes of professionals. The cost of debt rises as the profits of businesses decline, because perhaps, of falling prices. And governments’ tax revenues collapse, leading to an increase in overall debt, as wages, incomes and profits fall. This week we were reminded by the UK’s Office of Budget Responsibility of how this outcome impacts on the public finances.

These policies and conditions lead inexorably to stagnation, and if not reversed, will certainly lead to secular stagnation.

In the words of John Maynard Keynes: “Deflation….involves a transference of wealth from the rest of the community to the rentier class and to all holders of titles to money; just as inflation involves the opposite. In particular it involves a transference from all borrowers, that is to say from traders, manufacturers, and farmers, to lenders, from the active to the inactive.” (My emphasis. From A Tract on Monetary Reform (1923)).

But things really don’t have to be this way. We, and the economics profession as a whole, have the tools and the policies to reverse this process.

We just have to overcome a major obstacle: the resistance of those who are “holders of titles to money”; powerful creditors.  Those who have lent money – the global rentier class – gain effortlessly from deflation’s invisible inflation of their most valuable asset: debt.  In a deflationary environment, they stand idly by as the value and cost of debt effortlessly rises. ,

But things don’t have to be this way. Money-lenders can be faced down, as they were in the 1930s, 40s and 50s – by determined political leaders, and by enlightened economists.  And stagnation, deflation and inequality can all be reversed – if intervention is timely – by human agency.

There need be nothing inevitable, secular or irrevocable about deflation and stagnation.

Things really don’t have to go this way – whatever Larry Summers might say or write.

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