Larry Summers discusses the Great Stagnation

In “Larry Summers: Where Paul Krugman and I differ on secular stagnation” :

The topic of the debate was: “North America faces a Japan-style era of high unemployment and low growth.” Paul argued in favor. I opposed the motion — not on the grounds that the U.S. economy was in good shape, but on the grounds that our demand deficiency problems should be easier to solve than Japan’s…

And wraps up:

This is true and an important insight. But it seems to elide the main issue. Where is the deus ex machina? Where is the can opener? The essence of the secular stagnation and hysteresis ideas that I have been pushing is that there is no assurance that capitalist economies, when plunged into downturn, will, over any interval, revert to what had been normal. Understanding this phenomenon and responding to it seems the central challenge for macroeconomics in this era.

Any analysis that assumes restoration of previous equilibrium is, from this perspective, missing the main issue. I was glad to see Paul recognize this point recently.  I suspect it will lead to more emphasis on fiscal rather than monetary actions in depressed economies.

Summers is right about the relative seriousness of the Japanese demand deficiency problem. Japan´s monetary blunder was “criminal”, and the fiscal action that followed was nothing less than overwhelming (with countless bridges, some to nowhere, and even an airport over water). However, that did not help at all given the “dead in the water” monetary policy!

The two charts illustrate. The Japan NGDP trend is estimated for 1980-91, while the US trend is the Great Moderation trend established during 1987-97.

L Summers_GS




2 thoughts on “Larry Summers discusses the Great Stagnation

  1. Let’s not forget that the growth rate of Japan’s labor force has been slowing down in recent times. It would be interesting to look at nominal GDP growth divided by the potential labor supply for both countries as a function of time. While I certainly agree that Japan has been following a less than optimal monetary policy, it does not appear that the Japanese have suffered from a high unemployment rate, at least relative to the US.

    • Richard, I´ve always heard that unemployment in Japan is a “mystery”! I also know that population in Japan is shrinking. Despite all that, the “structural” arguments, also made for the US, are not consistent with the suddenness of the change in the NGDP trends. One importnat point that LS brings up is hysteresis. That´s why we still could see the US (Euro, UK, etc) situation becoming ever more Japan-like.

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