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.