‘Secular Stagnation’, Judge Dredd, and Spending

Paul Krugman and Larry Summers both seem to believe that bubbles are a necessary part of maintaining a functioning economy (boldface mine):

We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate.

So you might be tempted to say that monetary policy has consistently been too loose. After all, haven’t low interest rates been encouraging repeated bubbles?

But as Larry emphasizes, there’s a big problem with the claim that monetary policy has been too loose: where’s the inflation? Where has the overheated economy been visible?

So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest.

Krugman then goes on to discuss some of the potential political and regulatory ramifications of this. But I think Krugman and Summers are missing the point–in a highly advanced society, where most jobs are not ‘essential’ in terms of providing food, shelter, and energy (a ‘Judge Dredd economy‘), one solution is private debt driven bubble growth.

But instead of viewing this as a problem, the other solution presents itself as an opportunity (boldface mine):

In 1900, about half of the U.S. population was engaged in agriculture. While some of this was ‘non-essential’ in that the U.S. exported these products, that’s still a huge fraction. Today, less than two percent are engaged in agriculture. Yet somehow we keep most people employed. There were dislocations during the shift, such as the migration northward of African-Americans as sharecropping fell by the wayside (not that sharecropping was a wonderful living).

We can find plenty of worthwhile things for people to do, even if they are not ‘essential’: arts, education, research, improving our infrastructure. If we still lived in a world where we needed half of our workers on the farm or else we couldn’t eat, funding these things would be wasteful. But with idle workers, idle industrial capacity, and real needs, the only limiting ‘resource’ is currency. The federal government can create that at a drop of a hat–money should never be limiting.

There’s an obvious solution to Krugman’s and Summers’ concerns, even if in some quarters, it’s considered ‘make work’ (though how that differs from much of either military or basic research spending, not to mention our paltry support for the arts, escapes me). Spend the damn money. Though that might send inflation ‘skyrocketing’ to four or five percent.

And the one percent can’t have that, even if that’s the least onerous ‘tax’ for the majority of us.

Added: Brad DeLong seems to wind up at a similar policy conclusion (I think)

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4 Responses to ‘Secular Stagnation’, Judge Dredd, and Spending

  1. Robert L Bell says:

    Thanks for that, Mike.

    I have been beating this drum for decades: a reasonably small fraction of the workforce is engaged in producing all of the goods and services needed in an advanced technological society, so – less a sliver of managerial overhead – everyone else is caught up in a stupid and cruel game that determines who gets to keep how much of the output.

    It seems obvious to me, as a member of the technocratic elite at the heart of this material abundance, that if we could relax our insistence on DON’T WORK/DON’T EAT we would inevitably see an explosion in the arts and the sciences and a genuine increase in the standard of living: true creativity and true innovation, rather than the next round in slick graphics for smartphones.

    We have known since forever that it’s incredible what you can accomplish if you don’t have to worry about how to pay for tomorrow’s lunch. Some folks have picked up on this idea with respect to the Affordable Care Act: if a smart guy is not tied down to some crappy job by the urgent need to keep his insurance running, he is empowered to actually take those vaunted risks and create jobs and move society forward.

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  4. Art says:

    Lucid on the money side of employment the discussion misses entirely the work side and how work is allocated, or re-allocated. Wage/salary, work week, and overtime laws essentially re-allocate work. Spread the work hours more thinly over a greater number of people and you cut unemployment and invigorate the economy by increasing recreational time and spending. Which, in turn, encourages more hiring and a virtuous cycle.

    Nobody can claim that it is better to have a few people working hundred hour weeks while 12% are unemployed than everyone working a 32 hour week.

    To move int he right direction change the overtime laws back to a daily, as opposed to weekly, total. Shift to a 8 hour day and 32 hour week. Reverse the shift to salaried employees and subcontractors and return most people to an hourly wage. Strictly enforce the rules for salary v wage status, and time-and-a-half overtime.

    An increase in the minimum wage, and linking it to inflation, would help.

    Do all that and unemployment will go down and the velocity of money within the economy will go up. Workers will have money to spend and businesses will have someone to sell to.

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