A MORNING ILL-SPENT

O.K.  I have plowed through the book on secular stagnation, and I have some snarky things to say.  I trust no one will make the mistake of supposing that this is the place to get an unbiased mainstream account of this collection of essays.  For that, I refer you to Krugman's blog.

First things first -- the title and subject of the book.  The term secular stagnation ["secular" of course meaning long-term, as opposed to cyclical -- not laïc as opposed to clerical!] was popularized by Alvin Hanson.  Here is Wikipedia's summary of his assertion:  "In the late 1930s, Hansen argued that "secular stagnation" had set in, so the American economy would never grow rapidly again because all the growth ingredients had played out, including technological innovation and population growth. The only solution, he argued, was constant, large-scale deficit spending by the federal government....  However, the sustained economic growth beginning in 1940 undercut Hansen's predictions and his stagnation model was forgotten." 

Well, the boom years are over, and a number of economists are worried that the world's developed economies have entered into a period of long-term slow growth and underutilization of labor and capital that cannot adequately be addressed by the sorts of monetary adjustments they had come to rely upon.  The thirteen essays in the e-book range over the entire world, with several devoted to the experiences of the European Economic Union and one focused on Japan's long-term stagnant economy.

Needless to say, I am not going to try to summarize what I just speed-read.  However, there are two observations I want to make about the mind set and unexamined presuppositions of the essays, because I think they apply more broadly to contemporary academic economists.  Before I do that, let me quote two passages from the book that struck me particularly.  The first is unspeakable [one thinks of Oscar Wilde's famous description of fox-hunting as "the unspeakable in pursuit of the inedible"], and I confess it does not surprise me that it can be found in an essay written by a Harvard economist, Edward Glaeser.  Needless to say, he earned his doctorate at Chicago:

"[I]t is surely necessary to rethink the structure of the US’s social safety net and to ensure that it does less to discourage work. David Autor and Mark Duggan (2010) have made an interesting proposal suggesting that disabled people be allowed to work. The idea of combining social welfare programmes to eliminate overlapping anti-work incentives also seems sensible.

The Earned Income Tax Credit represents a reasonably successful intervention aimed at making work pay. More can be done in this area. Instead of raising the minimum wage, which risks deterring future job openings, the wage can be boosted by a federal subsidy. Social security taxes can be eliminated for workers at the low end of the earnings distribution. Structural reforms are surely necessary to ensure that the US makes work more attractive for the jobless."

 

Has he ever thought to ask whether getting rid of his tenure and that of other secure professors would get rid of the stickiness in the academic job market and encourage more out-of-work scholars to accept work at wages even lower than what they are now forced to accept?  Somehow, I doubt it.

The second passage is from an interesting essay by Richard Koo.  I quote it because I rather like the way his mind works.:

"The point is that it is almost impossible to maintain fiscal stimulus in a democracy during peacetime. It is difficult in a democracy because such policies cannot be implemented and maintained during peacetime unless millions of people are persuaded of the need for fiscal stimulus. In contrast, in an autocratic state, only one person – the dictator – needs to be persuaded in order to both administer and maintain fiscal stimulus.

Adolf Hitler and Franklin Roosevelt were both elected in 1933 when Germany and the US were in severe balance sheet recessions. The German unemployment rate reached 28% that year and US rate was not far behind at 25%. Although both started with fiscal stimulus, Roosevelt, worried about the criticisms from deficit hawks, reversed course in 1937, resulting in a serious double-dip recession and the unemployment rate increasing to nearly 20% again. Hitler, on the other hand, stayed the course and by 1938, German unemployment had fallen to 2%. [N]othing is worse than a dictator with a wrong agenda having the right economic policy, especially when the democracies around him are held hostage to the orthodoxy and remain unable to adopt correct policies."

Now to my two observations.  The first requires that I remind you of the famous Allegory of the Cave in Plato's Republic.  Socrates imagines people chained to the floor of a cave that is lit only by a fire behind a parapet in front of one wall.  People hidden behind the parapet walk back and forth between the fire and the wall holding various objects in their hands.  The fire throws grotesque shadows of the objects high on the face of the wall, which the chained observers, having no other experience, take to be reality.  One man struggles free of his chains and painfully makes his way through the tunnel that leads out of the cave.  There he finds himself in bright sunlight, and as his eyes adjust to the light, he sees for the first time the real things -- trees, tables and chairs, animals, flowers -- whose shadowy images he has been watching with his fellows in the cave.  When he re-enters the cave to tell his comrades what he has discovered, he is momentarily blinded by the change in light and stumbles, causing them to laugh at him as he desperately tries to tell them of the reality awaiting them in the open air.

That is Plato's metaphor for the relation between the Realm of Ideas and the sphere of appearances, but I have always thought of it as a perfect description of modern Macroeconomics.  All these really smart, hard-working, serious scholars are chained to the cave of capitalism, which they quite confidently believe is the only world there is.  They stare at their statistical time series, trying to outdo one another in guessing which images will flicker on the wall next.  Many are given life-time jobs at great universities for their efforts.  A few are so good at predicting the flow of images that they win Nobel Prizes for their efforts.  But when Karl Marx liberates himself from his chains, ventures into the sun, and comes back to tell them what he has seen, they laugh at his stumbles and missteps and dismiss him as an "autodidact."

My second observation is more in the nature of a book report.  In the entire 163 pages of the thirteen essays I read this morning by some of the world's most accomplished economists, there was not a single sentence -- not a single word -- to suggest that the root of secular stagnation is the capitalist organization of the economy.  Nor did any of these scholars even consider, in passing, the possibility that there might be some other non-capitalist way of organizing the deployment of the world's capital resources and labor talents so as to create equitably distributed, sustained economic growth.  Leave aside Edward Glaeser, who is belongs to the Greg Mankiw school of economic thought.  Paul Krugman is a liberal sort of guy, and even Lawrence Summers, execrable human being though he is, must be considered to the left of center of the existing American political spectrum. 

My God, my socialist grandfather, who never finished elementary school, knew more about the way the world works than these panjandrums!