Tags: Paul Krugman | stagnation | economy | depressed

Krugman: Economic Slump May Be Permanent

Tuesday, 19 Nov 2013 07:53 AM

By Michael Kling

Economists who suspect the current economic slump is essentially permanent are entering the mainstream, according to New York Times columnist Paul Krugman.

It's called "secular stagnation," a persistent depressed economy occasionally interrupted by brief periods of prosperity caused by unsustainable bubbles.

The idea that has been lurking on the fringes, but is now being openly discussed by leading economists, he writes.

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None other than Larry Summers, former White House economic advisor, warned about secular stagnation at a recent International Monetary Foundation conference.

"And if Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time," Krugman argues.

Summers noted that the economy, suffering from inadequate demand, only seems to approach full employment when it's buoyed by bubbles. Inflation has almost disappeared. Even in the housing bubble in the early part of the century, significant inflation never appeared.

Krugman points out that even though household debt relative to income skyrocketed in the decades before the financial crisis, the economy was merely acceptable and demand never exceeded of supply.

"Looking forward, we obviously can’t go back to the days of ever-rising debt. Yet that means weaker consumer demand — and without that demand, how are we supposed to return to full employment?"

That means the new normal is a mild depression interrupted by brief periods of prosperity caused by bubbles and unsustainable borrowing.

The permanent stagnation means low interest rates should and probably will continue.

"This, in turn, means we can forget all those scare stories about government debt, which run along the lines of 'It may not be a problem now, but just wait until interest rates rise'"

While Krugman also blames slowing population growth as contributing to stagnation, increased automation may be a contributing factor, says Mother Jones political commentator Kevin Drum.

Fewer jobs are available, as machines do more work. Also, increasing income inequality means the middle class has less spending power.

Others, point to the growing role of the financial sector.

"If Summers is right, this is not a temporary condition that can be solved with monetary policy, it's a permanent change in the economy. But why? One way or another, the answer has to get back to the real world," Drum writes.

"Usually, when bad economic times last long enough, people start to thing they'll last forever," he adds.

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