Summers the Stupid and Krugman the Konfused.
I had a go at Lawrence Summer’s daft secular stagnation idea here a few weeks ago. That’s the idea that we won’t be able to increase aggregate demand for years to come. But he repeated the idea in the Financial Times a few days ago, plus Paul Krugman has supported the idea. And that’s more serious because Krugman is a Keynsian, plus he has brains. So let’s run thru K’ arguments.
K’s article is in four sections and the first (entitled “When prudence is folly”) claims we’ve run out of useful things to spend money on, so the only way of attaining full employment is to boost demand and spend money on pointless stuff. You ever heard such drivel?
What about better health care or better infrastructure? Would they be pointless? What about better housing or longer holidays for everyone? K. must have had far too much to drink the evening before he wrote that nonsense. (He drinks white wine if you’re interested.)
In K’s second section (entitled “An economy that needs bubbles”) he argues that prior to the crisis, the economy was being driven by the housing bubble. Agreed. But he concludes that that shows that the economy is somehow now INHERENTLY short of demand, and can only be driven by bubbles. Completely inane!
It’s true that credit creation drives economies, but given a shortage of private credit creation, what’s to stop government and central bank (as advocated by Keynes and MMTers) simply printing money, and spending it into the economy (and/or cutting taxes)? Absolutely nothing!! The average cockroach understands that. Why don’t Summers and Krugman get it?
In K’s third section (called “Secular stagnation”) he argues that the population is rising more slowly than during the baby boom era, thus less investment is needed, thus there’s less demand stemming from investment. Well now if I have $X in the bank and find that there’s not much demand for it for investment purposes (i.e. interest rates are low), then I’ll probably spend it on something else: a better house or whatever.
But even if a cut in investment DOES MEAN less AD, then again, what’s wrong with the Keynes / MMT solution? Nothing!
And finally, in his fourth section, entitled “Destructive virtue”, K argues that we might need a negative interest rate to bring full employment, but that means we’ll have to abolish physical cash (else when negative rates arrive, people will avoid the loss they’d make by keeping their money in a bank by storing it under their mattress instead).
It’s true that negative rates given an inducement to spend, but people find physical cash USEFUL (despite the increased popularity of plastic cards in recent decades). Plus there’s a simple way to induce people to spend. You’ll never guess what it it is. Yep, it’s that good old Keynes / MMT solution. I.e. just feed extra money into private sector pockets. And what do people do when they find extra money in their pockets, e.g. as a result of a lottery win or tax rebate?
Summers the stupid and Krugman the Konfused can’t work it out. But the average cockroach can.
Ralph Musgrave | Ralphonomics