More on Secular Stagnation

Here is the link to a piece I wrote for the Globe on line this week re an interesting new eBook on secular stagnation.  I am struck by the fact that several eminently mainstream economists, mainly in the US but also Blanchard at the IMF,  see a need for public investment to drive growth, given the fact that loose monetary policy alone is not up to the job and is fueling financial bubbles. This is a view which we do not often hear in Canada from mainstream academics and economists.. eg Chris Ragan’s recent piece to the effect that we just have to tolerate slow growth and a weak job market.

The book also has an interesting discussion re technological progress and potential growth.


  • To this non-economist, this analysis sounds reasonable and humane. But I can’t help wondering if we’re ignoring another driving variable – energy costs and the declining net yield of useful energy from fossil fuel sources. Is it plausible that policies that worked in the world of $5 oil are still going to succeed when it’s $90 or more, and in future is unlikely to go lower, even in recessions?

    I’d like to see this forum explore what this means for the future of the Canadian economy. For example, what happens when the price of oil is so high that it neutralizes stimulatory policies, while still not being high enough to support increasingly capital-intensive energy projects in the tarsands or deep offshore?

    Physical constraints on the scale of the human economy from resources – both their absolute amounts and quality – are pretty humbling. But they aren’t going away.

  • Letter in Lethbridge Herald:

    Why not invest money so everyone can have job?

    Re: “Create jobs by running deficits, Ottawa urged,” Julian Beltrame, The Canadian Press, July 23 (

    The C.D. Howe Institute has urged the Canadian government to create 75,000 jobs by running a small deficit. But since we have over 1.3 million unemployed, why not create a substantial deficit and put everyone to work, just the way we gave jobs to all during the Second World War?

    The belief that higher deficits damage the economy stems largely from a paper written by economists Rogoff and Reinhart that has recently been discredited when a student discovered background computer calculation errors.

    The country with the largest debt ratio today is Japan, which controls its own currency just as does Canada. Japan has little inflation, low interest rates and no problem issuing government bonds. Why would having creating full employment through deficit spending be problematic for our economy? On the contrary, it would make us more productive and reduce long-term costs of unemployment, social problems and welfare.

    As John Maynard Keynes put it many years ago: “The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years.”

    Modern Monetary Theory in Canada

  • We will stumble along- the public sector will continue to be cut back and the added economic effects of a public infrastructure will fall away from the productive base. I read somebody recently that captured it quite succinctly – a robust and fluidly functional public sector allows citizens and business to willy nilly take advantage of all its benefits to produce products and services with much ease- compared to those without.

    Of course this comes down to ones belief in markets and the prevailing ideology which portrays the public sector as interfering with markets which believe market force must be free – i.e. business people can do whatever they like.

    But that is not what reality is- there are rules, and with those rules comes a requisite infrastructure in which these business entities must have to operate within- and that space is created through rules- the question is- to get access to that public space for private and collective benefit- how indeed must these rules be formed? The bottomline- business want the public space and also want to define the rules to that space- but seemingly the ideology is to cut back government influences over said infrastructure which to me seem counter intuitive.

    Here is a truly good assessment of the case for China and its current public space building and new role of business and government- sadly no room even under state capitalism for worker interests- apparently the increased output is all that matters. A very well thought out article.

  • Paul Tulloch: have to disagree with the quality of Michael Pettis’s economic ideas. He appears to believe social capital is maximized by free-market reforms, not, for example, redistribution of wealth through progressive taxation to reduce inequality and ensure all segments of society benefit from GDP and productivity growth (like we had during the post-war Keynesian era.)

    He compares France to Nigeria in terms of social capital, which is absurd. This is the typical neoliberal bias against France that Krugman regularly points out has no basis in reality. Although France may go too far with social benefits, they rank #6 world in productivity.

    Bad monetary policy, flaky economic theory and Germany’s whopping trade surplus are what’s killing the EU economy. EU power brokers believe in discredited “confidence fairy” expansionary austerity (“fiscal consolidation”.) Simon Wren-Lewis writes a good article on the real problem plaguing the eurozone (which is not socialism in France.)

  • I am not sure how you interpret what you did from that article and I am not an expert on Pettis- but he is stating very clearly that he is arguing against neo-liberal reforms of the financial elites.

    “t because they often or usually require a dismantling of the distortions and frictions that create rent for the elite, thus the undermining the ability of the elite to capture a disproportionate share of the benefits of growth. A financial system that allocates capital efficiently and productively, for example, is not one that allocates capital on the basis of power or access. A fair, clear, and predictable legal system is not one in which some groups are privileged relative to others. If anyone can start a business, the benefits of monopoly or oligopoly are undermined.”

    I could be wrong but is he not saying that many of the current varieties of capital are plagued by neo-liberal attempts at pretending that their version of market forces are muchh freer than others but essentially are unfree. And I thought he was arguing for more public social capital- that also included more institutions for taking wages out of this competitive race to the bottom.

  • Pettis is talking about the elites (oligarchs) in China, who didn’t achieve their wealth through neoliberal ideology. Many Asian economies are command economies where government plays a strong role in managing the direction the economy takes. Like “Japan Inc” which led the country to become an electronics super-power. The same happened in South Korea. (SK has the fastest internet on the planet through government intervention with the goal of becoming an internet technology super-power.)

    So China also has a command economy. But because they are authoritarian, instead of democratic, the benefits are not distributed among the people. The Chinese oligarchs in this sense are not much different from the free-market oligarchs which seek to reduce the powers of democratic government.

    Pettis places himself in between the Keynesians and the neoliberal ideologues, but is very much free-market leaning.

    Take his blog, Economic consequences of income inequality. Very informative and based on widely-accepted economic principles.

    But he doesn’t entertain the idea that a solution to reducing inequality could be greater government investment in infrastructure (an obvious increase in productive investment) funded through progressive taxation. Or that redistribution through greater public benefits could bolster disposable income, which would fuel sustainable consumption and increase household share of GDP. Or how an increase in minimum wage could do the same thing.

    He does produce a very interesting conclusion: that reducing global trade is a way to reduce inequality.

    I think many of the problems he talks about can be managed best with managed trade and common regulation trade blocks (fair trade.) Mercantilist countries that don’t increase consumption to reduce their trade surpluses will be punished with tariffs. Same with countries that abuse labor and the environment.

    The low levels of tariffs we had in the Keynesian era provided many benefits like leveraging jobs which created a bigger market (like the Auto Pact.) Free trade with Korea and the EU will mean foreign automakers will have little incentive to invest in new car plants in Canada. That will decrease Canadian demand for their cars in the long run.

  • Larry Kazdan: don’t forget that progressive taxation played a very important role in allowing deficit spending to be sustainable in the long run. In the post-war Keyensian era, developed countries paid down most of their debts (debt/GDP.)

    In North America, the reckless tax cuts of Reagan, Mulroney, Bush and Harper (unopposed by “liberals” like Clinton, Chretien, Obama and Trudeau) are a main source of the high deficits and government debt we face today.

    In Canada, these tax cuts amount to well over $100 billion a year (Harper boasts of $45B/yr in “tax relief” alone.) A big part of getting back on track to decent GDP growth and rising living standards will be eliminating this welfare for the rich – whose entire purpose is to bankrupt democratic government and the social safety net (“starve the beast.”)

  • I get it that he is talking about Chinese elites- but my point is, aside from his background- is that what is professed for the “communists” stands up very much to my belief in our economy- monopolists and oligopolists and the rent seeking. I agree it still does not get to the demand issue of the income inequality- however- it is indeed part of the solution. So I take part of what he is saying- but do not support the rest of his views. Innovation and productivity is the key to equality just as much as wage and social means. My main point here is it gets back to what Andrew is getting at- it takes a public sector, more than a private sector to deliver an economy onto a development pathway that is sustainable and productive. And most of that logic is locked up and kept in a cage by both the communists and the capitalists as they actually exist. Making a profit is the easy part for capital- creating the space to exist and define all that which is required to rationalize and structure the space is the complex part, and that to me is what Pettis points very fleetingly at that I want to draw focus- and not him and the rest of his package.

    Something is actually happening here- and Andrew is picking up on it- a growing belief in the center and maybe center right, that potentially the public sector is the new space for wealth generation. Instead of beating on the public sector like the Neo cons have done- there is a new belief in that crowd that it actually night be a good idea to grow that space- and a serious belief. Even the damn communists are starting to take note- that an effective public space is the key to grow.

    Hence why in Canada under Harper- even some of the red tories are starting to scream at him. There is a realization that institutional change is not easy to deliver and the economics that have been instilled by the neo-cons have worked out too well and could push us over the edge- the question I see being asked- what is the best way forward- and it seems like the growing interest in the public sector and even maybe nationalizing companies may find its way into the acceptable policy in-boxes of even the right wingers.

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