Secular stagnation has been a hot topic in the news ever since Larry Summers mentioned the idea in a speech late last year. Since then the topic has sparked a war of sorts in academic circles.
Some economists, like the uber-Keynesian Paul Krugman, have wholeheartedly endorsed the idea. Fellow Nobel Laureate Robert Shiller, on the other hand, has called secular stagnation an outdated “thought virus,” one that academics have paid little attention to in decades.
Presumably these are the same academics who failed to predict the financial crisis until our banks were going bankrupt left and right. Not even a Hollywood studio could write a more ham-fisted display of hubris.
One-Month Money argues that secular stagnation is a very real and very urgent problem.
Simply put, secular stagnation is a time when an economy is unable to employ all available labour without prolonged government deficit-spending. In other words, unless the government commits to endless stimulus, unemployment would remain persistently high.
Monetary policy alone, under this scenario, is ineffective. Even with interest rates at 0% and infinite QE, the private sector would still be unable to provide a job to every willing worker.
How does secular stagnation come about?
The root cause is demographics. With slowing (or declining) workforce growth, private-sector investment demand is simply unable to absorb all our savings. Because interest rates cannot turn negative, total spending falls and jobs disappear.
In the early 90s, Japan was the first major economy to enter secular stagnation. Other developed countries, especially in Europe, are following close on Japan’s heels.
So what can be done about it?
Larry Summers and others propose a set of policies that would reduce savings and increase investment. Wealth redistribution, for example, would put income in the hands of people with a lower savings rate, since the poor spend proportionately more of their pay than the rich. Government could also spur private sector investment by boosting business confidence and reducing structural barriers. The most direct tool is for the government to create demand itself, by borrowing excess savings and spending it on infrastructure. Build more bridges, more roads, etc. Taken together, these policies have a single overriding goal: absorb savings, boost demand.
But political hurdles aside, all these suggestions have serious flaws. At some point, the rich will refuse, Ayn Rand-style, to be soaked, and when it comes to spurring private-sector investment, how can we urge private firms to invest more if those investment opportunities are inherently poor because of bad demographics? This sounds like a recipe for speculative bubbles.
In the end, the only surefire way to protect an economy from secular stagnation is limitless government deficit-spending, regardless of how the money is spent.
But even here, there are problems. Government stimulus is notoriously difficult to calibrate. Governments may overshoot and trigger inflation (or crowd out the private sector) or they may undershoot and cause too-high unemployment. Governments are also prone to waste, mismanagement and corruption.
And then, of course, there’s debt. Over the last 25 years, Japan has had to run enormous deficits just to keep its economy afloat. Its debt-to-GDP is now a staggering 230%. How long can it keep this up before the bond markets desert it?
One-Month Money recognizes we need a different and better solution to secular stagnation. We need a solution that is free of the inaccuracies and political whims of elected officials. We need a solution that doesn’t require ballooning levels of public debt, one that works even when the interest rate necessary to drive full employment is negative – a target that is currently unachievable by central banks.
This solution is known as neutral money. All it requires of us is that we spend or save our income by the end of each month, otherwise it expires.
Expiration sounds a little scary at first, but it requires only minimal change on our part. What expiration really means is that we can no longer save by leaving cash in our current account or under the mattress.
In other words, we can’t hoard.
All other forms of saving would still exist. We can save by transferring money to a savings account or by buying stocks, bonds, real estate, or numerous other saving products.
It’s true, we’ll have to pay closer attention to our finances. But the result is an economy that is always at full employment, regardless of whether it is suffering from secular stagnation or not.
So we then have to ask ourselves: is this a price worth paying?
Oliver Davies blogs at All Things Secular Stagnation and is the author of One-Month Money: Why money ruins our economy – and how reinventing it could end unemployment and inflation forever. It is available now.