In response to an FT article by Larry Summers on 29th September 2016, entitled 'The middle class and secular stagnation'
“I have just come across an International Monetary Fund working paper on income polarisation in the US that makes an important contribution to the secular stagnation debate. The authors — Ali Alichi, Kory Kantenga and Juan Solé — use standard econometric techniques to estimate the impact of declines in middle-class incomes on total consumer spending. They find that polarization has reduced consumer spending by more than 3 per cent, or around $400bn annually. If these findings stand up to scrutiny, they deserve to have a policy impact.
This level of reduction in spending is huge. For example, it exceeds by a significant margin the impact in any year of the Obama stimulus programme. Alone, it would be enough to account for a significant reduction in neutral real interest rates. If consumers were spending 3 per cent more there would be scope to maintain full employment at interest rates much closer to normal. And there would be much less of a problem of monetary policy’s inability to respond to the next recession.
What is the policy implication? Principally, it is the macroeconomic importance of supporting middle-class incomes. This can be done in a range of ways from promoting workers’ right to collective bargaining to raising spending on infrastructure to making the tax system more progressive. These are hardly new ideas. And I supported them before seeing this new research. But there is now another powerful argument in terms of mitigating secular stagnation in their favor” – Larry Summers
Any 'cure' based on a misdiagnosis of the sickness will make the situation worse, which is what has been happening since Alan Greenspan discovered the magic money tree in the late eighties.
The 'stagnation' we are suffering from is not 'secular', any more than the 'glut' we are drowning in consists of 'savings'. Similarly there is no 'neutral real interest rate' that exists independently of the theories and the actions of the people measuring it. This is not science, it's quackery. Its main function seems to be to immunize the academics from any responsibility for the results of their actions: 'Don't blame me guv, it's that naughty natural interest rate, it made me lower interest rates...it made me print $3.5 trillion, I swear it did your honor...the more I did what it said, the more demanding it got"
Anyone wanting a more realistic take on what's happening, can read William White's piece at the FT from last week:
Here's a snippet:
"Perhaps we need look no further for the cause of the alarming slowdown in global growth than the insidious effects of easy-money policies. Two vicious circles are at work with a wounded financial system contributing to both. On the demand side, accumulating debt creates headwinds, leading to more monetary expansion and more debt.
This explanation contrasts sharply with the hypothesis of a “savings glut”: little more than a tautology for slow demand growth. On the supply side, misallocations slow growth which again leads to monetary easing, more misallocation and still less growth. This explanation seems far more convincing than “secular stagnation” in an era of extraordinary technological advances"
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Postscript: As usual Professor Summers is promoting the same ‘solutions’ that got us here:
a) Printing money out of absolutely nowhere - the result of zero productivity
b) Massive debt based spending directed through government programmes - a proportion of which will be funnelled through 'pork barrel' scams, another chunk which will be badly managed since government couldn't organise a kid’s party in a chocolate factory, some of which will squandered. Some will do some good
c) Redistributing income through taxation
d) Extra layers of bureaucracy and non-revenue generating functions
In the ivory towered world of governmental academics like Professor Summers, it’s all about ‘spend’, never about ‘create'. E.G: Notice that there is no mention of creating a more business friendly environment for the SMEs…which, in the US as in the UK, are the heart and soul of the real economy. That’s where we generate the jobs, the innovation, and the seemingly old fashioned sense of ‘taking personal responsibility for your own life’ - the 'sense' without which nothing much happens.