by Dan Kervick, New Economic Perspectives
When Larry Summers said:
Even a great bubble [first in high-tech and then in housing] wasn’t enough to produce any excess of aggregate demand…. Even with artificial stimulus to demand, coming from all this financial imprudence, you wouldn’t see any excess…
He wasn’t calling for more bubbles. He was pointing out that an economy that can only attain anything like full employment with stable inflation in a bubble is an economy with something deeply and structurally wrong with it–something that needs to be fixed.
DeLong then proceeds to lambaste Crook for his intellectual dishonesty. But Crook does not actually say Summers advocates bubbles. This is the relevant passage from Crook’s piece.
But Summers then asks, what if this isn’t temporary? Maybe there’s a chronic shortfall of demand, beyond what’s due to the crash. Maybe we face an age of secular stagnation, in which the zero lower bound is normal. If so, short-term fiscal easing can’t be the answer. Permanent fiscal stimulus may be necessary to maintain demand. And if that can’t be done because politics makes it impossible, what’s left? Bubbles. Summers doesn’t advocate them, mind you, he just poses the question.
So what did Summers actually say at the IMF Research Conference talk to which both Delong and Crook are referring? Summers’s grand concluding lesson in that talk is about the importance of the zero nominal interest rate barrier, and the need to think about how to make policy for an economy in which the zero bound persistently inhibits growth. However, just prior to getting to that point, Summers expresses doubts about an emerging regulatory policy agenda that might inhibit the expansion of credit. Summers says:
One has to be concerned about a policy agenda that is doing less with monetary policy than was done before; doing less with fiscal policy than has been done; and taking steps whose basic purpose is to cause there to be less lending, borrowing and inflated asset prices than there was before.
These concerns are tied into his earlier observation that in the pre-crisis environment high levels of private sector credit and debt were needed just to support demand at the non-inflationary level needed to buy up the output of the economy. He earlier described that extremely high volume of credit – which he acknowledges just about everyone now deplores – by using the term “bubble.”
So that sounds to me like a qualified defense of the advisability of permitting bubbles to form under current economic conditions.
Now DeLong is correct in suggesting that the upshot of the full discussion is an implied dilemma: either we do something creative about dealing with the zero bound, or we accept the need for bubbles. But Summers doesn’t at all reject the first horn of that dilemma. So it is not right to suggest that it is some kind of slander on Summers to say that he speaks kindly of bubbles in his talk. In fact, part of the message of the talk seems to be to defend his own legacy as a top economic policy maker during the dot-com bubble.
Summers’s speech – vaunted as daring and radical by the kinds of people whose thoughts move inside the tiny constipated circles permitted by the global plutocracy, its court academics and its approved ministers of the faith – is actually quite boring and conventional, and offers nothing that anybody who follows these discussions hasn’t heard many times before. The talk is more notable for the large territory of ideas that are excluded from discussion, rather than for the topics that are broached.
For one thing, there is a complete absence of thoughtfulness in Summers’s talk about what could account for the fact that the financial sector needs to loan households vast amounts of money just so that they can afford to buy all of the output they produce. That reality seems passing strange, doesn’t it? Why rising household debt instead of rising household income? Someone who wasn’t bound by the brain-crushing taboos and dogmas of the High Church Neoliberals at an IMF conclave might have asked some tough questions about incomes, power, distribution and exploitation.
Like most macroeconomists, Summers is loathe to look deeply at economic society and its many self-destructive pathologies. He prefers to pin the problem on an inexplicable fall in the probably bogus “natural rate of interest” – which he and others seem to regard as just some kind of brute cosmological constant. The natural rate hypothesis is built on a loanable funds model of credit via financial intermedition, a model which is completely inadequate to the institutional facts of an economic world in which new financial capital is generated by banks in the process of making loans, and where banks do not simply act as intermediaries for contracts involving already-existing capital.
For mainstream macroeconomists, Summers’s kind of thinking counts as “radical”. But these sentiments must be seen against the background of an extremely conservative economics profession and global financial hierarchy whose prime imperative is the protection of private property and established concentrations of wealth, and whose commissioners are ideologically committed to the preservation of autonomous private enterprise capitalism as the driver of economic development and the principle of social order.
Are we facing secular stagnation? It sure looks like it. But stagnation is a social choice, and it is a choice we can reverse. If we have the fundamental potential to make social and economic progress; if making that progress requires the expansion of human enterprise and the employment of unemployed human and material resources; and if the private sector seems persistently incapable of fostering that expansion of human enterprise either at the levels we need or of the kinds we need – then we are perfectly capable of mobilizing our citizenries into public enterprises that can carry out the necessary tasks directly. There is no need to sit around and wait for capitalist firms to get the magic interest rate that will set the tumblers of the vault of economic prosperity into place, and unlock our golden future. Nor is there a need to finance household purchases of the output they, themselves produce through the gaming in a plutocratic casino that generates crushing and destabilizing debts that can’t be repaid. Nor is there any reason to think that without an expansion of public enterprise and the active intervention of democratic government, the future that private firms alone would build is the one we actually need.
The 21st century challenges facing the nation and the globe are vast and daunting, and the social choice we have made in favor of stagnation is a crime against future generations. We have moved well beyond the point where these challenges can be met merely by twiddling further with interest rates, by further indebting households, or by pumping up more predatory financial froth and fluff.
Cross-posted from Rugged Egalitarianism