The Productivity Trap

In my last post, I began by discussing the two definitions of secular stagnation — how one relates to the demand-side while the other to the supply-side. As a proponent of a neutral monetary system, I said that I only cared about the demand-side definition, since the main impetus behind neutral money is to solve the problem of deficient spending.

The truth is that the two definitions are inextricably linked.

We need to talk about secular stagnation

Now that secular stagnation has become a catchword in financial circles, everyone seems to be weighing in on it. In a series of recent tweets, Marc Andreessen, a Silicon Valley honcho, has confidently declared that secular stagnation poses no risk to the US economy. In support of his argument, Andreessen cites a convoluted report from the Bank of Italy and quotes Larry Summers, who stated on CNBC that secular stagnation is more a problem for Japan and Europe than the US. The mistake in Andreessen’s logic, however, and it’s a mistake that many commentators make, is to confuse two definitions of secular stagnation. The first is a supply-side definition, and the second is a demand-side definition.

The collapse in oil should make the Fed more dovish, not less

There has been a lot of talk surrounding the collapse of oil prices. On one side are the optimists who focus on the income transfers to consumers. On the other are the bears who insist that the ongoing oil shock is symptomatic of a weakening global economy. Both camps have portrayed themselves as contrarian, with Gavyn Davies of the Financial Times going so far as to say that gloominess is always more popular than bullishness. The good people at Federal Reserve, salivating at the prospect of higher disposable incomes, seem to disagree.

Let’s start with an important point: we need to abandon the notion that the world is now more productive as a result of collapsing oil prices.

Nobody Knows

“Nobody really knows.” This is a phrase we should use more often, yet it’s guaranteed to send producers at CNBC running for the hills. If you want coverage, whether in the Financial Times or Bloomberg, you better pick a side. “Austerity will unleash a boom.” “Austerity will cause a depression.” Pick one of the above, but whatever you do, don’t sit on the fence.

Well, I happen to like fences. Despite the claims of Keynesian economists like Paul Krugman, the truth is that nobody really knew, in 2010, how austerity would affect Greece.