Commenting on the recent spat between Larry Summers and Ben Bernanke over secular stagnation, Greg Ip from the WSJ wrote that Bernanke has the theory while Summers has the evidence. In fact, Bernanke has neither.
These days, much of the free banking debate focuses on the history of banking. On one side are the free banking advocates who point to the vastly increased macroeconomic stability that occurred in free banking systems. On the other are the free banking haters, such as Lord Keynes from the blog Social Democracy for the 21st Century, who argue that these periods reveal no such thing. Either the economies in question were far from stable, Lord Keynes says, or their banking systems were nothing like free banking. What’s clear from the diametrically opposed viewpoints is that biased readings of history will not help us decide whether free banking is an improvement or a deterioration on our current monetary system.
What matters, instead, is the theory underlying the idea. For this reason I went to the source itself — George Selgin’s The Theory of Free Banking: Money Supply Under Competitive Note Issue.
Two weeks ago, I had the pleasure of speaking with Miles Kimball. For those unversed in the who’s who of the economics world, Miles is a Professor of Economics and Survey Research at the University of Michigan and blogs at Confessions of a Supply-Side Liberal and Quartz. As one of the few professional economists who believe our monetary system is in dire need of an overhaul, he has developed a proposal for removing the Zero Lower Bound (ZLB) without outlawing cash. In a gist, Miles’ proposal would allow the central bank to implement a deposit fee on its cash window, thereby creating a negative rate on physical currency. Miles is also the first person with academic credibility to read my book, and his feedback, delivered over a marathon phone call that lasted nearly three hours, was very positive.
Paul Krugman has been busy as a bee of late tearing into QE truthers and inflation hawks for their gross ignorance. How could they have been so stupid to believe that QE would cause inflation? he asks. Let me show you my IS-LM model, which clearly shows that QE cannot trigger inflation during a liquidity trap.
Before delving into the flaws of his argument, let’s be clear: he is right in some respects.
Last night I realised that focussing this blog solely on secular stagnation was a mistake. Reading through a discussion by pre-eminent economists on whether secular stagnation is the cause of the slow recovery, or of Greek’s problems, it suddenly hit me: it doesn’t really matter.
That’s right: it doesn’t matter what causes deficient demand. What matters is that demand can be deficient.
The problem is that the secular stagnation debate introduces a false premise: that without secular stagnation our monetary system is civilised.
What is One-Month Money about?
One-Month Money (buy from Amazon UK, Amazon US, Harriman House) is divided into two parts. Part One — ‘The Case for Change’ — explains why our current economy is inherently unstable, and why our tools of fiscal and monetary policy can only ever hope to moderate, but never eliminate, this instability. This section ends with an explication of secular stagnation in developed economies. Driven by a structural decline in workforce growth, secular stagnation will make our current remedies, already inadequate, even more so.
Larry Summers put it best in a speech delivered yesterday at the London School of Economics:
“We need to move beyond the Calvinist idea that more savings is always good and borrowing is bad because what we have right now … is a chronic excess of saving and at least judging by the market evidence it’s likely to be with us for some time to come.”
To read why neutral money would solve the problem of excess savings, please see the article just posted on my publisher’s website.
Keynesians like Paul Krugman and Simon Wren-Lewis have been working overtime in defence of their beliefs. The anti-Keynesian attack began before Christmas, when U.K. Chancellor of the Exchequer George Osborne wrote in the WSJ that Keynesians wanting more spending and more borrowing “were wrong in the recovery, and they are wrong now.” The attack continued when John Cochrane penned a WSJ opinion piece denouncing the efficacy of government stimulus. In it, he pointed to the fact that the US has grown despite austerity as proof that deficits are not only useless but harmful.
One question I struggled with in my book was how secular stagnation would manifest itself. Would the unemployment rate stay perniciously high? Or would the symptoms be subtler: a low unemployment rate, for instance, combined with a low participation rate?
The Twitter discussion surrounding the latest US jobs report has reignited my internal debate. So I thought I’d share it. For me the key question is this: what if the declining participation rates, shown in the chart below, are actually a result of secular stagnation? What if the US economy has become incapable of employing as many willing workers as it once could?