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Friday, January 03, 2014

'Taylor v. Summers on Secular Stagnation'

On Twitter, Roger Farmer says:

Jared Bernstein disagrees with John Taylor on secular stagnation. Jared is right ...

and he follows up with:

John ... policy is not always perfect but your faith in the curative powers of markets is misplaced

Here's the Jared Bernstein response to John Taylor that Roger Farmer is referring to:

Taylor v. Summers on Secular Stagnation: ... In a recent speech I’ve featured here in numerous posts, Larry Summers raised the possibility that the economy is growing below its potential, with all the ancillary problems that engenders (e.g., weak job and income growth), and not just in recession, but in recovery.  Stagnation is by definition expected in recession, but not in an expansion...
Taylor argues, however, that secular stagnation is “hokem.”  His argument rest on two points, both of which seem obviously wrong.
First, he claims that the current recovery has been weak is not due to any underlying problems in the private sector or lousy fiscal policy, but due to “policy uncertainty, increased regulation, including through the Dodd Frank and Affordable Care Act.”  But the recovery began in the second half of 2009, well before either of those measures took effect.  And, in fact, since they’ve done so, if anything, growth and jobs have accelerated.  Financial markets have done particularly well...
Taylor’s antipathy toward fiscal stimulus leads him to completely omit the fact of austerity in the form of fiscal drag as a factor in the weak recovery.  ...
His second argument is that if secular stagnation were a real problem, we would have seen it in the 2000s expansion, yet instead we saw “boom-like conditions, especially in residential investment.” ...
Yes, there was a lot—too much—residential investment, but employment growth was terribly weak...,the share of the population employed actually declined.  Real GDP grew almost a point more slowly per year over the 2000s business cycle relative to the prior two cycles.  Business investment grew less than half as fast in the 2000s than it did in the 1990s.  In fact, after rising pretty steeply in the 1990s, CBO’s estimate of potential GDP fell sharply in the 2000s..., a serious cost of the problem Summers is raising and Taylor is wrongly debunking.
It’s also worth noting that middle-class incomes and poverty rates did much better in the 1990s, thanks to full employment conditions in the latter half of that cycle, than in the 2000s, when slack labor markets led to a flattening trend in real median income and increasing poverty rates.
I doubt any of this will convince Taylor and others who simply want to go after the ACA, the Fed, stimulus measures, et al.  But those of us interested in blazing the path back to full employment should recognize these arguments as politically motivated distractions. ...

This post from Brad DeLong on the same topic is also worthwhile.

    Posted by on Friday, January 3, 2014 at 08:35 AM in Economics | Permalink  Comments (31)


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