Secular stagnation III –minus the irony

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I’m sor­ry, I could­n’t help it: when Lar­ry Sum­mers first made his sec­u­lar stag­na­tion speech at the IMF, and the Amer­i­can eco­nom­ics tribe her­ald­ed it as if it were the great­est (and lat­est) thing since sliced bread, my irony gene went into overload—and that showed in my first post on the top­ic. The argu­ment that the West has been suf­fer­ing from sec­u­lar stag­na­tion, and that only a series of finan­cial bub­bles have kept the illu­sion of pros­per­i­ty going, has been part of non-ortho­dox eco­nom­ics for over three decades.

Much of this has been in the real under­world of eco­nom­ics, ema­nat­ing from the hand­ful of avowed­ly Marx­ist econ­o­mists that have sur­vived in aca­d­e­m­ic insti­tu­tions and non-main­stream media. But issues such as the impact of transna­tion­al cor­po­ra­tions relo­cat­ing pro­duc­tion to third world free trade zones have been hot top­ics amongst non-main­stream econ­o­mists for decades (for instance, I wrote my first piece on this top­ic in 1979—here’s the some­what dat­ed Tech­ni­cal Appen­dix for wonks).

Back then. the reac­tion of main­stream econ­o­mists to this per­spec­tive was at best a deaf­en­ing silence, and at worst deri­sion. Weren’t these the left­ies who were always expect­ing the final cri­sis of cap­i­tal­ism, even after the fall of the Berlin Wall?

Of course, there was more than a grain of truth to that riposte. But rather than tack­ling the sec­u­lar stag­na­tion argu­ments direct­ly, main­stream econ­o­mists dis­missed them with deri­sion, in the sub­lime con­fi­dence that cap­i­tal­ism could nev­er have crises. My favorite such state­ment was by Edward Prescott (who, with Finn Kyd­land got the Nobel Prize for invent­ing the “real busi­ness cycle, rep­re­sen­ta­tive agent” approach to eco­nom­ics that still dom­i­nates the main­stream today). Enti­tled “Some obser­va­tions on the Great Depres­sion” and writ­ten in 1999, it con­clud­ed with this rhetor­i­cal flour­ish:

 The Marx­i­an view is that cap­i­tal­is­tic economies are inher­ent­ly unsta­ble and that exces­sive accu­mu­la­tion of cap­i­tal will lead to increas­ing­ly severe eco­nom­ic crises. Growth the­o­ry, which has proved to be empir­i­cal­ly suc­cess­ful, says this is not true. The cap­i­tal­is­tic econ­o­my is sta­ble, and absent some change in tech­nol­o­gy or the rules of the eco­nom­ic game, the econ­o­my con­verges to a con­stant growth path with the stan­dard of liv­ing dou­bling every 40 years. (Prescott 1999)

Yeah, right. One decade lat­er, that open­ing Marx­ist sen­tence began to sound a lot more real­is­tic than Prescot­t’s dis­missal of it.

Of course, main­stream econ­o­mists could nev­er acknowl­edge the pri­or argu­ments of a rival intel­lec­tu­al tra­di­tion, but now that Lar­ry (peace be upon him) Sum­mers has said it, sud­den­ly it’s OK to spout what the left­ies have been say­ing for 30 years (though with dif­fer­ent expla­na­tions, of course—it’s declin­ing pop­u­la­tion growth and falling lev­els of inno­va­tion, not nasty transna­tion­als relo­cat­ing pro­duc­tion, or finan­cial­iza­tion of the econ­o­my white-anti­ng the indus­tri­al sec­tor).

Oh give me a break—hence the irony. But since Sum­mers’ take on sec­u­lar stag­na­tion looks like it will be the flavour of the month for Amer­i­can econ­o­mists for the fore­see­able future, I have to take it more seri­ous­ly. Hence this more seri­ous post for my first col­umn in 2014, which builds on the last two on this topic—and with no irony what­so­ev­er.

But I’ll com­mence with two caveats: yes sec­u­lar stag­na­tion is real, but it has far more to do with rea­sons the main­stream has always reject­ed than with any­thing it will dream up post-Sum­mers; and the left­ies got there first.

That said, let’s get aca­d­e­m­ic over how “sec­u­lar-stag­na­tion-aug­ment­ed Loan­able Funds” might allow Neo­clas­si­cals to take pri­vate debt seri­ous­ly some of the time…

The cri­sis of 2007/08 has gen­er­at­ed many anom­alies for con­ven­tion­al eco­nom­ic the­o­ry, not the least that it hap­pened in the first place. Though main­stream eco­nom­ic thought has many chan­nels, the com­mon belief before this cri­sis was that either crises can­not occur (Edward C. Prescott, 1999), or that the odds of such events had either been reduced (Ben Bernanke, 2002) or elim­i­nat­ed (Robert E. Lucas, Jr., 2003) cour­tesy of the sci­en­tif­ic under­stand­ing of the econ­o­my that main­stream the­o­ry had devel­oped.

This anom­aly remains unre­solved, but time has added anoth­er that is more press­ing: the fact that the down­turn has per­sist­ed for so long after the cri­sis. Recent­ly Lar­ry Sum­mers sug­gest­ed a fea­si­ble expla­na­tion in a speech at the IMF. “Sec­u­lar stag­na­tion”, Sum­mers sug­gest­ed, was the real expla­na­tion for the con­tin­u­ing slump, and it had been with us for long before this cri­sis began. Its vis­i­bil­i­ty was obscured by the Sub­prime Bub­ble, but once that burst, it was evi­dent.

This hypoth­e­sis asserts, in effect, that the cri­sis itself was a sec­ond-order event: the main event was a ten­den­cy to inad­e­quate pri­vate sec­tor demand which may have exist­ed for decades, and has only been masked by a sequence of bub­bles. The pol­i­cy impli­ca­tion of this hypoth­e­sis is that gen­er­at­ing ade­quate demand to ensure full employ­ment in the future may require a per­ma­nent stim­u­lus from the gov­ern­ment – mean­ing both the Con­gress and the Fed – and per­haps the reg­u­lar cre­ation of asset mar­ket bub­bles.

What could be caus­ing the sec­u­lar stag­na­tion – if it exists? Krug­man (Paul Krug­man, 2013b) not­ed a cou­ple of fac­tors: a slow­down in pop­u­la­tion growth (which is obvi­ous­ly hap­pen­ing: see Fig­ure 1); and “a Bob Gor­donesque decline in inno­va­tion” (which is rather more con­jec­tur­al).

Though Sum­mers’ the­sis has its main­stream crit­ics, there’s a cho­rus of New Key­ne­sian sup­port for the “sec­u­lar stag­na­tion” argu­ment, which implies it will soon become the con­ven­tion­al expla­na­tion for the per­sis­tence of this slump long after the ini­tial finan­cial cri­sis has passed.

Krug­man’s change of tune here is rep­re­sen­ta­tive. His most recent book-length for­ay into what caused the cri­sis – and what pol­i­cy would get us out of it – was enti­tled End This Depres­sion NOW!. The title, as well as the book’s con­tents, pro­claimed that this cri­sis could be end­ed “in the blink of an eye”. All it would take, Krug­man then pro­posed, was a suf­fi­cient­ly large fis­cal stim­u­lus to help us escape the “Zero Low­er Bound”:

The sources of our suf­fer­ing are rel­a­tive­ly triv­ial in the scheme of things, and could be fixed quick­ly and fair­ly eas­i­ly if enough peo­ple in posi­tions of pow­er under­stood the real­i­ties…

One main theme of this book has been that in a deeply depressed econ­o­my, in which the inter­est rates that the mon­e­tary author­i­ties can con­trol are near zero, we need more, not less, gov­ern­ment spend­ing. A burst of fed­er­al spend­ing is what end­ed the Great Depres­sion, and we des­per­ate­ly need some­thing sim­i­lar today. (Paul Krug­man, 2012, pp. 23, 231)

Fig­ure 1: Pop­u­la­tion growth rates are slow­ing

Post-Sum­mers, Krug­man is sug­gest­ing that a short, sharp burst of gov­ern­ment spend­ing will not be enough to restore “the old nor­mal”. Instead, to achieve pre-cri­sis rates of growth in future – and pre-cri­sis lev­els of unem­ploy­ment – per­ma­nent gov­ern­ment deficits, and per­ma­nent Fed­er­al Reserve spik­ing of the asset mar­ket punch via QE and the like, may be required.

Not only that, but past appar­ent growth suc­cess­es – such as The Peri­od Pre­vi­ous­ly Known as The Great Mod­er­a­tion– may sim­ply have been above-stag­na­tion rates of growth moti­vat­ed by bub­bles:

So how can you rec­on­cile repeat­ed bub­bles with an econ­o­my show­ing no sign of infla­tion­ary pres­sures? Sum­mer­s’s answer is that we may be an econ­o­my that needs bub­bles just to achieve some­thing near full employ­ment – that in the absence of bub­bles the econ­o­my has a neg­a­tive nat­ur­al rate of inter­est. And this has­n’t just been true since the 2008 finan­cial cri­sis; it has arguably been true, although per­haps with increas­ing sever­i­ty, since the 1980s. (Paul Krug­man, 2013b)

This argu­ment ele­vates the “Zero Low­er Bound” from being mere­ly an expla­na­tion for the Great Reces­sion to a Gen­er­al The­o­ry of Macro­eco­nom­ics: if the ZLB is a per­ma­nent state of affairs giv­en sec­u­lar stag­na­tion, then per­ma­nent gov­ern­ment stim­u­lus and per­ma­nent bub­bles may be need­ed to over­come it:

One way to get there would be to recon­struct our whole mon­e­tary sys­tem – say, elim­i­nate paper mon­ey and pay neg­a­tive inter­est rates on deposits. Anoth­er way would be to take advan­tage of the next boom – whether it’s a bub­ble or dri­ven by expan­sion­ary fis­cal pol­i­cy – to push infla­tion sub­stan­tial­ly high­er, and keep it there. Or maybe, pos­si­bly, we could go the Krug­man 1998/Abe 2013 route of push­ing up infla­tion through the sheer pow­er of self-ful­fill­ing expec­ta­tions. (Paul Krug­man, 2013b)

So is sec­u­lar stag­na­tion the answer to the puz­zle of why the econ­o­my has­n’t recov­ered post the cri­sis? And is per­ma­nent­ly blow­ing bub­bles (as well as per­ma­nent fis­cal deficits) the solu­tion?

First­ly there is ample evi­dence for a slow­down in the rate of eco­nom­ic growth over time – as well as its pre­cip­i­tate fall dur­ing and after the cri­sis.

Fig­ure 2: A sec­u­lar slow­down in growth caused by a sec­u­lar trend to stag­na­tion?

The growth rate was as high as 4.4% p.a. on aver­age from 1950–1970, but fell to about 3.2% p.a. from 1970–2000 and was only 2.7% in the Naugh­ties pri­or to the cri­sis – after which it has plunged to an aver­age of just 0.9% p.a. (see Table 1).

Table 1: US Real growth rates per annum by decade

Start End Growth rate p.y. for decade Growth rate since 1950
1950 1960 4.2 4.2
1960 1970 4.6 4.4
1970 1980 3.2 4
1980 1990 3.1 3.8
1990 2000 3.2 3.7
2000 2008 2.7 3.5
2008 Now 0.9 3.3


So the sus­tained growth rate of the US econ­o­my is low­er now than it was in the 1950s–1970s, and the undoubt­ed demo­graph­ic trend that Krug­man nom­i­nates is clear­ly one fac­tor in this decline.

Anoth­er fac­tor that Krug­man alludes to in his post is the rise in house­hold debt dur­ing 1980–2010 – which at first glance is incom­pat­i­ble with the “Loan­able Funds” mod­el of lend­ing to which he sub­scribes. In the Loan­able Funds mod­el, the aggre­gate lev­el of debt (and changes in that lev­el) are irrel­e­vant to macro­eco­nom­ics – only the dis­tri­b­u­tion of debt can have sig­nif­i­cance:

Ignor­ing the for­eign com­po­nent, or look­ing at the world as a whole, we see that the over­all lev­el of debt makes no dif­fer­ence to aggre­gate net worth – one per­son­’s lia­bil­i­ty is anoth­er per­son­’s asset. It fol­lows that the lev­el of debt mat­ters only if the dis­tri­b­u­tion of net worth mat­ters, if high­ly indebt­ed play­ers face dif­fer­ent con­straints from play­ers with low debt. (Paul Krug­man,
2012a, p. 146)

Fur­ther­more, the dis­tri­b­u­tion of debt can only have macro­eco­nom­ic sig­nif­i­cance at pecu­liar times, when the mar­ket mech­a­nism is unable to func­tion because the “nat­ur­al rate of inter­est” – the real inter­est rate that will clear the mar­ket for Loan­able Funds, and lead to zero infla­tion with oth­er mar­kets (includ­ing labor) in equi­lib­ri­um – is neg­a­tive.

Pri­or to Sum­mers’ the­sis, Krug­man had argued that this pecu­liar peri­od began in 2008 when the econ­o­my entered a “Liq­uid­i­ty Trap”. Pri­vate debt mat­ters dur­ing a Liq­uid­i­ty Trap because lenders, wor­ried about the capac­i­ty of bor­row­ers to repay, impose a lim­it on debt that forces bor­row­ers to repay their debt and spend less. To main­tain the full-employ­ment equi­lib­ri­um, peo­ple who were once lenders have to spend more to com­pen­sate for the fall in spend­ing by now debt-con­strained bor­row­ers.

But lenders are patient peo­ple, who by def­i­n­i­tion have a low­er rate of time pref­er­ence than bor­row­ers, who are impa­tient peo­ple:

Now, if peo­ple are bor­row­ing, oth­er peo­ple must be lend­ing. What induced the nec­es­sary lend­ing? High­er real inter­est rates, which encour­aged “patient” eco­nom­ic agents to spend less than their incomes while the impa­tient spent more. (Krug­man, “Delever­ag­ing and the Depres­sion Gang”)

The prob­lem in a Liq­uid­i­ty Trap is that rates can’t go low enough to encour­age patient agents to spend enough to com­pen­sate for the decline in spend­ing by now debt-con­strained impa­tient agents.

You might think that the process would be sym­met­ric: debtors pay down their debt, while cred­i­tors are cor­re­spond­ing­ly induced to spend more by low real inter­est rates. And it would be sym­met­ric if the shock were small enough. In fact, how­ev­er, the delever­ag­ing shock has been so large that we’re hard up against the zero low­er bound; inter­est rates can’t go low enough. And so we have a per­sis­tent excess of desired sav­ing over desired invest­ment, which is to say per­sis­tent­ly inad­e­quate demand, which is to say a depres­sion. (Krug­man, “Delever­ag­ing and the Depres­sion Gang”)

After Sum­mers, Krug­man start­ed to sur­mise that the econ­o­my may have been expe­ri­enc­ing sec­u­lar stag­na­tion since 1985, and that only the rise in house­hold debt masked this phe­nom­e­non. Con­se­quent­ly the lev­el and rate of change of pri­vate debt could have been macro­eco­nom­i­cal­ly sig­nif­i­cant not mere­ly since 2008, but since as long ago as 1985.

Fig­ure 3: Ratio of house­hold debt to GDP

Com­ment­ing on the data (Fig­ure 3, sourced from the St Louis Fed’s excel­lent FRED data­base, is tak­en from Krug­man’s post), Krug­man not­ed that per­haps the increase in debt from 1985 on masked the ten­den­cy to sec­u­lar stag­na­tion. Cru­cial­ly, he pro­posed that the “nat­ur­al rate of inter­est” was neg­a­tive per­haps since 1985, and only the demand from bor­row­ers kept actu­al rates pos­i­tive. This in turn implied that, absent bub­bles in the stock and hous­ing mar­kets, the econ­o­my would have been in a liq­uid­i­ty trap since 1985:

There was a sharp increase in the ratio after World War II, but from a low base, as fam­i­lies moved to the sub­urbs and all that. Then there were about 25 years of rough sta­bil­i­ty, from 1960 to around 1985. After that, how­ev­er, house­hold debt rose rapid­ly and inex­orably, until the cri­sis struck.

So with all that house­hold bor­row­ing, you might have expect­ed the peri­od 1985–2007 to be one of strong infla­tion­ary pres­sure, high inter­est rates, or both. In fact, you see nei­ther – this was the era of the Great Mod­er­a­tion, a time of low infla­tion and gen­er­al­ly low inter­est rates. With­out all that increase in house­hold debt, inter­est rates would pre­sum­ably have to have been con­sid­er­ably low­er – maybe neg­a­tive. In oth­er words, you can argue that our econ­o­my has been try­ing to get into the liq­uid­i­ty trap for a num­ber of years, and that it only avoid­ed the trap for a while thanks to suc­ces­sive bub­bles.

In gen­er­al, the Loan­able Funds mod­el denies that pri­vate debt mat­ters macro­eco­nom­i­cal­ly, as Krug­man put it emphat­i­cal­ly in a series of blog posts in 2012:

Keen then goes on to assert that lend­ing is, by def­i­n­i­tion (at least as I under­stand it), an addi­tion to aggre­gate demand. I guess I don’t get that at all. If I decide to cut back on my spend­ing and stash the funds in a bank, which lends them out to some­one else, this does­n’t have to rep­re­sent a net increase in demand. Yes, in some (many) cas­es lend­ing is asso­ci­at­ed with high­er demand, because resources are being trans­ferred to peo­ple with a high­er propen­si­ty to spend; but Keen seems to be say­ing some­thing else, and I’m not sure what. I think it has some­thing to do with the notion that cre­at­ing mon­ey = cre­at­ing demand, but again that isn’t right in any mod­el I under­stand. (Paul Krug­man, 2012b. Empha­sis added).

How­ev­er, the Sum­mers con­jec­ture pro­vides a means by which pri­vate debt could assume macro­eco­nom­ic sig­nif­i­cance since 1985 with­in the Loan­able Funds mod­el. Once sec­u­lar stag­na­tion com­menced – dri­ven, in this con­jec­ture, by the actu­al drop in the rate of growth of pop­u­la­tion and a hypoth­e­sized decline in inno­va­tion – the econ­o­my was effec­tive­ly in a liq­uid­i­ty trap, and some­how ris­ing debt hid it from view.

That is the broad brush, but I expect that explain­ing this while remain­ing true to the Loan­able Funds mod­el will not be an easy task—since, like a Liq­uid­i­ty Trap itself, the Loan­able Funds mod­el is not sym­met­ric. Where­as Krug­man was able to explain how pri­vate debt caus­es aggre­gate demand to fall when debt is falling and remain true to the Loan­able Funds mod­el (in which banks are mere inter­me­di­aries and both banks and mon­ey can be ignored – see Gau­ti B. Eggerts­son and Paul Krug­man, 2012), it will be much hard­er to explain how debt adds to aggre­gate demand when it is ris­ing. This case is eas­i­ly made in an Endoge­nous Mon­ey mod­el in which banks cre­ate new spend­ing pow­er, but it fun­da­men­tal­ly clash­es with Loan­able Funds in which lend­ing sim­ply redis­trib­utes exist­ing spend­ing pow­er from lenders to bor­row­ers. Nonethe­less, Krug­man has made such a state­ment in a post-Sum­mers blog:

Debt was ris­ing by around 2 per­cent of GDP annu­al­ly; that’s not going to hap­pen in future, which a naïve cal­cu­la­tion sug­gests means a reduc­tion in demand, oth­er things equal, of around 2 per­cent of GDP. (Paul Krug­man, 2013a)

If he man­ages to pro­duce such a mod­el, and if it still main­tains the Loan­able Funds frame­work, then the mod­el will need to show that pri­vate debt affects aggre­gate demand only dur­ing a peri­od of either sec­u­lar stag­na­tion or a liq­uid­i­ty slump – oth­er­wise the sec­u­lar-stag­na­tion-aug­ment­ed Loan­able Funds mod­el will be a capit­u­la­tion in all but name to the Endoge­nous Mon­ey camp (Nick Rowe, 2013). Assum­ing that this is what Krug­man will attempt, I want to con­sid­er the empir­i­cal evi­dence on the rel­e­vance of pri­vate debt to macro­eco­nom­ics. If it is indeed true that pri­vate debt only mat­tered post-1985, then this is com­pat­i­ble with a sec­u­lar-stag­na­tion-aug­ment­ed Loan­able Funds mod­el – what­ev­er that may turn out to be. But if pri­vate debt mat­ters before 1985, when sec­u­lar stag­na­tion was clear­ly not an issue, then this points in the direc­tion of Endoge­nous Mon­ey being the empir­i­cal­ly cor­rect mod­el.

I will con­sid­er two indi­ca­tors: the cor­re­la­tion between change in aggre­gate pri­vate non­fi­nan­cial sec­tor debt and unem­ploy­ment, and the cor­re­la­tion between the accel­er­a­tion of aggre­gate pri­vate non­fi­nan­cial sec­tor debt and the change in unem­ploy­ment. I am also using two much longer time series for debt and unem­ploy­ment. Fig­ure 4 extends Krug­man’s FRED chart by includ­ing busi­ness sec­tor debt as well (click here to see how this data was com­piled – and a longer term esti­mate for US debt that extends back to 1834: the data is down­load­able from here). The unem­ploy­ment data shown in Fig­ure 5 is com­piled from BLS and NBER sta­tis­tics and Leber­got­t’s esti­mates (Stan­ley Leber­gott, 1986, 1954, Christi­na Romer, 1986) and extends back to 1890.

Fig­ure 4: Long term series on Amer­i­can pri­vate debt

Fig­ure 5: Cor­re­la­tion of change in aggre­gate pri­vate debt with unem­ploy­ment

Cor­re­la­tion is not cau­sa­tion as the cliché goes, but a cor­re­la­tion coef­fi­cient of ‑0.57 over almost 125 years implies that the change in debt has macro­eco­nom­ic sig­nif­i­cance at all times – and not just dur­ing either sec­u­lar stag­na­tion or liq­uid­i­ty traps.

Table 2:
Cor­re­la­tion of change in aggre­gate pri­vate debt with unem­ploy­ment by decade

Cor­re­la­tion with lev­el of unem­ploy­ment
Start End Per­cent­age change Change as per­cent of GDP
1890 2013 -0.57 -0.51
1890 1930 -0.59 -0.6
1930 1940 -0.36 -0.38
1940 1950 0.15 0.32
1950 1960 -0.48 -0.28
1960 1970 -0.33 -0.58
1970 1980 -0.41 -0.37
1980 1990 -0.27 -0.55
1990 2000 -0.95 -0.95
2000 2013 -0.97 -0.95

Short­er time spans empha­size the point that nei­ther sec­u­lar stag­na­tion nor liq­uid­i­ty traps can be invoked to explain why changes in the lev­el of pri­vate debt have macro­eco­nom­ic sig­nif­i­cance. Sec­u­lar stag­na­tion sure­ly did­n’t apply between 1890 and 1930, yet the cor­re­la­tion is‑0.6; nei­ther sec­u­lar stag­na­tion nor a liq­uid­i­ty trap applied in the peri­od from 1950 till 1970, yet the cor­re­la­tion is sub­stan­tial in those years as well.

The cor­re­la­tion clear­ly jumps dra­mat­i­cal­ly in the peri­od after the Stock Mar­ket Crash of 1987, but that is more com­fort­ably con­sis­tent with the basic Endoge­nous Mon­ey case that I have been mak­ing – that new pri­vate debt cre­at­ed by the bank­ing sec­tor adds to aggre­gate demand – than it will be with any sec­u­lar-stag­na­tion-aug­ment­ed Loan­able Funds mod­el.

The debt accel­er­a­tion data (Michael Big­gs and Thomas May­er, 2010, Michael Big­gs et al., 2010) ham­mers this point even fur­ther. Fig­ure 6 shows the accel­er­a­tion of aggre­gate pri­vate sec­tor debt and change in unem­ploy­ment from 1955 (three years after quar­ter­ly data on debt first became avail­able) till now. The cor­re­la­tion between the two series is ‑0.69.

Fig­ure 6: Cor­re­la­tion of accel­er­a­tion in aggre­gate pri­vate debt with change in unem­ploy­ment

As with the change in debt and unem­ploy­ment cor­re­la­tion, short­er time spans under­line the mes­sage that pri­vate debt mat­ters at all times. Though the cor­re­la­tion is strik­ing­ly high­er since 1987 – a date I empha­size because I believe that Greenspan’s actions in res­cu­ing that bub­ble then led to the Ponzi econ­o­my that Amer­i­ca has since become – it is high through­out, includ­ing in times when nei­ther “sec­u­lar stag­na­tion” nor a “liq­uid­i­ty trap” can be invoked.

Table 3:
Cor­re­la­tion of accel­er­a­tion in aggre­gate pri­vate debt with change in unem­ploy­ment by decade

Start End Cor­re­la­tion
1950 2013 -0.6
1950 1960 -0.53
1960 1970 -0.61
1970 1980 -0.79
1980 1990 -0.6
1990 2000 -0.86
2000 2013 -0.89

I await the IS-LM or New Key­ne­sian DSGE mod­el that Krug­man will pre­sum­ably pro­duce to pro­vide an expla­na­tion for the per­sis­tence of the cri­sis in terms that, how­ev­er tor­tured, emanate from con­ven­tion­al eco­nom­ic log­ic in which banks and mon­ey are ignored (though pri­vate debt is final­ly con­sid­ered), and in which every­thing hap­pens in equi­lib­ri­um. But how­ev­er clever it might be, it will not be con­sis­tent with the data.


Bernanke, Ben. 2002. “Defla­tion: Mak­ing Sure “It” Does­n’t Hap­pen Here,” Wash­ing­ton: Fed­er­al Reserve Board.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.