Sunday, August 17, 2014

Economic Propaganda and Wonkish Babble — Secular Stagnation?

Paul Krugman recently defined "secular stagnation" as an underlying change in the economy (such as slow growth in the working-age population) — and that it is not the same thing as a slow growing of economic potential, although that might also contribute to secular stagnation — by reducing investment demand [as opposed to consumer demand]. He says, "It’s a demand-side, not a supply-side concept".

Editor's Note: I'll attempt to translate this into a simple analogy:

If an investor built a factory in your hometown to manufacture widgets, no matter how many people the investor hired to produce however many number of widgets, the investor would still need enough people who not only wanted those widgets, but had the money to buy those widgets to meet the investor's price. This would enable the investor to make a profit, pay his creditors (and his suppliers and employees), re-invest in the business and expand, and hire more workers. Just the act of manufacturing widgets (at cost) alone doesn't create any demand, it only creates a supply of widgets. But people (consumers) with a little extra money in their pockets (who can afford to spend a little) might buy one of those new fangled widgets, thereby creating the demand for widgets. Sometimes consumers will form long lines or camp outside the retail stores, waiting to buy the latest widget when the demand is very high. The opposite is true when the demand is low. The unsold widgets will pile up in warehouses, and the market will have a glut of widgets. Maybe the widgets will be sold off in bulk during a bankruptcy preceding for 10¢ on the dollar, or sold for scrap. But either way, the investor will have lost money and the employees would be laid off.

Economists might call this a lack of aggregate demand. If you want to witness demand, visit a grocery store during the first few days of the month after everyone receives their Social Security deposits — or go to a Black Friday sale, when a drop in prices can equate to a rise in wages.

Consumer demand

Krugman then references a new and free 179-page e-book by VoxEU.Org (edited by Coen Teulings and Richard Baldwin) which is titled: "Secular Stagnation: Facts, Causes and Cures". First, let's attempt to assimilate some of the "economic propaganda", and then later, some of the "wonkish babble".

Economic Propaganda -- Edward L. Glaeser 

Beginning on page 83 of the eBook, I found the following excerpts below under the chapter titled "Secular Joblessness", written by Edward L. Glaeser at Harvard University. Occasionally you will see a few of my sub-notes.

The wonders of the internet age cast doubt on the idea that technological progress is stagnating. Worryingly, however, some fraction of US job losses has become permanent after almost every recession since 1970. This chapter argues that persistent joblessness is unlikely to be a purely macroeconomic phenomenon.

US investment and innovation – the most standard ingredients in long-run economic growth – are not declining. The technological world that surrounds us is anything but stagnant. Yet we can have little confidence that the continuing flow of new ideas will solve the US’s most worrying social trend: the 40-year secular rise in the number and share of jobless adults. Past history suggests that such joblessness will persist, even during the most robust recovery, unless there are serious structural reforms involving the social safety net and the formation of human capital.

The 2007 recession was particularly severe and at its peak, prime-aged male joblessness rose to almost 20%. Today, the rate has fallen to 16.6%. It seems reasonable to believe that the rate will continue to fall somewhat, but if past recoveries provide any guide, a greater share of prime-aged males will be jobless at the end of the recovery than at the beginning of the recession.

Editor's Note: This is one of the first real assessments of the unemployment rate that I have ever come across, with the exception of Shadowstats.Com. The site is authored by John Williams, an economic consultant with an economics BA and an MBA from Dartmouth College, New Hampshire (Source: Wiki)

If one in five adults is disconnected from the productive side of the economy, what will this mean for their voting behavior, or their sense of connection with the country’s larger economic goals? Can this lead to a self-reinforcing process where this group votes regularly for larger jobless benefits which in turn increase the level of joblessness? We are, unfortunately, just beginning to understand the potential impact of the sea change in American life.

Why did joblessness rise in the US? Over time, less skilled American workers have been hit by a series of adverse labor demand shocks. These shocks may well have increased joblessness, even if America’s social safety net had not evolved since 1960, but their impact was exacerbated because of institutional changes that made joblessness less painful and increased the incentives to stay out of work.

While the US social welfare system remains less generous than many European safety nets, it has become substantially more generous over time. The US has a bevy of social programs – including Medicaid, the Supplemental Nutrition Assistance Program (food stamps), Temporary Aid to Needy Family [TANF], Section 8 Housing vouchers and insurance for both disability and unemployment – that have generally increased in generosity over time, often for quite laudable reasons. These programs also sharply reduce the incentives to work, often by directly taxing earnings (both food stamps and Section 8 vouchers carry an independent 30% tax on earnings) and by making joblessness less miserable.

Editor's Note: I seriously question the author's reasoning as to why he believes eating food (using food stamps), or having healthcare (such as Medicare) or temporarily receiving unemployment benefits (to pay rent while looking for a new job) "sharply reduces the incentives for people to work". Unemployment benefits only last 26 weeks (much less in some states). And TANF pays very little and is capped for 5 years in one's entire lifetime. Social Security disability benefits (SSDI), in many cases, is next to impossible to qualify for — and it can take up to 3 years before someone can be awarded on a claim (and SSDI also pays very little). And yes, having these social programs does make the jobless less miserable, because survival is a much better alternative than starving to death, becoming disabled or terminally ill, or being homeless. But most people would prefer to "live" and not just "survive" on a very meager income or government supplement. A real "living wage" job can also provide many more creature comforts. Especially people with children, who tend to want much more for their offspring rather than just providing them with the bare essentials of food and shelter. These government benefits don't keep people from working, they allow them to survive when they can't find work, or are paid too little, or are no longer physically capable of working. I've learned that the majority of critics are usually the very ones who don't need these benefits, until the day when they do.

Perhaps the most important program connected to long-term joblessness is disability insurance. In 2010, 16.6% of Americans between21 and 64 reported being disabled, and 11.4% reported a severe disability. In 1970, 1.5 million Americans were receiving Federal disability insurance; in 2013, 8.9 million Americans received such aid (Social Security Administration 2014). This increase in disability is particularly startling given the general increase in US health over the same time period, and surely institutional changes, including those meant to reduce unemployment, have played some role in this dramatic increase.

Editor's Note: I question the percent/ratio of those on disability in proportion to the growing population and the labor market during that same period of time. And regarding "US health" --- The Atlantic: Get Rich, Live Longer. But for the rest of us, after doing labor intensive work for 40 or 50 years, the doctors can't fix things like degenerative arthritis in one's back. See my posts in the links below about disability and Social Security:

Why haven’t smart innovators figured out ways to make money by employing the jobless? One explanation is that current technological trends just don’t favor products made with less skilled labor. The second explanation is that the safety net has just made this labor too expensive relative to more mechanized alternatives.

Editor's Note: I question the author's reason for bringing up the old debate about American workers lacking skills without any mention at all about the offshoring of jobs to low-wage countries that require very few job skills — or that many of these jobs could be accomplished with only a minimum of on-the-job training. But he does mention "mechanized alternatives" — such as computers, automation and robotics — and that will always be less expensive than human labor. (See these posts: The STEM Crisis is Myth and Offshoring from Sea to Shining Sea and Will Robots will Displace Middle-Class Jobs?)

If the problem is perceived as secular stagnation, then policy thoughts move towards macroeconomic interventions aimed at improving the US’s overall economic mojo, such as investing in infrastructure or reducing corporate taxes. If the problem is perceived as a vast increase in the share of out-of-work Americans that has persisted through good times and bad, then such macroeconomic interventions seem poorly targeted.

Editor's Note: Why did he mention reducing corporate taxes (reducing revenues), the exact opposite of investing in infrastructure (requiring increased revenues)? The GOP wants to do both: Cuts taxes AND cut spending. There's no real debate of "either/or".

The cross-sectional relationship between education and unemployment is so strong that it is hard not to focus on America’s troubled education system. As of June 2014, 72.7% of college graduates over the age of 25 were employed, while only 39.4% of high school dropouts had a job. This extraordinary cross-sectional gap doesn’t prove causality, but the hundreds of studies attempting to estimate the casual impact of education on earnings and employment have generally confirmed at least some positive effect.

Editor's Note: College grads are doing jobs that many high school drop-outs used to do — jobs that don't require a higher education. L.A. Times: "College-educated workers are taking jobs that don't require degrees." Also see this post: Education Alone Is Not the Answer to Income Inequality and Slow Recovery: "If everyone in America got a PhD, the job market would not be transformed."

Education cannot fix the problem single-handedly, especially if we refuse to write off the current generations of adults. One possibility is that targeted demand-side interventions, such as infrastructure investments, can employ these workers and thereby rebuild their human capital. Perhaps this will be the case, but there are reasons to be skeptical. Much infrastructure investment is now capital intensive. America’s infrastructure programs have often been criticized for waste and inefficiency. Better research and, again, more experiments are surely needed to make the case for such interventions.

Editor's Note: The author believes we need more experiments to build dams, roads, bridges, hydro-electric plants, power grids, wind and solar farms, sewer systems (etc.) because it's too expensive to make a case for government intervention? Does he completely dismiss out-of-hand FDR's infrastructure and defense programs, or Eisenhower's national highway system, or NASA's race to the moon? With interest rates (at the Fed's window) at 0%, what better time to borrow and spend to put people back to work if not now? Theoretically speaking, with any inflation at all, we'd be "paying back" with cheaper dollars. Have a look at China's infrastructure investment over the past 30 years.

It is surely necessary to rethink the structure of the US’s social safety net and to ensure that it does less to discourage work. David Autor and Mark Duggan have made an interesting proposal suggesting that disabled people be allowed to work. The idea of combining social welfare programs to eliminate overlapping anti-work incentives also seems sensible.

Editor's Note: Disabled people are already allowed to work. During a trial work period, there are no limits on earnings for those receiving Social Security disability benefits. During a 36-month extended period of eligibility, one usually can earn up to $1,070 a month before their benefits will stop. It's not that some disabled people may choose to work (or not work), it's the lack of available jobs for those who would prefer to work — disabled or otherwise.

Instead of raising the minimum wage, which risks deterring future job openings, the wage can be boosted by a federal subsidy.

Editor's Note: This is the one big red flag in his chapter, and is totally ridiculous — and his assertion has been thoroughly debunked by too many well-known economists to list here. Low wage workers already receive "federal subsidies" in the form of SNAP and Medicare benefits (and/or the earned income tax credit) because employers don't pay their workers enough — and this is costing the taxpayers billions of dollars a year as "corporate welfare". Just ask Wal-Mart. One study finds that because Wal-Mart wages are so low, many of its workers rely on food stamps and other government aid programs, and could cost taxpayers as much $1 million a year for each Wal-Mart supercenter --- and there are 3,182 Wal-Mart supercenters in the U.S.

Social security taxes can be eliminated for workers at the low end of the earnings distribution. Structural reforms are surely necessary to ensure that the US makes work more attractive for the jobless.

Editor's Note: The Social Security trust fund (it is claimed by some) is already in trouble, so eliminating these taxes would only contribute more to any of the perceived shortfalls. Why not eliminate or raise the $117,000 cap on "earned" wages — and also start taxing capital gains ("unearned" income) for Social Security taxes? (See this post - Taxes: How Congress Let's the Rich Pay Less). And if you want to make work "more attractive" for the jobless, first:

1) offer them a job.
2) offer a real living wage.

The massive secular trend in joblessness is a terrible social problem for the US, and one that the country must try to address. I do not believe that this is a macroeconomic problem that can be solved with more investment or tax cuts alone. The US needs targeted investments in education and workforce training, and the country needs to radically improve the incentives to work.

Editor's Note: He is correct when he says "more investment or tax cuts alone" won't solve the problem, but "more investment and tax hikes" might (such as taxing capital gains as regular wages). In my humble opinion, it appears that the Harvard author of this chapter of the Vox eBook appreciates lower corporate tax rates (even though corporations only pay an average effective tax rate of about half of the statutory tax rate), does not want to force employers to pay their workers living wages, does not want to use federal tax revenues to invest in infrastructure, thinks those on disability should work (even though there are not enough jobs for those WITHOUT a disability), and thinks food stamps (and other "welfare" programs) discourages people from looking for non-existent jobs. This is just one example of how some individuals subtly mix propaganda and/or ideology into the economic debates — like Paul Ryan, pretending to be concerned about the jobless and poor, but making a case that will only harm them more — and which would only benefit the very people who consistently exacerbate the problems of inequality, poverty and joblessness.

Wonkish Babble -- Paul Krugman

And now, the "wonkish babble". Beginning on page 75 (in the new and free 179-page e-book by VoxEU.Org) I found the following excerpts below under the chapter called "Four observations on Secular Stagnation" written by Paul Krugman, Princeton University and CEPR (You will also see a few of my sub-notes):

If you’re following events and looking at the data, it’s actually quite natural to raise once again the concerns Alvin Hansen raised 65 years ago, when he worried that low population growth would produce a situation of persistently inadequate demand.

Secular stagnation is the proposition that periods like the last five-plus years, when even zero policy interest rates aren’t enough to restore full employment, are going to be much more common in the future than in the past — that the liquidity trap is becoming the new normal.

Editor's Note: A liquidity trap is a situation, described in Keynesian economics, in which injections of cash into the private banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient consumer demand, or war. Common characteristics of a liquidity trap are interest rates that are close to zero (like they are now) and fluctuations in the money supply that fail to translate into fluctuations in price levels.

See these posts on "hoarding" that economists call "saving" --> Cash Hoarding becomes an Addiction and Corporations Hoard Cash While Americans Go Without A Job and Why a Basic Income will Eventually be Needed. The top 0.1% and large American corporations hoard their profits, rather than paying better wages to their employees and reinvesting in America. And when they aren't investing overseas, they'll spend billions of dollars on mergers and acquisitions — while at the same time, say they can't afford to pay their employees a little more. (Also see this speech by the billionaire Nick Hanauer: Beyond the Dreams of Avarice.)

Hansen’s old concern – slow population growth – is back. Why is this a problem? For the same reasons Hansen invoked: slow or negative growth in the working-age population means low demand for new investments, both in housing and in productive capital, and therefore reduces the natural rate of interest still further.

Editor's Note: Paul Krugman also promotes more immigration into an already over-saturated job market with a high rate of sustained long-term unemployment, but yet believes that adding more "people" will create more "demand", and hence more jobs. It's here that many people greatly disagree with Krugman, who finds it odd that so many people are saying unemployment benefits, food stamps and Medicare (or Obama-Care™) are keeping people from looking for work — even though extended unemployment benefits ended last year — and still these people remain unemployed or are no longer counted as part of the labor force. According to the Bureau of Labor Statistics, we have 11 million more working-age adults today who are "Not in Labor Force" than we did when the recession ended in June 2009 (over the past 5 years).

Add to that, within the current population the National Center for Education Statistics reports over 3 million young Americans graduate from high school every year. That's 18 million just since June 2009 (not counting high school drop-outs or those who graduated from college); but Krugman believes more people will create more jobs with more demand (rather than, more people with more money will create more demand, and therefore, more jobs). Krugman, in this instance, may be putting the cart before the horse.

Recently in the New York Times Senator Chuck Schumer and Paul Craig Roberts wrote an op-ed and said, "American workers face direct global competition at almost every job level–from the machinist to the software engineer to the Wall Street analyst. Any worker whose job does not require daily face-to-face interaction is now in jeopardy of being replaced by a lower-paid equally skilled worker thousands of miles away. American jobs are being lost not to competition from foreign companies, but to multinational corporations that are cutting costs by shifting operations to low-wage countries."

And they are correct. According to one study, 1/3 of American jobs are still currently prone to offshoring/outsourcing.

But Krugman believes more people will create more jobs. He worries (on page 79 of the eBook) about "a sharp demographic slowdown......that imply still weaker demand looking forward." Then he delves into monetary policy (the Fed's control of the money supply):

The most persuasive story about how monetary policy can work at the zero lower bound is that it can gain traction if you can convince the public that there has been a regime change, that the central bank will maintain expansionary monetary policy even after the economy recovers, in order to generate high demand and some inflation ... The central bank must credibly promise to be irresponsible."

Did you get that? I didn't, but he does support continued quantitative easing.

But regarding his stance on new immigration: Housing and occupancy rates appear more than able to absorb a few more people, but also without generating any new boom in construction jobs. Established companies can absorb any new demand for more food without the need to hire a lot more people. More people might generate more demand for telecommunication services (but without building more cell phone towers — and cell phones are made in China anyway, and the same goes for most major appliances). And we won't need to hire more people to turn on the electricity when they do move here. But to pay for rent and food, one usually needs a job FIRST. What we do need is more demand for consumer discretionary spending — the "goodies" — meaning, other than rent, food, electricity and the other basic staples that one needs just to subsist. A new car perhaps? A night out at posh restaurant? A trip to the local mall to buy some new clothes made in Bangladesh? Maybe a road trip to see the Grand Canyon? You get the idea — economic activity — the movement of money from one hand to another within a local economy (and not to a foreign economy).

And here's Paul Krugman on inflation (page 80), just in case you can understand what he's saying. (If you do, please email an explanation):

And now we are talking seriously about secular stagnation in Europe and the US as well, which means that it could be a very long time before ‘normal’ monetary policy resumes. Now, even in this case you can get traction if you can credibly promise higher inflation, which reduces real interest rates. But what does it take to credibly promise inflation? It has to involve a strong element of self-fulfilling prophecy: people have to believe in higher inflation, which produces an economic boom, which yields the promised inflation. A necessary (though not sufficient) condition for this to work is that the promised inflation be high enough that it will indeed produce an economic boom if people believe the promise will be kept. If it is not high enough, then the actual rate of inflation will fall short of the promise even if people do believe in the promise, which means that they will stop believing after a while, and the whole effort will fail.

Editor's Note: Krugman calls this the "timidity trap". And some people argue in favor of inflation because it increases the value of the assets/investments they hold — but ordinary people on fixed or stagnating or declining incomes don't want to see their cost-of-living getting higher either.

What about fiscal policy? Here the standard argument is that deficit spending can serve as a bridge across a temporary problem, supporting demand while, for example, households pay down debt and restore the health of their balance sheets, at which point they begin spending normally again. Once that has happened, monetary policy can take over the job of sustaining demand while the government goes about restoring its own balance sheet. But what if a negative real natural rate isn’t a temporary phenomenon? Is there a fiscally sustainable way to keep supporting demand?

Editor's Note: It might be a whole lot simpler than all this hair-pulling by the economists might indicate in their wonkish ways. Maybe people would start "spending normally again" if more people had jobs, and if more people had more money to spend, and if more people had more confidence in the clowns who are governing our economic policies (aka Tea Partiers, Libertarians, Republicans, Dixiecrats, Third Way Democrats, etc.). If more people worked (while also earning higher wages), they'd be paying more in taxes as well — then the government can restore its balance sheet. And what about the Buffet Rule or taxing capital gains as ordinary wages? Stagnating nominal wages (or declining real wages) doesn't help consumers, just as offshoring jobs overseas doesn't help workers. Common sense would help a whole bunch more.

The crucial point, for now, is that the real possibility that we’ve entered an era of secular stagnation requires a major rethinking of macroeconomic policy.

Editor's Note: Yes Paul, on your last point, I think you're absolutely correct. And you and your fellow economists should try to translate your wonkish theories into plain English so that the rest of us (like myself) can better understand. It's no wonder so many members of Congress can't make any good economic decisions — because they're either too ignorant to understand, or too egotistical to ask someone else who might know better.


To remedy any further debates about "secular stagnation", let's try my concept: Rather than having the Federal Reserve/U.S. Treasury creating billions of new digital dollars out of thin air and "loaning" this new supply of money to the commercial banks (who only reinvests in U.S. Treasury bills and pays themselves huge bonuses), let's take all that new money and create debit cards for $10,000 each* and mail them to every single American citizen with a Social Security number to spend as they wish within the U.S. to create more demand — which in turn will require more supply, which in turn will create more jobs. After the labor pool has absorbed the bulk of the unemployed, we can increase immigration to fill any open jobs and create yet more demand. As Paul Krugman noted: "It’s a demand-side, not a supply-side concept."

* Total cost: Est. $1.7 trillion based on the number currently reported by Social Security as "wage earners" (est. 154 million). Those who are currently unemployed or "not in the labor force" since 2009 (est. 20 million) would also qualify. Those with reported incomes of $1 million or more from the previous year would not qualify. (Note: When purchases are made, a portion of state tax would apply, generating revenues for state budgets as well.)

Disclosure - Quantitative easing and immigration are probably the only two topics where this editor disagrees with Paul Krugman. And while I can understand why Mr. Krugman may be "wonkish" when writing "working papers" for his peers, he should also consider using simpler terms (that we can better understand) when writing op-eds for public consumption at the New York Times. 

P.S. - If you have the time and the inclination to read the entire 179-page e-book by VoxEU.Org, please email some of the highlights — or leave them as a comment to this post. Anonymous comments on this blog are accepted and don't require a log in with a username or password — just type the security code that's presented. Thanks.


  1. My non-economist summation: After a hard recession, buying power is diminished. Investors become risk averse since fewer people are working, and those working have wages depressed; with those factors leading to less buying. As a result, it’s less risky for investors to invest in safety such as Treasuries then to invest in a factory or other job creation endeavor that demands a healthy buying public.

  2. Antonio Fatas: Irrational Exuberance Meets Secular Stagnation

    "A new eBook released by VoxEU presents convincing evidence in favor of the idea of secular stagnation. Secular stagnation is characterized, among other things, by real interest rates that are very low, possibly negative...Secular stagnation also suggests that the growth rate of real GDP (and therefore earnings) is slowing down."

  3. From Bloomberg: "How to Survive a Secular Stagnation"

    Are the U.S. and Europe suffering from more than the aftermath of a major financial crisis? Might they be stuck in an unusual and prolonged equilibrium, in which frustratingly slow economic growth is the norm? These are the crucial questions addressed in a new e-book from the Center for Economic Policy Research (posted at that I would recommend to policy makers, academics and investors alike, which tend to involve three elements:

    * Structural headwinds from aging populations, poor infrastructure, heavy debt burdens, slow productivity growth and inequality;
    * Demand that is poorly distributed around the world and in many cases inadequate as people channel money toward paying down debt instead of spending; and
    * A "sclerosis" effect in the labor market as persistent unemployment erodes skills and youth joblessness threatens to create a lost generation.

    Given the enormous stakes for current and future generations, the book rightly argues that serious thinking should be devoted to developing alternative policies. These involve pro-growth initiatives such as investing in education and infrastructure -- ideas that have broad support among economists but have been stymied by political dysfunction.

    A second part looks at more controversial proposals for economic rethinks and institutional revamps, such as increasing central banks' inflation targets or raising the retirement age.


    (MY NOTE: With so many people already unemployed, how would raising the retirment age help? And when Bloomberg says "political dysfunction", they should have accurately reported "Republican obstruction".)

    In another article: "Monetary policy cannot solve secular stagnation alone" --- The very last line in the post: "Public investment and new investment opportunities are needed to address secular stagnation."


  4. The New Republic: "Unemployed Americans Are Miserable, and Republicans Are Making It Worse "

    Further evidence against the Republican position that unemployment benefits discourage work. The results from several studies show that laid-off Americans who are cashing unemployment checks are still miserable and would vastly prefer to be working. Add this to the long list of evidence that unemployment insurance largely doesn’t cause workers to forego jobs and mooch off the government. Improving Americans’ lives ultimately comes down to fostering a functioning, growing economy — not tinkering with the levers of social policy. But Republicans haven't offered a plan to foster a functioning, growing economy. If Republicans want to contend that unemployment benefits is a second-best policy (behind boosting job growth), then they have to propose policies that create jobs. And that requires supporting fiscal or monetary stimulus. But the party has been vocal opponents of both, and that's why economy is where it is today.