More Rubbish On Secular Stagnation

by: Ralph Musgrave

Summers' original SS idea was that we're doomed because there's been a significant rise in the desire to save and there's nothing we can do about it because interest rate cuts are the only way of raising demand, and interest rates are currently at or near zero. (More on the latter point here.)

Summers may not have heard of Keynes, but Keynes pointed to the same problem about seventy years ago. Keynes called that the "paradox of thrift". That's the fact that saving money reduces demand and raises unemployment. And as Keynes rightly pointed out, the solution is essentially to print more money and spend it till "savings desires" are met (to use MMT parlance).

However, the Financial Times has done us the great service of adding to the nonsense. In this op-ed article the FT claims that the solution to SS is

Investment and productivity have meanwhile disappointed. These factors strengthen the case for the government borrowing to invest. The purpose would be to raise the sustainable growth rate.

Well, there's certainly a strong case for Keynes' "print and spend" solution, but why concentrate on "investment"?

Of course "investment" is an EXTREMELY SEXY word. If you run around advocating more investment you'll have a HUGE following, even if the investment you propose is completely pointless. Investment involves sacrificing current consumption, and ever since the world began, human beings have adhered to a variety of religions all of which have one thing in common: sacrifices must be made to placate the Gods. God knows (pardon the pun) why that desire to lash oneself is so ingrained in the human brain, but it just is.

Anyway, returning to economics, whence the assumption made by the FT, namely that because stimulus is needed, that therefore the stimulus must take the form of more investment? There is only one valid reason for making an investment, and that's the fact that the investment seems to pay for itself: i.e. it's a cheaper way of doing something than a more labour intensive method.

And there is very little reason to think that the number of potential investments which meet the latter criterion will hugely expand just because stimulus is needed.

As for the fact that productivity improvements have recently been poor, that poor performance is NOT NECESSARILY down to lack of investment: it could be that the pace of technological change is slowing (or to be more accurate, the pace at which technological change can boost productivity via sundry investments may have slowed).

So how do we determine the truth or otherwise of the latter point? Well it's easy: just carry on making investments where they pay for themselves, and not where they don't. To repeat, the fact that stimulus is needed to counter secular stagnation has no bearing on the latter "pay for themselves" point.

But I'm probably wasting my breath. The desire to lash oneself with chains overrides logic.