The other big debate among mainstream economists at ASSA 2020 was over whether the major capitalist economies are stuck in a long period of ‘secular stagnation’ and what to do about it.  Top economist from the Bank for International Settlements, Claudio Borio and others had a session entitled WhySoLowForSoLong_ALong-TermView_preview

Their view was not that of the Keynesians.  The Keynesians reckon low interest rates and low growth are due to a lack of effective demand from consumers and investment.  In contrast, Borio et al, being from the Austrian school, reckon low interest rates are a product of interference by central banks.  Quantitative easing and other ‘unconventional’ measures of monetary policy have artificially driven interest rates down: “we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes.”

Nobel prize winner Robert Shiller from Yale University PopularEconomicNarrativesAdvancingTh_powerpoint. Yes, the US economy has set a new record for length of expansion without recession, now over a decade. The unemployment rate is at its lowest in almost 50 years, while stock, bond and housing market prices are at record highs. But the expansion is also the weakest since 1945.  So the state of the US economy is more like uninterrupted stagnation.

In a special session, the great and the good of the world’s leading central bankers discussed the causes of this ‘secular stagnation’.

Janet Yellen, former head of the Federal Reserve reckoned that there were “structural factors” causing a savings glut.  These were found in ageing population that spends less and in low productivity growth (caused by??). With real interest rates (that’s after inflation is deducted) down to no more than 1%, monetary policy is less effective.  And you don’t want to take interest rates into negative territory to stimulate the economy.  That’s why central banks resorted to ‘unconventional policies’ like quantitative easing or so-called ‘forward guidance’.

Ben Bernanke, another former Fed chief, when addressing the AEA as its new president, claimed that unconventional monetary policies under his watch had been equivalent to a 3% pt cut in the Fed’s policy rate.  And he reckoned there was still plenty of monetary measures available to keep the economy going.   Yellen reckoned that “we have had to keep rates lower for longer but we have avoided negative rates in the US.”  But now the Fed must keep this approach to prepare for the ‘next downturn’. Both Bernanke and Yellen, and Mario Draghi who addressed the audience by video were positive about the value and success of monetary policies adopted by central banks in the last ten years.  They had avoided another slump or financial crash.

But then they would say that, wouldn’t they?  Claudio Borio from the BIS was worried that these easy money, zero interest policies would eventually generate another credit bust globally.  At the other end of the mainstream spectrum, Keynesian former Treasury chief Larry Summers was much less sanguine about the efficacy of monetary policy.  Summers said that Europe and Japan are already in a zero rate world.  A new recession will drive US rates down to zero rates like Europe and Japan.  So there is a Keynesian-style ‘liquidity trap’ that is semi-permanent in industrialised world.  A liquidity trap means that no amount of money ‘printing’ or central bank bond purchases will get the ‘real’ economy going.  QE has diminishing returns.  At the same time, low rates risk financial instability with speculative capital (Borio or Minsky-style).  Despite companies like Apple and Google having oodles of cash, productive investment is low.  Money, instead, is ploughed into bonds and stocks.  Low investment, low inflation, low growth could lead to outright deflation.

So what’s the answer?  Summers presented the classic Keynesian solution: we need fiscal stimulus.
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There is no problem with running budget deficits that leads to higher public debt because interest costs on that debt will be low.  And anyway, the boost to the economy from government spending on productive investments as in energy efficiency and social measures will stimulate demand and deliver more tax revenue.   And there will be no crowding out of capitalist investment while credit is so plentiful.

Yellen pretty much agreed with this. And in his presidential address, Bernanke just noted that if the neutral rate is quite low, monetary policy may need help from automatic fiscal policy. And Adam Posen, from the Petersen Institute and an expert on the Japanese economy, pointed out that Japan had survived and even prospered with a public debt ratio of over 230%of GDP because the Bank of Japan kept interest rates low so that the government could run budget deficits.  Yes, it was true that nominal GDP growth in Japan had been near zero, but this did not mean that Japan had suffered a ‘lost decade’ of growth because with inflation below or at zero and a falling population, per capital real GDP growth matched that of Europe, if not the US.

To add to this, the proponents of Modern Monetary Theory were at ASSA, like Randall Wray, to tell us that there is no financial constraint on government spending and budget deficits. Indeed with interest rates set low or at zero by central banks, governments can fund new spending through the creation of money at will.

So all is fine, then.  There may be low growth but at least there is no new slump.  And with judicious use of central bank monetary policy and government fiscal stimulus programmes, the major economies can avoid a new slump and even achieve a pick-up in growth with a debt crisis if they act aggressively. I beg to differ.

First, all the speakers were agreed on one fact.  Capitalist investment was weak and as a share of GDP had been falling in all the major economies.  But why was not clear to the mainstream.  Yellen said that “There is common factor globally”, but did not say what it was. I have argued in this blog that the key reason is low profitability in capital.  The huge cash profits of the likes of Apple, Google etc. (the so-called FAANGS), even in the US, overall profitability is still low compared to before the Great Recession and global total profits are stagnating.  This explains low productive investment and, in turn, low productivity growth. And thus, stagnation or depression.

Take Japan, Ben Bernanke in his address claimed that Japan’s monetary policy worked.  Adam Posen reckoned that from the late 1990s, a combination of easy money and fiscal stimulus led to a revival in Japan’s (real) growth rate.  So this was the way forward for others.  But was Japan’s relative recovery in the 2000s really due to monetary and fiscal stimulus?  I have shown that the underlying reason was a recovery in the profitability of capitalist sector through an increased exploitation of the workforce.

The central bankers at ASSA all said that monetary policy had been successful and yet they all advocated fiscal measures now.  But if monetary policy is so successful, why do capitalist economies need fiscal intervention by governments?  Yellen actually pointed out that there was no empirical evidence that interest rates can have an effect on investment. (see here https://thenextrecession.wordpress.com/2019/08/19/recessions-monetary-easing-and-fiscal-stimulus/)

Then there is the issue of ‘semi-permanent’ budget deficits leading to dangerously high levels of public debt, so that the servicing costs of that debt rise significantly and start to ‘crowd out’ capitalist sector investment.  All the speakers in this session were sanguine about this risk.  And anyway, Yellen said, as long we can keep long-term government spending on pensions and healthcare down, debt will not rise too much!  There’s a thought.

Other top mainstream economists are less sanguine.  The famous (infamous) public debt expert, Kenneth Rogoff predicted a new Systemic Financial Crisis.  “Deep systemic financial crises tend to be infrequent events, as they leave deep lasting scars on the psyche of consumers, investors, politicians and regulators. Normally, especially given strengthened regulation and, one would not expect another systemic event for many decades. But the situation today is anything but normal. Record high global public and private debt combined with political paralysis and extraordinarily weak leadership outside central banks make today’s uncharacteristically fragile at this point in the debt supercycle.”

The neoclassical gang of economists had their own session on fiscal policy.  Richard Evan of the University of Chicago attacked the view that low interest rates meant that high public debt was no problem.  His empirical research, he claimed, shows that high debt raises financial risk and lowers output gains, contrary to the prevailing view of Olivier Blanchard. PublicDebtLowInterestRatesAndN_preview Top right-wing neoclassical economist Greg Mankiw presented his critique of MMT as the solution for government deficit financing (A Skeptic’s Guide to Modern Monetary Theory).  ASkeptic’sGuideToModernMonetaryT_preview  Jasmina Hasanhodzic, Assistant Professor of Finance, Babson College argued that rising pubic debt would leave a huge burden on future generations in servicing the debt. SimulatingTheBlanchard-SummersConjec_preview “welfare losses resulting from the introduction of a pay-go pension Ponzi scheme are significant, measuring 20 percent in terms of expected lifetime utility.” 

Other economists considered whether fiscal stimulus would not boost the economy much – ie, the magnitude of the fiscal multiplier. I have looked at this issue before. The evidence is varied.  At ASSA, one empirical paper on the efficacy of Japan’s government spending concluded that “the on-impact output multiplier is 1.5 in the ZLB period and 0.6 outside of it. We estimate that government spending shocks increase both private consumption and investment during the ZLB period, but crowd them out in the normal period.”  So even the best estimate delivers quite a low multiplier, ie a 1% of GDP rise in public spending may boost real GDP by 1.5% if interest rates are zero, but no more than 0.6% with ‘normal rates’. TheGovernmentSpendingMultiplierAtTh_preview

Perhaps the most controversial paper on the impact of high debt came from outside the ASSA conference.  During the conference, the IMF published a new report, entitled Debt is not free. The report stated the issue: “with public debt soaring across the world, a growing concern is whether current debt levels are a harbinger of fiscal crises, thereby restricting the policy space in a downturn. The empirical evidence to date is however inconclusive, and the true cost of debt may be overstated if interest rates remain low.”  But the IMF found that “public debt is the most important predictor of crises, showing strong non-linearities. Moreover, beyond certain debt levels, the likelihood of crises increases sharply regardless of the interest-growth differential. These results, while not necessarily implying causality, show governments should be wary of high public debt even when borrowing costs seem low.”

So we are back to the old argument presented by Reinhart and Rogoff in their book, Growth in the time of debt, that argued that when public sector debt got as high as 90% of GDP, there was a high probability of a debt crisis and a slump.  The credibility of this thesis was crushed when it was found that their working were full of error and adjustments.  But it seems that the mainstream remains worried that fiscal stimulus and budget deficits, especially if financed by the expansion of money supply (MMT) will create such high public debt that it could cause a financial bust or lower economic growth by squeezing out capitalist investment.  It is the classic dilemma for the mainstream.  They want to preserve capitalism and free markets but when capitalism is not working well, should governments intervene if intervention only kills the goose that (supposedly) lays the golden egg.

The problem for the mainstream, whether neoclassical, Austrian or Keynesian, is that they start from the premise that capitalism is the only economic system that works.  But capitalism has contradictions that cannot be resolved by tinkering or management; or by leaving things alone.

In the final part of my report on ASSA 2020, I’ll briefly look at some other sessions covering climate change, China and cryptocurrencies before reviewing the presentations made in the sessions of the Union of Radical Political Economics (URPE).

January 7, 2020

- Michael Roberts URL: https://wp.me/pLequ-4lm