I appreciate the fact that John Taylor responded to my recent critique of his WSJ oped debunking the Summers’ thesis of secular stagnation. It’s also timely in that Larry has another piece on the issue that’s worth reading in today’s WaPo.
With respect to John–we often disagree but I think we do so without being disagreeable–I didn’t think his response to me was…um…responsive. His main argument is that since I didn’t address the decline in the equilibrium interest rate, we’re talking past each other.
…to my surprise, I see that [Jared] does not even mention the decline in the equilibrium interest rate which is at the heart of the view that Larry put forth. So Jared’s response has missed the main point of the argument between Larry and me, and I’m disappointed that there’s not much to respond to in that regard.
Both John and Larry (and myself and everyone else who talks about this) frame the issue in terms of weak output, high unemployment, low investment and the decline in potential GDP, even in the face of very low interest rates. John refers readers to a recent piece he wrote on the issue, in which the abstract begins:
In recent years the American economy has been growing very slowly averaging only 2 percent per year during the current recovery. The result has been stagnant real incomes and persistently high unemployment.
Summers’ oped today begins the same way, pointing to weak output and unemployment even in the face of very low rates.
The interest rate point is diagnostic: a near-zero Fed funds rate since 2009 amidst this continued weakness leads Larry to worry about secular stagnation and John to worry about the ACA, Dodd-Frank, et al. No one, John included, denies the fact of the near-zero FFR and the weak recovery.
Larry then emphasizes a very common macroeconomic argument these days that the equilibrium rate needed to clear the output market is a few points below zero. I’ve stressed this point in lots of other posts (most recently here) and again consider it basic diagnostic logic based on IS-LM relations at the zero bound and the empirical rule of thumb by none other than Taylor himself.
I entered the argument viewing this diagnostic as given and objected to John’s WSJ oped based on his following two points, one about now, the other about the last business cycle. I think the current problem is weak demand; he thinks it’s those bad Obama policies that House Republicans are always trying to repeal.
He thinks the booming 2000s cycle is evidence against secular stagnation. I agree with Larry’s point that “even a great bubble wasn’t enough to produce any excess in aggregate demand.” As I stressed in my original post, employment and growth were notably weak in those years, with significant negative consequences for middle and low-income families.
Yet in his short pushback to my post he seems to be saying that all that other stuff about demand and jobs and the heretofore weak recovery is “another secular stagnation thesis.”
In fact, I think we’re talking about the same thesis. Nor does he offer any defense for his case that it’s ACA, Dodd-Frank, and bad fiscal and monetary policy that are currently holding things back. He neither addresses my arguments nor those offered by Brad DeLong et al here.
So I too am disappointed. I’m happy to argue about the extent of the decline in the equilibrium interest rate, but we can all see that an FFR at zero hasn’t “cleared the market.” My (and Larry’s, Brad’s, Paul’s et al) “why not” has to do with inadequate demand. John’s “why not” has to do with policy uncertainty. That’s the debate.