Published: November 17, 2013
Spend any time around monetary officials and one word you’ll hear a lot
is “normalization.” Most though not all such officials accept that now
is no time to be tightfisted, that for the time being credit must be
easy and interest rates low. Still, the men in dark suits look forward
eagerly to the day when they can go back to their usual job, snatching
away the punch bowl whenever the party gets going.
But what if the world we’ve been living in for the past five years is
the new normal? What if depression-like conditions are on track to
persist, not for another year or two, but for decades?
You might imagine that speculations along these lines are the province
of a radical fringe. And they are indeed radical; but fringe, not so
much. A number of economists have been flirting with such thoughts
for a while. And now they’ve moved into the mainstream. In fact, the
case for “secular stagnation” — a persistent state in which a depressed
economy is the norm, with episodes of full employment few and far
between — was made forcefully recently at the most ultrarespectable of
venues, the I.M.F.’s big annual research conference. And the person
making that case was none other than Larry Summers
. Yes, that Larry Summers.
And if Mr. Summers is right, everything respectable people have been
saying about economic policy is wrong, and will keep being wrong for a
Mr. Summers began with a point that should be obvious but is often
missed: The financial crisis that started the Great Recession is now far
behind us. Indeed, by most measures it ended more than four years ago.
Yet our economy remains depressed.
He then made a related point: Before the crisis we had a huge housing
and debt bubble. Yet even with this huge bubble boosting spending, the
overall economy was only so-so — the job market was O.K. but not great,
and the boom was never powerful enough to produce significant
Mr. Summers went on to draw a remarkable moral: We have, he suggested,
an economy whose normal condition is one of inadequate demand — of at
least mild depression — and which only gets anywhere close to full
employment when it is being buoyed by bubbles.
I’d weigh in with some further evidence. Look at household debt
relative to income. That ratio was roughly stable from 1960 to 1985,
but rose rapidly and inexorably from 1985 to 2007, when crisis struck.
Yet even with households going ever deeper into debt, the economy’s
performance over the period as a whole was mediocre at best, and demand
showed no sign of running ahead of supply. Looking forward, we obviously
can’t go back to the days of ever-rising debt. Yet that means weaker
consumer demand — and without that demand, how are we supposed to return
to full employment?
Again, the evidence suggests that we have become an economy whose normal
state is one of mild depression, whose brief episodes of prosperity
occur only thanks to bubbles and unsustainable borrowing.
Why might this be happening? One answer could be slowing population
growth. A growing population creates a demand for new houses, new office
buildings, and so on; when growth slows, that demand drops off.
America’s working-age population rose rapidly in the 1960s and 1970s, as
baby boomers grew up, and its work force rose even faster, as women
moved into the labor market. That’s now all behind us. And you can see
the effects: Even at the height of the housing bubble, we weren’t
building nearly as many houses as in the 1970s
Another important factor may be persistent trade deficits,
which emerged in the 1980s and since then have fluctuated but never gone away.
Why does all of this matter? One answer is that central bankers need to
stop talking about “exit strategies.” Easy money should, and probably
will, be with us for a very long time. This, in turn, means we can
forget all those scare stories about government debt, which run along
the lines of “It may not be a problem now, but just wait until interest
More broadly, if our economy has a persistent tendency toward
depression, we’re going to be living under the looking-glass rules of
depression economics — in which virtue is vice and prudence is folly, in
which attempts to save more (including attempts to reduce budget
deficits) make everyone worse off — for a long time.
I know that many people just hate this kind of talk. It offends their
sense of rightness, indeed their sense of morality. Economics is
supposed to be about making hard choices (at other people’s expense,
naturally). It’s not supposed to be about persuading people to spend
But as Mr. Summers said, the crisis “is not over until it is over” — and
economic reality is what it is. And what that reality appears to be
right now is one in which depression rules will apply for a very long
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