Tuesday, May 17, 2016

Summers Misleads with Secular Stagnation Tilt

Larry Summers recently peered into his cob-webbed trunk of worn out economic ideas and found something that was discarded with Dad’s WWII army uniform – the concept of SS. For those of you unfamiliar with Lucky Cigarettes and Bing Crosby, secular stagnation basically means that your economy has a disease that implies it will forever grow at a rate slower than your mailman on the day the Social Security checks arrive.

SS was coined after WWII. Alvin Hansen thought that the US would go back into a depression since defense spending would be greatly reduced at the end of the war. The logic was clear – Great Depression – war spending up – war spending down – Great Depression. It didn’t actually happen that way and despite three recessions in the 1950s, the US was off and running like Forest Gump.

You cannot blame Summers for wanting to dust this baby off and try it out again. We had a great recession in 2008/2009 and ever since we have had lackluster economic growth in the US. If my fingers are correct it has been about seven years since that recession technically ended. It ended and we had no real recovery stage. And the expansion stage would not put pho on the table for most of us. So Summers is right to wonder if maybe this time we have contracted SS.

Summers is as predictable as Charlie Sheen at a Margarita Bar, but he is also nuanced. He was a college President and you learn a lot of skills in that kind of job. Summers new emphasis on the long-run issue of SS appears to have distanced him from the usual mantra about short-run demand. But he is like the pickpocket who attracts your glance toward one hand while he empties your IU Credit Union Account with the other.

Summers doesn’t exactly say why it is that the government debt shifted to twice its long run average (as a percent of GDP), and increasing debt even more is perfectly fine for long-run economic growth. Recall that he wants to end SS. Hopefully he wants to end it in the next decade but you’d never know it. For example, he wants to stop SS in its tracks with more spending on the environment and education. I don’t care what political colors you wear – there is no way to connect the dots here – you can spend a lot more on both of those things and you might get your pug to leap through a gas-fired ring six feet off the ground. But how long will it really take to get the growth needle to move after more of this kind of spending?

He also wants to tax the rich and redistribute the proceeds to the poor and middle class. Again, that’s a nice thought. It might even increase spending in the short-run. But in what circus do you call that long-run economics? I remember the kid’s comic book wherein Scrooge McDuck (Donald’s Uncle) sat in his vault and played in the money. So it makes sense to give some of that money to poorer people. But please – don’t tell me this is a means to permanent raise the growth of the economy.

Finally, Summers want to increase infrastructure spending. Most of us nod and say that’s a cool thing to do. And despite its budget-busting implications it can logically be classified as long-run policy. But please do not tell me that it is going to do much for growth in my lifetime. Remember in 2008 the term “shovel-ready" projects? 

We learned what many of us knew – government spending is a long and tortuous (and corrupt?) road. Correct me if I am wrong but it took five years before a healthy portion of that money legislated in the last recession was actually spent on something. You know the deal – someone has to advertise for bids and then someone has to type them out on nice typing paper using an Underwood typewriter. Then all the stamps must be licked and pressed on envelopes. Okay I am joshing with you but you get the point. It takes a while to select the contractors and then they have to get geared up to do the work. Bribes must be paid and checks cleared. Then the checks roll and the magic happens. Hold on to your kiddies -- the Summers express is ready to take-off.

I have hit my six million word allotment for the day. While our liberal and revered soothsayers are talking long-run policy or not, the truth is that they are asking for the same policies they always ask for. These policies are not working. A real durable supply-side policy is possible that might find compromises by all the parties that address our current economic slowdown. But you are not going to get it from the usual hacks. Their faux SS argument means little. It is time to try something else. 

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