Saturday, June 6, 2015

Along came the Buiter (gang)

And they build a pretty sturdy web to explain secular stagnation;
 ‘Technological exhaustion’ – the low-hanging fruit on the tree of knowledge has been plucked (even if only for IT, see Fernald 2014) – is an unlikely cause of stagnation, cyclical or secular, in our view. The poor performance of productivity in many advanced economies and emerging markets is probably more a reflection of the difficulty of accurately measuring technological progress, and of myriad man-made supply-side constraints, than of the world running out of ideas, space and oomph to innovate.
By supply-side constraints they mean
Supply-side hysteresis whereby supply-side distortions – including dysfunctional institutions, policies, rules, regulations and practices – depress current and expected future potential output growth, which in turn depresses effective demand, can also be a serious problem, notably in the Eurozone. High costs of hiring and firing workers may turn labour into a quasi-fixed factor and could thus discourage complementary capital formation. The same holds true for incentive-dulling taxes, intrusive and distortionary regulations of product and labour markets and slow legal procedures, all of which discourage investment and hiring.
Unfortunately, they end up rounding up the usual suspects (without gathering any real evidence first);
The demand-side drivers of secular stagnation include excessive indebtedness and high (income and wealth) inequality. The optimal response to the threat of secular stagnation therefore includes extensive debt restructuring where there is an overhang of debt and policy measures (including in tax policy, benefits policy, and education policy) to halt, and in part reverse, the persistent increase in inequality.
That last, which we've bolded, is largely the result of those dysfunctional institutions, policies, rules, regulations and practices that Buiter et al were earlier criticizing--the rising inequality in the U.S. came along at about the right time to be explained by the (perhaps) well-meaning reforms of the Great Society.

Also, they ought to drop the analysis in terms of interest rates--though theirs is a pretty clear one--because that's not necessary, since interest rates are not the price of money and only adds to the public's (and often the professoriate's) confusion.


  1. If interest rates are not the price of money, what are they the price of?

    1. Interest is the price of renting money, not of buying it.