Is Another Recession Looming? Secular Stagnation is back in the news… | #Jobs on Blog#42

Economist and former Secretary of The Treasury, Larry Summers, warns of a new recession in two posts on secular stagnation, based, in part, on a report in The Economist. (note: also see this piece regarding Donald Trump’s prediction of a new recession)

I posted a definition of Secular Stagnation months ago. Now, Summers is warning us again, and it is time to revisit the issue. Secular stagnation is related to the creation of economic bubbles. In a new piece published in the Washington Post, Summers writes about the record high profits on Wall Street that are not translating into the expected investment in our economy and, by extension, the creation of new high-wage jobs to go with it. This is in line with what all three top contenders in the primary are talking about, each in his and her own way, to varying degrees of willingness to address the issue of lack of investment head on, using measures that will actually solve the underlying causes.

Summers explains the current thinking on the signs of secular stagnation, but also notes that they differ in some notable ways from what he had previously defined them.

“Secular stagnation has as a central element a decline in the propensity to invest, leading to chronic shortfalls of aggregate demand and difficulties in attaining real interest rates consistent with full employment.”

Summers goes on to point out that the issues are more complex and what should be happening along with current conditions is “… an unusually high rate of investment would be expected to go along with a high rate of return on existing capital.” But we aren’t seeing that high rate of investment. What we are seeing is hardly any such thing. Summers goes on to theorize that this could be due to a compensation for higher risk, increased demand for higher liquidity – though Summers admits it doesn’t account for weak investment – or, that higher profits are a reflection of monopolies, which is exactly what we’ve been witnessing.

Summers wrote in a February blog post that if we are indeed in secular stagnation, then the Fed needs to, again, implement quantitative easing (QE):

“I would put the odds of a US recession at about 1/3 over the next year and at over ½ over the next 2 years.   There is a substantial chance that widening credit spreads, a strengthening dollar as Europe and Japan plunge more deeply into the world of negative rates, and lower inflation expectations will be tightening financial conditions even as recession looms.  And while there is certainly scope for QE, for forward guidance and possibly for negative rates it is very unlikely that the Fed can take steps that are nearly the functional equivalent of 400 basis point cut in Fed funds that is normally necessary to respond to an incipient recession.

If I am right in these judgements, monetary policy should now be focused on avoiding an economic slowdown and preparations should be starting with respect to the rapid application of fiscal policy.”

By now, all three major candidates have given voters broad outlines of their economic prescriptions. Donald J. Trump’s answer to everything these days is in the form of trade wars and taking back what foreign nations “took from us.” The problem with Trump’s statements is that they are not truthful. It isn’t that China, Mexico, Japan and Vietnam stole from us, but that his fellow plutocrats gamed the system by bribing Congress and then ordering it to change regulations that would facilitate the taking of jobs overseas as well as making inversion legal and parking profits out of the US, while reducing tax liabilities to near zero. Under these conditions, it is no wonder that we are facing secular stagnation and that there is no investment in business.

Why? Because normal economic incentives have been replaced by the encouragement of speculative behaviors, facilitated by the replacement of economic policy and regulation with tax shelters and a release from any corporate liability. Why create when you can do just as well or better through speculation?

The Drumpf, of course, doesn’t tell his unsuspecting voters that latter part. As I’ve written in previous posts, Trump has already announced that he’d nominate Wall Street corporate raider Carl C. Icahn to run his trade policy. To put it mildly, Carl Icahn isn’t known for a business model that is worker-friendly.

Hillary Clinton’s prescription, when compared to her Democratic opponent’s, Bernie Sanders, is still far too business-friendly to address the severity of the problems we are facing. Any economic measures, from this point forward, must reverse years of relaxation of regulations that were put in place during FDR’s New Deal and since, in order to prevent the situation we now find ourselves in. Furthermore, as Summers himself urges policy-makers, we must return to investing in the economy at much larger rates in order to address a new recession:

“The focus of global coordination should shift from clichés about structural reform and budget consolidation to assuring an adequate level of global demand.   And policymakers should be considering the radical steps that may be necessary if the US or global economy goes into recession.”

Without the “political revolution” called for in Bernie Sanders’ campaign platform, such global reforms, led by the US, cannot take place. What’s more, if the last seven years are any lesson, the Federal Reserve acting alone is not a replacement for actual economic policy. Without a new Congress – or at the very least a split Congress – there is virtually no chance the next administration will be any more able to effect policy than the current one. Secretary Clinton’s minimalist approach and focus on succession of the current administration would not be enough of a shock to the system to reverse a new recession. Key to the success of any new president will be solving the political deadlock we are mired in, and breaking free of the neoliberal-progressive split the Democratic party has been working up to since the 1990’s. This election season, finally, is seeing the progressive wing of the party aggressively challenging neoliberalism, with the support of a new underclass called “precariat.”

I have had many disagreements with Paul Krugman’s views in the past two years, but if there is one statement I agree with to this day, it is that America’s economic problems are rooted in its dysfunctional politics. The economy, for now, still rests on a sound foundation. How much longer that foundation remains sound enough to salvage is anyone’s guess, but the longer the right-left stalemate is allowed to go on, the less likely we are to remain a democracy and the far more likely it is that our economy will remain geared to sustain Americans in the way it had all throughout the last century. Secular Stagnation, in such a terrible event, would indeed become permanent and reversible only with extreme popular intervention.



Profiling The Angry American In This New Political And Economic Era | Blog#42