Thursday, May 8, 2014

Paul Krugman Lecture on Secular Stagnation At Oxford

Paul Krugman provides three slides in this article which explain why he believes that the US economy will experience periods of secular stagnation.  We have secular stagnation when even zero interest rates are not able to restore full employment.  We have spent the last seven years with real interest rates below zero and we have not restored full employment.  Moreover, real interest rates have declined over the last three business cycles and we did not get much traction from monetary policy even before the 2008 crisis.

The 2001-2007 business cycle recovery was based upon an explosion of household debt as a percent of GDP.  Households have been deleveraging during the current business cycle but even if household debt as a percent of GDP stabilized at the current level, spending would be 4% lower than it was during the 2001-2007 business cycle.

A slowdown in population growth will have a negative impact on GDP growth in the US.  Krugman argues that slower population growth will cause the growth in potential GDP to decline by 1%.  Consequently, if we assume a 3:1 ratio of capital spending to output, a 1% decline in potential GDP growth will lead to a 3% drop in business investment.

If  we add up the effect of a 4% decline in spending due to stabilizing household debt to GDP at the current level, and a 3% drop in business investment in response to a 1% decline in the growth of potential GDP,  the US economy is faced with a 7% anti-stimulus burden to overcome relative to the 2001-2007 business cycle.  Negative real interest rates may not provide the traction necessary to produce full employment.


  1. “Negative real interest rates may not provide the traction necessary to produce full employment.” Ooh. Err. Gosh. What are we going to do?

    The solution is desperately simple. Keynes spelled it out 70 years ago: have government print or borrow money and spend it (and/or cut taxes). When people find they have more money – revelation of the century this – they tend to spend some of it.

    By the way Norman, were you actually at the Oxford do last night? If so, was the above the gist of what he said? Or if you weren’t there, do you know of any videos of his talk or where the text of it might be?

  2. I was not at Oxford. Krugman posted the three slides which he intended to use in his presentation. He claimed that they were the gist of his argument. There is no link to a video of the discussion that took place. Lord Skidelsky was one of the discussants. Both he and Krugman advocated Keynesian fiscal stimulus to deal with the liquidity trap during the recession. Instead we got fiscal tightening. Budget deficit reduction was more politically powerful than fiscal stimulus.