It has been noted that the focus of macroeconomics has shifted dramatically after the results of the 2007 credit crunch have made themselves felt through recessions and stagnation: from ‘stabilization-around-a- positive-trend’ to resuming growth –or, at least, avoiding too hard and long a secular stagnation.
My starting point is that the 2007-2008 banking-cum-financial crisis shocked us into realizing that a huge difference had been building between ‘what it was’ and ‘what it will be’. More specifically, I argue that the pre-2007 high per capita income world of high rates of GDP growth, productivity increases, population expansion, government countercyclical policies, and shrinking income inequality, is, more likely than not, gone. Unfortunately, all those characteristics of the pre-2007 period were exactly the causes for growth. It follows that the post-2007 world has to be necessarily a world characterized by slower growth, increasing inequality, ageing population, slowing investment expenditure vis-à-vis increasing saving, and government consciously chosen impotence.
How long will it last? How costly will it be in terms of lost output and permanent fall in potential output?
I consider three scenarios. I ask first whether ‘the market’ will pull us out of difficulties, possibly in interaction with central banks; in the second scenario European governments will let go of the austerity insanity that led them to foster saving in a world in which we have been having a tremendous savings glut for years and years, and directly go slowly back to their role as managers of anti-cyclical fiscal policies as it was in the old, good paradigm. In the third scenario, a game-changing move of central banks into fiscal territory may take place which we will calling ‘money financed fiscal stimulus’.
I conclude that, though for very different reasons, none of these scenarios entails a quick and painless-for-all exit from ‘secular stagnation’, however long a secular stagnation is. Indeed, the first and the second scenarios appear to be rather unlikely, the third will entail a long period of hand-wringing and convincing of politicians.
Click this link for reading the paper (pdf document). This version of the paper is preliminary and incomplete. Please do not quote. Comments most welcome.