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Op-Ed: Paul Krugman claims slow economic growth may be new normal

By Ken Hanly     Nov 18, 2013 in Business
New York - Paul Krugman argues that the problem of maintaining adequate demand is likely to be persistent. He argues that this lack of demand is likely to create a situation where slow growth will be the new normal for economies.
Paul Krugman is a well known liberal American economist and a Nobel Prize recipient. Wikipedia describes his present status as follows: Paul Robin Krugman (born February 28, 1953) is an American economist, Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times.
Krugman notes that monetary officials look to a near future situation where interest rates will return to "normal" and not remain at the near zero rates they are at present. However, for now in order to keep the economy growing interest rates must stay near zero to encourage investment and demand. Krugman admits that not all authorities agree with this policy.
Krugman notes that over the past five years depression-like conditions have existed. While growth has been slow in many advanced capitalist countries, this has not been the case in many countries such as China whose problem has been to slow growth somewhat and stimulate domestic demand through wage raises etc. rather than depend so much on export growth. Krugman's analysis perhaps fits developed countries such as the US but the global economy is surely more complicated with different countries facing different issues.
Krugman thinks that slow economic growth may become the new norm with low interest rates not leading to much greater investment or consumption. The theory of "secular stagflation" in various forms has been around for quite a while and versions of it advanced by leftist economists according to Krugman. However, a recent speech by none other than Larry Summers at the IMF's annual research conference also argues along similar lines. The appended video is of the Summers' speech.
Summers agrees with Krugman that even though the Great Recession ended about four years ago, the economy remains depressed. Summers remarks that there were huge housing and debt bubbles before the recession but that the overall economy was not doing that marvelously and the boom did not produce significant inflationary pressure or bring full employment. Krugman claims that Summers concludes that we now have an economy whose normal condition is one of inadequate demand. Only when the economy is buoyed by bubbles such as the housing bubble does employment increase to higher levels.
Krugman gives further evidence as to why demand is not likely to increase much. Household debt relative to income rose rapidly from 1985 to 2007. Even when debt was rising the economic performance over the period was mediocre Krugman claims. Given present debt levels, we cannot expect future large increases in those levels and hence demand will not increase very much. Krugman concludes: Again, the evidence suggests that we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing.
Krugman suggests a number of reasons why this slow growth situation will persist. Future population growth will slow lowering demands for virtually everything humans need. Demand will thus drop off. This feature applies only to developed economies with low population growth not developing economies where demand for all the benefits of developed countries will be quite strong. Another factor he claims is persistent trade deficits. However, this explanation would only apply to specific economies such as that of the US and others who have these deficits.
Krugman thinks that his analysis shows that bankers talking about an "exit strategy" makes little sense since easy money and low interest rates will be required indefinitely. Krugman also suggests that the argument that government debt will be a real problem as interest rates rise is irrelevant for quite a long time since interest rates will not rise significantly in the near future.
While Krugman may have some valid points they apply mostly to the USA and perhaps some other advanced economies. Even in those economies it hardly explains much that is happening. Although growth is slow it is overall positive and profits are overall quite high. The US stock markets are hitting record highs in a long bull market. The growth in aggregate demand may not be sufficient for high rates of overall economic growth but capitalism pursues profits and economic growth is just a means to that. As the situation changes other means will be used to keep profits growing even with slow growth. Even austerity provisions such as those common in much of southern Europe that reduce demand may be seen as positive by capital since they force cutbacks in entitlements, reduce wage demands, etc. and increase the power of capital over labor. These tactics in some cases even produce recessions but from the point of view of capital this may be a small price to pay for increasing its power.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
More about Paul Krugman, secular stagnation, aaggregate demand, Economic growth
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