Sunday, November 24, 2013

Engineering and Secular Stagnation

Engineering needs to follow this - - see post.  Looking like Japan for at least the rest of this decade.

"The diagnosis of a secular stagnation comes out as being plausible. In fact economists like Robert Gordon and Tyler Cowen have been arguing that the low hanging fruits from technological innovations having been plucked, we may now be in a period of technological stagnation. This when coupled with the declining population growth lends strong credence to a secular stagnation hypothesis. These are important long-term trends whose effects are certain to be profound.

Given the secular stagnation hypothesis, I am not sure whether the policy goal should be to attain the Great Moderation era "full employment" by seeking to lower the real interest rate. That would require continuing for an indefinite period the regime of quantitative easing and further monetary accommodation, as Krugman suggests, or deepening financial de-regulation, as Summers (may) be alluding to. Both are fraught with serious dangers of resource mis-allocation, incentive distortions, and structural problems (widening inequality and workers dropping out of the labor force).

There appears to be a distinct reluctance to accept the reality of a secular stagnation. Fundamentally, a sustainable pre-crisis trend recovery can happen only through the aggregate demand channel. But the aforementioned long-term structural trends are certain to keep aggregate demand muted. Therefore, instead of asking how to restore growth and employment back to pre-crisis levels, a more relevant exploration would be that of managing the economy given this new reality of a lower potential output. And that surely is not about seeking to lower real interest rates."

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