The inbred Bernanke-Summers debate on secular stagnation
from Steve Keen
Ben Bernanke has recently started blogging (and tweeting), and his opening topics were why interest rates are so low around the world, and a critique of Larry Summers’ “secular stagnation” explanation for this phenomenon, and for persistent low growth since the financial crisis. Summers then replied to Bernanke’s argument, and a debate was on.
So who is right: Bernanke who argues that the cause is a “global savings glut”, or Summers who argues that the cause is a slowdown in population growth, combined with a dearth of profitable investment opportunities, not only now but for the foreseeable future?
I’d argue both of them, and neither simultaneously—both, because they can both point to empirical data that support their case; neither, because they are only putting forward explanations that are consistent with their largely shared view of how the economy works.
And the extent to which they are the product of a single way of thinking about the world simply cannot be exaggerated. It goes well beyond merely belonging to the same school of thought within economics (the “Neoclassical School” as opposed to the “Austrian”, “Post Keynesian”, “Marxist” etc.), or even the same sect within this school (“New Keynesian” as opposed to “New Classical”). Far beyond.
They did their graduate training in the same economics department at the Massachusetts Institute of Technology (MIT). They attended the same macroeconomics class: Stanley Fisher’s course in monetary economics at MIT for graduate students (was it the same year—does anybody know?) Some of their fellow Fisher alumni included Ken Rogoff and Olivier Blanchard.
And that’s not all—far from it. Paul Samuelson (MIT) was overwhelming the intellectual architect of what most people these days think is Keynesian economics. Paul Samuelson is Larry Summers’ uncle.
Samuelson’s “Foundations of Economic Analysis” was the core of the MIT approach to economics, and it became the model for economics textbooks around the world. Gregory Mankiw’s (PhD, MIT) market-dominating text today is a pale echo of Samuelson’s original.
This group has been notably dismissive of other approaches to doing economics. Krugman (PhD MIT) leads the pack here, deriding views that are outside this mindset.
If I were describing a group of thoroughbred horses, alarm bells would already be ringing about a dangerous level of in-breeding. Sensible advice would be proffered about the need to inject new blood into this dangerously limited breeding pool. But the issue would only be of importance to the horseracing community.
Instead I am talking about a set of individuals whose ideas have had enormous influence upon both the development of economic thought and the formation of economic policy around the globe for the last four decades. The fact that so much of the dominant approach to thinking about the economy emanates, not merely from such a limited perspective, but from such a limited and interconnected pool of people, should be serious cause for alarm—especially given how the world has fared under the influence of this thoroughbred group.
It all looked fine for a while of course, before the financial crisis hit—and especially to this set of intellectual racehorses. Bernanke saw “The Great Moderation” as proof of how well he and his alumni were managing the global economy:
the low-inflation era of the past two decades has seen not only significant improvements in economic growth and productivity but also a marked reduction in economic volatility, both in the United States and abroad, a phenomenon that has been dubbed “the Great Moderation.” Recessions have become less frequent and milder, and quarter-to-quarter volatility in output and employment has declined significantly as well. The sources of the Great Moderation remain somewhat controversial, but as I have argued elsewhere, there is evidence for the view that improved control of inflation has contributed in important measure to this welcome change in the economy. (Bernanke 2004)
Olivier Blanchard stated—one year after the financial crisis had begun—that “the state of macro is good”:
For a long while after the explosion of macroeconomics in the 1970s, the field looked like a battlefield. Over time however, largely because facts do not go away, a largely shared vision both of fluctuations and of methodology has emerged. Not everything is fine. Like all revolutions, this one has come with the destruction of some knowledge, and suffers from extremism and herding. None of this is deadly however. The state of macro is good. (Blanchard August 2008)
Now, after the crisis, the horses are not so sanguine. But they are trying to understand why things went so badly wrong using explanations that are consistent with the inbred intellectual perspective from which they all emanated.
Are they likely to get it right? Hardly: the odds that the explanation for our post-financial-crisis malaise can be found within the same set of intellectual ideas that didn’t see the crisis coming—and that generated policy biases that arguably made the crisis far worse—must be vanishingly close to zero. This is why students of economics are finally revolting and calling for a wider range of economic ideas to be both taught and developed in our Universities. Groups like Rethinking Economics and the International Student Initiative for Pluralism in Economics are in effect pointing out the degree of in-breeding that has occurred in economics in the last 40 years, and calling for the introduction of new blood (my School at Kingston University in London is one of the few that is responding positively to that student call).
I’ll discuss the substance of the Bernanke-Summers “debate” in a subsequent post. For now I’ll close with a simple visual indication of one aspect of the shared mindset that leads them astray, however much they may appear to differ on this issue. This mindset sees capitalism as a system that either is in or tends towards equilibrium—and the key puzzle for them is explaining why it isn’t in equilibrium at any given time. Figure 1 shows a word cloud of Bernanke’s first blog post, and the word “equilibrium” is the 9th most frequently used in the whole post.
Figure 1: Word cloud for Bernanke’s 1st blog. Equilibrium 9th most frequently used word