Home > Uncategorized > Can Trump overcome secular stagnation?

Can Trump overcome secular stagnation?

from James K. Galbraith and RWER no. 78

Could the economic program of President Donald Trump, if enacted, overcome secular stagnation? This essay addresses part of that question, focusing on the effects of a changing macroeconomic policy mix and thrust in the present US national and global context. A separate essay will address considerations on the supply side.

The phrase “secular stagnation” is usually attributed to the early post-war Harvard economist Alvin Hansen, one of the first American disciples of John Maynard Keynes, who used it to argue that the American economy would return to the Great Depression once the Second World War ended. Today, secular stagnation is defined by Lawrence Summers, who defines it as the condition of a “low real neutral rate of interest”, or in Fed-speak a “low R* world”. A neutral rate of interest (“R*”) is said to be the one that neither increases nor restrains the economic growth rate. If such a rate exists and if it is close to zero, then monetary policy cannot spur growth, and a big-deficit fiscal policy is required.

For this reason, it is argued, the great recession-cure of “Quantitative Easing”, so highly touted a few years back, proved to be mostly a dud. But fiscal policy would have better luck, whether through increased public spending or tax cuts, although only so long as the fiscal push is not offset by higher interest rates. If interest rates rise, in a “low R* world” then the fiscal expansion will fail. This tension between fiscal and monetary forces is of great importance just now, as Donald Trump assumes the presidency on a program of infrastructure spending and tax cuts, while interest rates are starting to rise.  

So, what do economists who argue along the lines described by Summers – a group that includes Paul Krugman, Ben Bernanke and other substantial figures – say that they think governs the interest rate? One might say: it’s obvious, Janet Yellen and Stanley Fischer decide the interest rate. But this is not what our leading economists appear to believe. Instead, they appear to believe – or anyway, they argue – that a panoply of natural and social forces lie behind the interest rate. And therefore, if interest rates rise to block the Trump expansion, it will be because those stars are aligned against him.

We have seen this movie before, in the early 1980s, when interest rates rose dramatically in advance of the Reagan tax cuts. Those high interest rates – reaching twenty percent briefly, and sustained at high levels for two years, generated a deep recession. They destroyed much of heavy industry in the Mid-west and of the trade union movement, previously the backbone of the Democratic Party. They were, in their way, the forebear of the economic conditions that have brought Donald Trump to power now.

In this paper I will first explore the intricate doctrines of the interest rate which are still circulating among high-profile economists, and which have the effect of obscuring a basic reality. The reality is that in the modern world of integrated global finance, the central bank of the largest economy determines the core financial conditions for the United States and also for the world at large. Whether a change in those conditions will serve, or undermine, the Trump program is the question.  read more

  1. March 25, 2017 at 8:34 pm

    “And the upshot is that Trump, as his Federal Reserve … drives interest rates up, will be able to hide behind a bipartisan phalanx of academic obfuscation.”

    What a great, insightful, erudite and artful essay! Its artfulness equal to the manner in which Galbraith demolishes Neoclassical economics in The End of Normal, attacking the “standard model” of his profession without insulting anyone, calling names, or otherwise making them feel bad.

    I have just one incidental request/side issue: is there a way for those who, as Galbraith does, know the illusion of the conventional idea of economic growth, to find another expression than “growth”? It seems to me that, in this regard, we have an example of why we don’t want to speak our political opponent’s name more than we must. Or, put another way, an unintentional perpetuation of The Big Lie.

    Just saying. I love Jamie Galbraith.

  2. charlie
    March 25, 2017 at 11:10 pm

    I have a couple of Galbraith’s books, was influenced in the 70’s by the John K. and continue to find sanity in his observations. I am not trained as an economist, but have read a good bit.
    I too would like to find another expression for ‘growth’. When women entered the job market en mass the GDP grew, but how much of that was due to the shift from the household, unpaid work of women to paid work and the creation of fast food economy etc. That is something that has always bothered me about that era, as well as the Reagan economic illusion.

  3. March 26, 2017 at 9:18 am

    This is I agree a brilliant take down of mainstream economics and economists. Particularly, American economists. But there are several of these. Some as good as Galbraith’s. They haven’t really changed much about the profession or the absurd stories it tells to help it’s plutocratic masters. Other social scientists have done an equally good job. With somewhat better results. I suggest a look at “The McDonaldization of Society” by George Ritzer; Max Weber’s “The Protestant Ethic and the Spirit of Capitalism,” in which he introduces the notion of the “iron law of rationality;” Karl Mannheim’s “Ideology and Utopia,” whose goal isn’t to identify the ultimate “truth” of something, but instead to figure out in practice how people frame, perceive and interpret “the world out there.” One of Mannheim’s key insights here is that the world is not given to us simply by our senses – we interpret it, though lenses based on culture, position, interests, and – Ideologies.

    As for alternatives for the “growth” vocabulary I ask you to consider “Farewell to Growth” by Serge Latouche. He coins the term and “ideology” of “degrowth.”

  4. frank peters
    March 26, 2017 at 12:47 pm

    Central bankers only control one point on the interest rate curve, and can easily be knocked off course when their own forecasts go awry on growth or inflation.

    Our greatest economists believed that the interest rate is set by overwhelmingly by one ‘social force’; the rate of profit (ie, Marx, Smith, even Ricardo*). If the interest rate exceeds what we might now call the risk adjusted profit rate, then net new investment decelerates or falls outright.

    Bernake, Yellen et al deny the centrality of profits to capitalism. There’s no reason why Left economists should.

    * http://socialdemocracy21stcentury.blogspot.co.uk/2014/10/david-ricardo-on-natural-rate-of.html

    * http://adamsmithslostlegacy.blogspot.co.uk/2009/02/falling-profit-rates-raise-real-incomes.html


    • March 31, 2017 at 6:52 am

      “If the interest rate exceeds what we might now call the risk adjusted profit rate, then net new investment decelerates or falls outright.”

      This sounds like a fancy way of saying that investors switch from stocks to bonds and lower interest rates to match profit rate. Of course, “net new investment” is ambiguous. If consumption dollars are no longer available to seek, then putting money into stocks merely increases the price of stocks without changing the quantities of underlying physical capital. Does this count as “new investment”?

  5. March 27, 2017 at 5:26 am

    Some questions about history. Could secular stagnation exist in 1790 USA? Could it exist in 1660 UK? Could it exist in 1930 USSR? I submit the answer in each case is no. That seems to tell us that certain specific conditions are necessary for secular stagnation to exit. Now question is, what are these conditions and how are they created? Are they inevitable outcomes of economic developments. What sorts of economic developments? And why these developments and not others? Second, is secular stagnation a social problem? If yes, why? Third, how do we cure the social problem of secular stagnation. Answers, with data to back them up would be appreciated.

    • March 31, 2017 at 7:00 am

      “That seems to tell us that certain specific conditions are necessary for secular stagnation to exit. … Third, how do we cure the social problem of secular stagnation.”

      Every good produced for GDP involves both creation of that good and consumption of this good. Whenever either the ability to make stuff or the ability to buy stuff becomes scarce we know from basic chemistry that the rare ingredient will always determine the rate of reaction.

      I talk about the relationship between the 80 year cycle of concentration of power and consistently downward sloping growth in this recent quora post:


  6. Risk Analyst
    March 28, 2017 at 7:27 pm

    I think it would be fair here to be waving one of those FOX news bias alert flags. The story woven in the paper is that Trump wants lower taxes and higher (sic) interest rates to enrich himself. Was there a companion paper to this one outlining the relationship between Bill, Hillary, and Walmart? Walmart gave many millions of dollars total for donations to the Clinton Foundation, direct campaign donations, and Hillary even was a paid member of Walmart’s Board of Directors at one time until it became politically uncomfortable. In return, critics charge that the Clintons promoted international trade relationships that financially benefitted Walmart such as trade policies encouraging outsourcing of US jobs. Did anyone notice Hillary did not exactly speak up to complain about Walmart’s aggressive anti-union activities. I think the direct relationship between Walmart and the Clintons is a much more obvious ethical issue than trying to create a link between Trump’s conventional and conservative advocacy of tax and interest rate policies and his own portfolio. Heterodox economics should not be tied to a particular political party.

    • March 29, 2017 at 9:42 am

      That the Clintons, and many other Democratic politicians did not help, and in many instances harmed the working and middle classes in the USA is not in question for me. Neither is that they often sided with large corporations like Walmart. That said, why can I not point out that Trump did the same, including padding the profits of his own businesses by supporting international trade deals, using foreign workers and materials in constructing his hotels, and playing the race card whenever it benefited him and his business interests? Before Trump was a GOP presidential candidate, he believed that the nation’s economy ran better when Democrats were in control (per his own words in interviews). So, my comments on Trump are not a party thing. Trump has many problems, some that he shares with the Clintons and others. Some of his problems seem unique, however. While many politicians (and others) lean toward narcissism and sociopathy, Trump is extreme in these tendencies. He seems to have no sense of empathy or concern for others, and is so tied up in his own feelings of inadequacy that he must lie to ensure he never has to accept defeat or that he is anything less than perfect. This is a problem in any area of life. For a President, it must eventually lead to disaster. If the disaster takes down Trump, that’s one thing. If it takes down the nation and/or large parts of the world, that’s something else.

      • Risk Analyst
        March 29, 2017 at 6:15 pm

        Ken: My comments were directed at Mr. Galbraith’s paper and not your note although I am happy to explain my comment to you. Mr. Galbraith wrote a very nice essay on interest rates especially mentioning the Fed’s focus on natural rates of interest which many believe are an incorrect framework. But for some reason, he just seemed to paste on a few incongruous and highly disparaging paragraphs about Trump. Go look at the essay. The essay stood by itself really and those paragraphs added nothing.

        The bias in many discussions and papers seems to be the necessity to complain about Trump to show that readers are all part of the same fraternity.

      • March 30, 2017 at 6:09 am

        Risk Analyst, the title of the paper is “Can Trump overcome secular stagnation?” So, Trump is not really an add-on. “This tension between fiscal and monetary forces is of great importance just now, as Donald Trump assumes the presidency on a program of infrastructure spending and tax cuts, while interest rates are starting to rise.” This implies a relationship. Galbraith argues that per leading economists an array of social and natural factors determine interest rates. And if that rate rises to stop Trump’s policies, it these factors that are the blame. Galbraith argues that in the modern world of integrated global finance, the central bank of the largest economy determines the core financial conditions for the United States and also for the world at large. Including interest rate, I assume. So, if Trump’s appointments to the Fed drive up interest rates Trump will argue it’s not his fault and use the “leading” economists to cover his ass.

        Galbraith argues that Trump intends to follow the Reagan pattern – tax cuts and pubic works spending. But Trump also pledges to fight inflation. Trump promises everything to everyone. Combine this a high dollar and you have investors running to real estate – where Trump will be waiting to clip them for whatever he can. Smart plan for Trump; not so much for the nation. Is Galbraith incorrect?

  7. Risk Analyst
    March 30, 2017 at 6:35 pm

    Again, if you strip out a limited number of lines of text, including the title you point out, this paper would be a (very interesting) stand-alone paper and the added reference to Trump is superfluous. You ask me if Galbraith is correct. It would take way too long for me to write an adequate response to that. Instead of my going there, I will just say there are sharp differences of political emphasis and choice of model between my beliefs and his. I will point out one example of each:

    1. In the last paragraph Galbraith says that the US economy will be run to serve the personal interests of the President who will additionally know when to cash out from the cycle he creates. In my view, that is just a way “over the top” exaggeration and assumption of massive conspiracy and ill-intent that is not justified by any evidence. It’s fine to say interest rates may impact Trump’s portfolio in a certain way, but to claim such massive government conspiracy is not helpful to clear analysis.

    2. I disagree with Galbraith’s construction of the term structure of the interest rate yield curve. On page 24 he uses the neoclassical efficient markets valuation model in which long rates are just the risk neutral projection of the market’s expectation of future short or federal funds rates. Risk neutral valuation provides arbitrage conditions for contemporaneously coherent pricing. However, those mathematically implicit forward rates are not a real world objective forecast of future federal funds rates. And the expectations of federal funds rates over the next 30 years is not determining the shape of the curve.

  8. March 31, 2017 at 6:45 am

    This was overall an interesting read, but it seems to ignore the impacts of inequality. The statement that long term interest rates are primarily driven by short term interest rates, which are driven by actions by the fed seems to miss the point. The most salient point of the trillions of dollars is not that it was possible to got that large, but rather that it was necessary to go that large. We threw trillions of dollars into the economy and the only apparent result was that we avoided going into a Great-Depression style negative chain reaction. While this is certainly positive, it raises questions of how big a hole needed to be filled and where those huge magnitudes could possibly come from.

    The answer, of course, should reference leverage. Not all of those trillions of dollars were applied to the problems in the economy which were essentially issues of demand shortage. when interest rates are low, you can expect some “leakage” from rich people to poor people via increasing housing and asset prices which can stimulate demand. You can also have increased “leakage” in the form of unviable projects with negative profit rates (and indeed to some degree viable projects with negative cash flow) with low interest rates. But some of this leakage becomes less effective as interest rates approach zero. Indeed, the benefits we had from “trillions” in the asset markets could have probably been had with just “tens of billions” in the form of Universal Basic Income.

    Keynes quote about the desire to hold wealth in the form of cash still leaves out two major factors: 1) the actual number of dollars that exists above the consumption saturation line in the first place, and 2) the actual number of dollars that exist below the consumption saturation line and therefore are available to provide “Return on Assets” of various types, including bonds. Indeed, dollars available to pay mortgages can be read as a cause and dollars offered to provide mortgage loans as an effect just as easily if not more easily in today’s climate as vice-versa, Ironically, the inequality aspect seems more consistent with Larry Summer’s definition – not that Larry Summers cares about inequality.

    The article then goes on to claim that higher interest rates will drive up the value of the dollar, which in turn will hurt trade, but I think the later Reagan years are more instructive here. We had consistently lower interest rates pretty much consistently from 1980 onward and the lower interest rates actually were associated with a strong dollar and trade deficits. The claim that higher interest rates would cause a strong dollar may seem logical based on supply and demand arguments, but if there is one thing that 1999 should have taught us, investments often move in the direction opposite to where supply and demand point, and for many countries and funds, the USD and assets behind it are investments.

    Reagan, with his tax cuts on the rich set the stock market on a runaway roller-coaster (at least from a P/E perspective). Some might question whether dollars going outward for consumption or dollars coming inward for investment drove our trade imbalance, but the strong dollar we saw answered this conclusively. As interest rates lowered, bond prices (and associated assets) increased, and investment managers everywhere know that you need to buy the strongest in the pack rather than the weakest. In defense of the hurting exports idea, Trump’s proposals should b expected to increase inequality in much the same way Reagan’s actions did.

    “But such protection would bring inflation, product shortages,
    unemployment in the distribution and retail sectors, a massive decline in real consumption –
    since new production facilities would have to be established on a vast scale to replace …”

    With more moderate protectionism (say 20% across the board tariffs, there would be a modest amount of inflation, but given that the US still is a manufacturing giant, the tariffs would be offset to a large degree by greater local sales and greater local wages. This advantage would go away as our trading partners adopted their own 20% tariffs, but even then, the tax collected from the 20% could be put to good use to offset the effects. For example, with a starter UBI program. Given a trade deficit, we would be immediate winners in a balanced trade wars and the downward pressure on inequality would immediately support an increase in growth even if the impact was neutral for capital formation from a trade balance perspective. Of course, this is not the type of protectionism that Trump would propose. An arbitrary, capricious form of protectionism would have the suppression of capital formation described in the paper, just with slightly different explanation, IMO.

    Overall, though, I think the paper makes a lot of strong points.

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