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The Stiglitz-Summers Catfight Over Secular Stagnation

War of the...err..."Titans"?
Image courtesy World Economic Forum

Image courtesy World Economic Forum

The Democratic Party is weaker today than it has been in nearly 100 years, but not even this level of irrelevance can convince leading party figures to close ranks. The most entertaining volley in left’s civil war was issued this week buy Nobel-prize winning economist Joseph Stiglitz, who served as the Chair of President Clinton’s Council of Economic Advisor at the same time that Larry Summers was Deputy Secretary of the Treasury. Stiglitz took aim at Summers in an essay published Tuesday, along with his theory of secular stagnation, which argues that wealthy economies today cannot achieve satisfactory growth without resorting to low or even negative interest rate policies.

“Those responsible for managing the 2008 recovery (the same individuals bearing culpability for the under-regulation of the economy in its pre-crisis days, to whom President Barack Obama inexplicably turned to fix what they had helped break) found the idea of secular stagnation attractive, because it explained their failures to achieve a quick, robust recovery,” Stiglitz writes, clearly referring to Summers. “So, as the economy languished, the idea was revived: Don’t blame us, its promoters implied, we’re doing what we can.”

Stiglitz goes on to argue that this theory has been proved useless by the events of the past year. “The sudden increase in the US deficit, from around 3% to almost 6% of GDP, owing to a poorly designed regressive tax bill and a bipartisan expenditure increase, has boosted growth to around 4% and brought unemployment down to an 18-year low,” the essay continues. “These measures may be ill-conceived, but they show that with enough fiscal support, full employment can be attained, even as interest rates rise well above zero.”

Stiglitz has been an energetic and articulate proponent of left economic ideas since leaving government service, but in this critique of Summers he is finding himself in agreement with Republican economists and commentators. Mike Salon, former Mitch McConnell policy advisor, for instance, took to the Wall Street Journal editorial page to argue that second-quarter growth of 4.2% means that all the economic problems of the Obama years have been solved by lower corporate taxes and decline in the pace at which new regulations are issued.

Salon and Stiglitz agree on nothing about the nature of the economy, other than that it is good now, apparently. But how much better is the economy today than two or three years ago? Consumers and businesses are clearly more confident, and it’s quite possible that the mere presence of a business-friendly Republican in the White House has been the primary driver of this phenomenon. But outside these data, it’s remarkable how little has actually changed. Sure, the 4.1% expansion of GDP in the second quarter is impressive, but the economy had two other quarters of above-4% growth during the Obama years as well. The unemployment rate has dropped to 3.9%, but this is a continuation, not an acceleration, of a trend that had been in place since the start of the recovery.

The Trump Administration says it has eliminated 22 regulations for every one that it has instituted, and it argues that this is one of the primary reasons to expect growth to continue to be well above the average growth rates seen during the Obama years. Setting aside the question of the costs to other priorities of deregulation, the 22-to-1 claim is just brazenly wrong. And even if you accept the assertion that the Trump Administration has been on a deregulatory binge, there has been little evidence of it affecting the business practices of companies that would benefit from such a policy.

For years, we have been told that government policy and the performance of the economy are inherently related: voters cared about the economy (stupid), not ideology. If leaders could deliver economic performance, they would be rewarded. Embedded in this assumption is that politicians have a lot of power to affect the performance of the economy. But the 2016 election and the events that followed strongly suggest that people’s perception of the economy is driven by their political beliefs, rather than the objective state of the economy driving voter’s view of government. Meanwhile, the events of the past two years should cause us to reevaluate just how important government policy is to the performance of the economy.


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