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Spend any time around monetary officials and one word you’ll hear a lot is “normalization.” Most such officials accept that now is no time to be tightfisted, that for the time being credit must be easy and interest rates low.
Still, the men in dark suits look forward eagerly to the day when they can go back to their usual job, snatching away the punch bowl whenever the party gets going.
But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist for decades?
A number of economists have been flirting with such thoughts for a while. Now, the case for “secular stagnation”—a persistent state in which a depressed economy is the norm, with episodes of full employment few and far between—and was made forcefully recently at the most ultrarespectable of venues, the IMF’s big annual research conference. And the person making that case was none other than Larry Summers. Yes, that Larry Summers.
And if Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time.
The financial crisis that started the Great Recession is now far behind us. Yet our economy remains depressed.
Summers then made a related point: Before the crisis we had a huge housing and debt bubble. Yet even with this huge bubble boosting spending, the overall economy was only so-so—the job market was OK but not great.
Summers went on to draw a remarkable moral: We have, he suggested, an economy whose normal condition is one of inadequate demand—of at least mild depression—and which only gets anywhere close to full employment when it is being buoyed by bubbles.
Why might this be happening? One answer could be slowing population growth.
America’s working-age population rose rapidly in the 1960s and 1970s, as baby boomers grew up, and its work force rose even faster as women moved into the labor market.
That’s now all behind us. And you can see the effects: Even at the height of the housing bubble, we weren’t building nearly as many houses as in the 1970s.
Another important factor may be persistent trade deficits, which emerged in the 1980s.
Why does all of this matter? Central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt.
More broadly, if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics—in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off—for a long time.
I know that many people just hate this kind of talk. Economics is supposed to be about making hard choices (at other peoples’ expense, naturally). It’s not supposed to be about persuading people to spend more.
But as Summers said, the crisis “is not over until it is over”—and economic reality is what it is: one in which depression rules will apply for a very long time.•
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Krugman is a New York Times columnist. Send comments on this column to ibjedit@ibj.com.
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