Source: Business Insider
Secular Stagnation Schematic
March 3, 2015 1:00pm by Barry Ritholtz
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Whenever we see a graphic like this, it is always important to remember that the answer may be D) All of the Above.
I have done forensics on a number of engineering failures over the years. the key lesson I have learned from it is that they are generally complex requiring a combination of causes that occur during the planning and design phases, the construction phase, and the response phase.
A full-blown financial crisis and extended period of economic stagnation will also require all of these. I think the only reason that we did not get a full-blown 1930s depression is because the Fed had learned from that experience and was able to put enough stop gap measures in place in the response phase over the past 6 years to just get us into a stagnation period. However, the political fiscal leadership in the US and elsewhere have generally been sadly lacking.
Things like the S&L crisis, the emerging markets financial crisis, the LTCM crisis, the 2000 stock market crash all had the opportunity to cause major economic disaster, but they didn’t. The house of cards tower was still in the early stages of construction and all of the floors were not yet installed. That required a few more years in the 2000s before it was ready to go after all of the elements outlined in the flow chart above had been installed.
Demographics, the financial crisis, and our broken educational system are certainly factors however in my view over regulation, a bloated government, and tax/class uncertainty in the country that was the economic leader of the world stifled growth and opportunity globally. Not mentioning these issues when discussing the “lower potential GDP” and a “permanent demand deficit” is missing a big part of the equation.
The demand-side argument is the more persuasive since it relied mainly upon neo-Kenysian and heterodox (e.g. Minsky) economic models that not only projected probability of financial crisis ahead of time but performed well during the aftermath whereas supply-side models universally failed, usually in both categories.
However it looks to me like some elements of the chart are variables in both domains and not in one alone; e.g., income inequality really belongs in the demand side too for rather obvious reasons and a rise in demand for safe assets creates supply problems when the only issuers of such assets are governments controlled by austerity regimes.
This is a rather weird chart. To start with, shouldn’t the causes be on the left and cause things. Why are they using the passive voice, so to speak? Besides, it doesn’t always make sense. Did debt overhang cause the financial crisis? I thought it was a consequence. Did income inequality cause supply side secular stagnation? Most economists would argue that income inequality leads to demand side problems. Does the falling relative price of investment goods really lead to global imbalances? You’d imagine that it would lead to global balancing.
What do the blue arrows connecting the insufficient demand box to the global imbalances and financial crises boxes mean? Is this another is-caused-by relationship? It almost looks like they’ve flipped supply and demand.
Then there’s the which infers column. How does impaired investment profitability infer a permanent demand deficit? Do they mean implies or indicates?
That chart is a real mish-mash and doesn’t really say anything, at least not anything coherent. I hate to go all Tufte on a lightweight chart like this, but really guys.