In the latest Annual Research Conference of the IMF, several economists have been arguing about what would happen if the current economic conditions stay for long time. Yes, we’re talking about DECADES. Some of them strongly defended the argument of secular stagnation, a lasting state in which the economic depression would be the norm, with few episodes of full employment in between.
Yoy may think it sounds madness, but please, listen. Before the crisis We had a huge real estate and debt bubble. Even so, stimulating spending, the economy only worked at half: the labor market was good, but not great. Therefore What make us think that things will change?
Monetary policy is actually constrained by the zero lower bound. It doesn’t work. In spite of austrian arguments the normal rules of economic policy don’t apply anymore. We will live long time according to the backward rules of an economy, where virtue is vice and prudence, folly. SURE.
Our economies show unsustainable indebtedness, unacceptable inequality rates but mostly and inefficient demand. What means we face difficulties in implementing certain policies. For that reasons, I call for:
– Fiscal policy. It would stimulate demand by major infraestructure and employment programs. What about the debt problem? Keep reading.
– Some bigger rates of inflation. It’s what some countries need. Japan is pursuing that goal and Germany should do the same. It would make peripheral countries more competitive in the EU, stimulating net exports and providing opportunities of recovery for Spain, Italy… But we need some countries’ deficits for others superavits. The paradox of thrift appears again. We all can not save at the same time. And a bigger inflation rate also reduces the debt burden.
– Bigger taxes for the richest. It would reduce inequality as increasing the funds for social programms.
– Regulation. We can’t not allow the existence of too big to fail institutions as long as they all are not under the proper surveillance programs.
I don’t know if we could get off secular stagnation anytime soon. But it doesn’t make sense without even trying. I bet none would like to see these terrorific snapshots again.