That term refers to a situation where Demand is simply insufficient to encourage producers to Supply more stuff, wages from which generates more demand in a cycling-up of economic activity. Japan's mediocre economic performance since its own 1990 asset-bubble burst is the best contemporary model, unless you want to return to Great Depression era for an analog. Remember the 1980s fear that we'd all be submerged by Japan Inc.? We don't hear that talk much, anymore.
Paul Krugman and Robert Reich, to their considerable credit, have been beating this drum for years ? against a mainstream flow of policies recommending Austerity, here and in the EU. 'Austerity' here takes the form of government budget-cutting, relying entirely on monetary policy to stimulate growth by making new money essentially free to borrow.
Krugman has called for continued fiscal stimulation of the economy to pump-prime, or jump-start consumer demand. Reich has written earlier and more perceptively than anyone to explain the deteriorating plight of the American middle class since the 1980s. As he says, in vain attempts to stay even, they first went to two incomes, then worked the world's longest hours and finally borrowed against the bubble equity in their primary assets ? their homes. None of it has worked, the bubble burst, and the great middle class engine-of-spending is sputtering, badly.
Now Larry Summers has joined that estimable band. In a recent, fifteen-minute, extemporaneous talk at MIT, he laid-out the basis for the concern. Policy makers are used to tinkering with their monetary and fiscal tools, around a 'normal' situation of good growth and low unemployment. The idea is tp maintain that middle ground -- to goose the economy out of lows, and poop-the-party when it overheats.
But here we are, five years out from the 2008 crisis that ground new economic activity to a halt. You would expect that there would be a catch-up bump in such activity and employment, to make up for ground lost in the crisis. It hasn't happened, as the economy just lies there on the couch. That suggests that the "new normal" may be high unemployment and low growth, in response to the fundamentals identified by Reich. And that's what gives rise to comparisons with Japan's "Lost Decade," a period that has now stretched into almost two such periods of secular stagnation.
In Japan's case, consumer demand has not returned to prior levels, likely because of a cultural preference for greater frugality and saving than is broadly shared among Americans. My sense is that, in the aggregate, we'd love to spend the money ? if we only had it. But the vast migration of wealth from the middle to the top in America means that the middle doesn't have it anymore, and the top can't spend it fast or conspicuously enough to take up the slack. The result is a similar secular stagnation, with no obvious end in sight.
Policy responses, beyond the immediate Stimulus (which worked, after all), have run monetary and fiscal policy at cross-purposes. Real, inflation-adjusted interest rates are actually negative ? and still no takers, whereas we are pulling the reins-in on general fiscal spending ? 'Sequestering' it. Congress is even taking away spending that responds to The Most Basic of needs ? food in the mouths of babes (the SNAP program). Deficits fears have turned 'irrational exuberance' into 'irrational hostility' to spending that would goose this dead duck of an economy.
Since I don't have to try to get elected to anything, nor do I have to douse my prescription in political reality, here's what I'll do when they make me King. Monetary policy can't address the fundamental demand problem; only fiscal and tax policy will do that. What is needed is to move static wealth from the cob-webbed coffers of the top few percent, and invest it in things that will generate new jobs and the middle class spending that will inevitably ensue in the short run ? and that will contribute to greater American competitiveness in the world, in the longer run. Education would be my first priority, followed by technological and physical infrastructure. This generation has really not invested in America the way our forebears did, and it shows.
Now, if you think this prescription hearkens back to the 1930s and the New Deal, indeed it does. The infusions of public spending then relieved economic malaise and contributed mightily to American competitiveness later in the century. That stimulus has run its course ? we've lived off it handsomely. It may be time for another dose. Of course, the trick would then be to reduce spending as better times return ? as King I could do that, too, but politicians can always find something else to spend-on, even when it doesn't contribute to good policy.
Will it happen? I fear not, as the deficit hawks hold sway, as well as the House of Representatives, and tax reform is a dead-letter among those who can't finance their own re-election campaigns. But the New Normal is unhealthy, unjust and unsustainable, unless you believe in demand fairies. It will only get worse with the progressive hollowing-out of the middle class that is clearly well underway.
I'm reminded of the internet meme that Serious Cat is Serious. Well, the Dismal Science is Dismal, indeed.
