Part 3: Demand Dynamics, Inequality and Secular Stagnation · Keynesian Macroeconomics for the 21st...
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Keynesian Macroeconomics for the 21 st Century Part 3: Demand Dynamics, Inequality and Secular Stagnation YSI – INET Lectures Edinburgh, Scotland—October, 2017 Steven Fazzari Washington University in St. Louis Departments of Economics and Sociology Weidenbaum Center on the Economy, Government, and Public Policy
Transcript of Part 3: Demand Dynamics, Inequality and Secular Stagnation · Keynesian Macroeconomics for the 21st...
KeynesianMacroeconomicsforthe21stCentury
Part3:DemandDynamics,InequalityandSecularStagnation
YSI–INETLecturesEdinburgh,Scotland—October,2017
StevenFazzari
WashingtonUniversityinSt.LouisDepartmentsofEconomicsandSociology
WeidenbaumCenterontheEconomy,Government,andPublicPolicy
UnderstandingRecentExperience
• AOermathoftheGreatRecession:slowrecovery• Briefempiricalcasefor“secularstagnaUon”
• Inadequacyofsupply-sidestories• Strongcaseforsluggishdemandgrowth
• Householddemanddynamics• Roleofinequality• Government
• ReverseSay’sLaw:demandleadssupply• Afewthoughtsonpolicy
RecentStagnation(Peak-to-peakgrowthofrealGDPpercapita)
PeakDates TotalGrowth(percapita)
GrowthperYear(percapita)
1973:4to1979:3 11.9% 1.8%
1979:3to1990:2 25.0% 2.1%
1990:2to2000:2 24.2% 2.2%
2000:4to2007:4 10.9% 1.4%
2007:4to2017:2* 5.6% 0.6%
*Finalcycleisincomplete
AnExcessivelyOptimisticForecast(EvolutionofCBORealPotentialOutputfor2017:Q2)
16.00
16.50
17.00
17.50
18.00
18.50
19.00
19.50
20.00
January2007 January2009 January2011 January2013 January2015 October2017
Trillionsof2
009Do
llars
TimeofForecast
Dropof12.6%--$2.8trillion(2009dollars)
GrowthofLaborForceParticipation(Percentagepoints,smoothedyearoveryear)
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
All Ages25-54
Incompleterecoverybefore2007
NegaUveunUl2016;Hardlyanyrecovery
StagnationthroughtheMainstreamLens
• Persistent:10yearssincepeak;8yearssincetrough• Weare“beyondtheshortrun”
• ConvenUonalview:Keynesianeffectsshouldhavebeencorrected• SomequalificaUonforzerolowerboundonshortrates• ButFedisraisingratesnow
• Therefore,itmustbethesupplyside• Badpolicy:it’sallObama’sfault• Badluck:structuralsupply-sideshocksandmediocre“newnormal”
• Let’slook…
LaborMarketMismatch?(TheBeveridgeCurve)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0
VacancyRa
te
UnemploymentRate
LousyBusinessCapitalInvestment?(NominalnonresidentialFixedInvestment/NominalGDP)
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
Eraofinvestment-ledgrowth
Bubble
Rathernormalrecovery
WeakInnovativeActivity?(PrivateR&DtoGDP)
1.0%
1.1%
1.2%
1.3%
1.4%
1.5%
1.6%
1.7%
1.8%
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
SupplyorDemand?(Real)InterestRateswillTell
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
10-YearTBond-CorePCEInfl 5-YearTBond-CorePCEInfl 10-YearTIPSRealYield
TheDemand-SideTheoreticalLens
• NoautomaUcorpolicymechanismtorestoreADtoY*“beyondtheshortrun”
• DemandgrowthdynamicsareproximatedeterminateofeconomicacUvity
• TounderstandstagnaUon,lookatthedemandgeneraUonprocess
HouseholdDemand:OMG!(AdjustedhouseholddemandbasedonCynamon&Fazzari,2017)
4000
4500
5000
5500
6000
6500
7000
7500
8000
8500
9000
9500
10000
10500
11000
11500
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
RealAdjustedHouseholdDemand 2000-2006Trend(HHDem)
2016Gap:21.7%
$2.3trillion
Trendre-joinedinpastcycles
WeakHouseholdSpendingandtheStagnantRecovery(BasedonCynamon-FazzariReviewofIncome&Wealth,2017)
80.0
85.0
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
1 2 3 4 5 6 7 8 9 10 11 12
Inde
xPe
ak=100
YearsSincePeak
RealHouseholdDemandProfiles(PopulaRonAdjusted)
1978-1989
1989-2000
2000-2006
2006-2015
HistoricShiftofDemandGeneration
• Pasttrendnot“structural,“butwhateconomyneeded
• Pre-crisisdemandgrowthrequiredunsustainablehouseholdfinance
• Butnowthe“consumerage”financialdynamicshavechanged
• SevereandpersistentdemandstagnaUon
• ConsistentwithinterestratedataandgeneralizedcorrelaUonofweaknessacrosssectors
GovernmentDidNotReplaceHouseholds
1500.00
2000.00
2500.00
3000.00
3500.00
4000.00
4500.00
5000.00
5500.00
6000.00
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
TotalGovernmentConsumpUon,Investment,&Medical 2000-2006Trend
ItCouldHaveBeenWorse…NetExports/GDP
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
NuancedRoleforInequality• RisinginequalityasexplanaUonforstagnantdemand
• Richspendor“recycle”asmallershareofincomethanothers
• Timingproblem• Borrow-and-spenderapostponesdemanddrag• Aidedandabeqedbythefinancialsystem!
• Notinequalityvs.financialexpansion• Inequalityandfinancialexpansion• Again,dynamicsofdemandgeneraUon
• GreatRecessionforcesmiddle-classdemanddown• Moreinlinewithstagnantincomes• Butweneededthatdemand
InequalityinaKeynesianGrowthModel
• Autonomousdemandandthe“supermulUplier:”
• IncomedistribuUonbetween“H”and“L”groups(λ),spendingpropensiUes(α),andtaxrates(τ)
• Twoproblems• (1)LossofautonomousconsumpUonandgovernmentspending• (2)LowersupermulUplierduetorisinginequality• #1abrupt;#2slow
• SimplecalibraUon(Cynamon&Fazzari,EJEEP,2015)• MulUplieralonecanexplainatleast10percent
DemandLeadsSupply
• CurrentUSsituaUon• NohugeoutputgapdespitestagnaUon• Mainstream:unfortunatenewnormal• AlternaUve:weakdemandlowerssupply
• Channels• InvestmentandtechnologicaldisseminaUon• Pressureforlabor-savinginnovaUon(Duq:“necessityisthemotherofinvenUon”)
• Endogenouslaborsupply:parUcipaUonandimmigraUon• ReverseSay’sLaw
NewResults(Fazzari-Ferri-Variato)• Demand-ledgrowth“supermulUplier”model
• ReviewofKeynesianEconomics,2013• Harrodmodelwithinstabilitycontained
• Newpaperaddsendogenousadjustmentofsupply• Technologyandlaborsupplychannels
• Keyresults:• Growthdrivenbydemand• Steadystategrowthledbyautonomousdemand• Supplyaccommodatesdifferentdemandpaths• Slowdemandgrowthdragssupplydownwithit• AcceleraUonofdemandpullssupplyup• Limitstohowfarsupplycanbepushed
Consequences
• AdisappoinUng“recovery”• Deleveragingnotenoughtorestorerobustdemandgrowth
• Doesnotfixrootcauseofrisingincomeinequality• Inconsistentcallforsmallergovernmentwithoutaddressingdemandgap
• Whereistheengineofdemandgrowth?• Recoveryreliesinlargepartonspendingoftheaffluent
TheAf`luentasGrowthEngine?
80
100
120
140
160
180
200
220
240
260
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Index of Real Consumption, Bottom 95% and Top 5% (1989=100)
Bottom 95% Top 5%
WhattoDo?• AqenUontodemandgrowthnecessary• SkepUcalaboutmonetarypolicyandQE• Fullemployment(Baker&Bernstein,Atkinson,manyothers)
• Helpsaddressinequality• Publicinfrastructure• Middle-classtaxcuts,possiblymoneyfinanced• Employeroflastresort
• Qualityjobswithadequatepay• Possiblycontractwithprivatesector
• InsUtuUonalchangestofavorwagegrowthacrosstheincomedistribuUon
