Secular stagnation and the pact with the devil

Heinrich Kley, “Sabotage” (Betriebsstorung)

I have long argued (e.g., here and here) that capitalism involves a kind of pact with the devil: control over the surplus is reluctantly given over to the top 1 percent in return for certain promises, such as just deserts, economic stability, and full employment.

In recent years, as so often in the past, we’ve witnessed those at the top sabotaging the pact (simply because they have the means and interest to do so) and now, once again, they’ve undermined their legitimacy to run things.

First, they broke their promise of just deserts, as the distribution of income has become increasingly (and, to describe it accurately, grotesquely) unequal and the tendency toward high concentrations of wealth has returned, threatening to create a new class of coupon-clippers. Then, they ended the Great Moderation with speculative decisions that ushered in the worst economic crisis since the First Great Depression. And, now, the promise of full employment appears to be falling prey to the prospect of secular stagnation.

That’s the worry expressed in a new ebook edited by Richard Baldwin and Coen Teulings published by Vox. While secular stagnation can be defined in different ways, the basic idea is that, for the foreseeable future, economic growth—and therefore the prospect of full employment—is probably going to be much lower than it was in the decades leading up to the global crises of 2007-08. Moreover, what little growth is expected will most likely be accompanied by great inequality and financial stability.

If it becomes a reality, secular stagnation represents the end of the pact with the devil. It’s going to be impossible to keep any of the promises—just deserts, economic stability, and full employment—that have maintained capitalism’s legitimacy.

I don’t know if the members of the 1 percent are aware of or concerned about the extent to which secular stagnation may be their undoing (because, in fact, they may hold out the hope that more austerity can successfully be imposed to keep pumping out the surplus). But, to judge from many of the contributions to the Vox volume, the prospect of secular stagnation certainly appears to be worrying mainstream macroeconomists.

Why? Because their own promise was to analyze the uneven and shifting patterns of the macroeconomy and to devise the appropriate set of monetary and fiscal policies to ensure the continuation of the pact with the devil. However, secular stagnation—including the idea that the real rate of interest would have to be negative to maintain an equilibrium of savings and investment—calls into question the efficacy of the kinds of macroeconomic policies that have long held sway among mainstream macroeconomists. Now, they’re not sure they’ll be able to maintain the promise of creating a just distribution of income, avoiding financial instability, and creating enough jobs to ensure every able-bodied person who wants a decent, well-paying job can have one.

Actually, as we’ve seen, they haven’t been able to fulfill that promise for the past 7 years. And now, the threat of secular stagnation means they won’t able to do it anytime in the near future.

There just may not be a happy Disney ending to this one. . .