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Final Thoughts on Secular Stagnation

Too little was done in the aftermath of the financial crisis a decade ago to stimulate aggregate demand, which would be boosted by a more equal income distribution. And substantially stronger financial regulation than was in place before 2008 needs to be adopted to minimize the risks of future crises.

CAMBRIDGE – Joseph Stiglitz, Roger Farmer, and I are now and have long been in agreement on what are probably the most important points. The “New Keynesian” paradigm that sees business cycles as arising from temporary rigidities in wages and prices is insufficient to account for events like the Great Depression and the Great Recession. Too little was done in the aftermath of the financial crisis a decade ago to stimulate aggregate demand. A more equal income distribution operates to increase aggregate demand. Substantially stronger financial regulation than was in place before 2008 needs to be adopted to minimize the risks of future crises. 

I continue to have disagreements with Stiglitz on the record of policy advice, and with both Stiglitz and Farmer on some points of theory regarding secular stagnation.

Starting with the policy record, Stiglitz is right to assert that economists should not be expected to agree on issues of political feasibility. They should, however, be able to agree on what texts say. The New York Times commentary that Stiglitz proudly cites calls for a stimulus of “at least $600 billion to $1 trillion over two years.” The Obama administration called for and received stimulus totaling some $800 billion, a figure well within Stiglitz’s range, despite being politically constrained by the necessity of Congressional approval. So I’m not sure what he is claiming.

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