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Indian readers may be forgiven for thinking that when we hear the phrase "secular stagnation," the opposite of it must be something like communal growth. But jokes aside, the bubbling debate over the idea of secular stagnation in the West may prove to have far-reaching intellectual and practical consequences for the world. The debate was given a boost recently by Larry Summers in a speech to the IMF, in which he worried about the fact that America had not been able to achieve either its potential growth or full employment despite near zero interest rates. There is a worry that a Japan-like stagnation may be in the offing if radical measures are not adopted. The radical measures being proposed turn conventional logic on its head: negative interest rates and cheap credit are good; if inflation is one way of achieving that, so be it; debt, whether public or private, is not something to worry about, especially if real interest rates can be made negative; savings would be bad at this juncture and so forth. It is, as Krugman put it, as if "normal rules" don't apply anymore.
Economists are more competent to debate the technical arguments behind the secular stagnation diagnosis and the proposed measures to combat it. But it is a fascinating moment in history and politics. Of course, the contexts are different, but there is a distinctly 19th century feel about the debates: they are deeply uncertain and take us back to some fundamental questions. This is so in four respects. First, now that the consensus around normal rules has shattered, there is just the sheer audacity of the experiments being proposed to induce negative interest rates: eliminating paper money, giving negative interests on deposits and so forth. In short, a lot of unconventional and unthinkable measures have come within the realm of possibility. This is a world that will require incredibly creative and nimble thinking, not dogmatic certainties.
The second is a return to more fundamental questions about drivers of growth. There is, once again, a growing body of literature which is beginning to wonder whether the continuous post-war growth of Western economies was an aberration rather than the rule. Was it a combination of factors — demography, geo-strategic rents, education and an unusual phase in innovation — that have largely run their course? What is interesting about this is, so much of this debate over growth moves it away from the purely economic factors that had so marked the Washington consensus just a couple of decades ago: getting prices right, openness, fiscal rectitude etc. In many ways, the drivers of growth now seem to be deeper hidden forces, whose importance was occluded by the selection bias in the range of hypotheses we were willing to consider. But Summers, as he does typically, let the cat loose amongst the pigeons by arguing that perhaps it takes bubbles to sustain growth. According to this view, most of the recent the growth spurts in the US have required bubbles of one kind or the other, whether in real estate, technology or finance.
Third, there is a return to the question of inequality. In an odd way, while coming from different disciplines and methods, the positions of Larry Summers and the great Marxist historian who foresaw the turbulence in the global economy, Robert Brenner, now seem to converge on one major thing. Brenner had basically argued that there was a long-term underlying stagnation in the American economy that was disguised by credit bubbles. But the difference between Summers and Brenner seems to turn on one crucial point. The Left is more inclined to attribute depressed demand, as evidenced by lack of inflation, to inequality, stagnant wages and the shrinking middle class. Cheap credit and financialisation, as Raghuram Rajan has also argued, comprised a kind of political compensation for this stagnation. How inevitable is this inequality in an age of labour-saving technological change and mobile capital? Can more education or a different education address this problem? When Summers speaks of bubbles, he is not speaking of a fundamental psychological irrationality where prices depart from what their real levels should be. He is speaking of deliberately induced over-consumption and debt. This bubble argument is politically fraught because it easily dovetails with condoning almost any irrationality, particularly that of bankers. It is a perversely self-serving argument for the continued financialisation of the economy. Even mad, greedy bankers producing credit bubbles will do more for the economy at this point than almost anything else, the argument goes. It is a measure of how confusing our times are that the very thing that was blamed for the crisis of 2009, financialisation, is now being seen as possibly the very thing that might have produced full employment.
To be fair, there are other ways being put forward for raising demand that are more conventional: aggressive public spending for one. But the political prospects for this option to be exercised are not bright. So finally, in the debate, there is a return to an issue that had long disappeared from our horizons: adjustment to the prospect that high unemployment will be the norm rather than the exception. The idea has not gained traction in the US, but it is not an accident that an unconditional basic income is now becoming a live political option in many countries, from Switzerland to the UK. There are many complicated arguments behind this. There is a normative argument that only such an income can produce a society free from exploitation; there is also a practical argument that basic income cash transfers can replace the complex bureaucracy of a welfare state. But there is a new argument that unconditional basic income might, paradoxically, allow for more flexible employment structures, by giving people the option to take supplementary employment rather than a full time job. The whole welfare-employment link will be considered anew.
There are lessons for India. In the short run, we might think that Summers' defence of bubbles is good for emerging markets. But we need to draw long-term lessons. We need to have clarity about how these debates over secular stagnation are likely to turn out. It will affect our growth model. It also is a good mirror to come to terms with what the real drivers of growth are versus what merely appears to induce it. The Washington dissensus should be a spur to thinking. But most importantly, societies have a two to three-decade window of opportunity to improve their wellbeing before larger factors turn against them. We are in that window, and busy squandering it.
The writer is president, Centre for Policy Research, Delhi, and a contributing editor for 'The Indian Express'
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