by Peter Kinder
No administration was more tumultuous than Woodrow Wilson’s second (1917-21): World War I entered and won; the fight over the League of Nations; Prohibition’s start; the influenza pandemic; the Red Scare and dragnet; women got the right to vote; a severe post-war recession….
Little wonder that in the spring of 1920 the words of dark-horse candidate, US Sen. Warren G. Harding (R-Ohio) resonated:
America’s present need is not heroics, but healing; not nostrums, but normalcy; not revolution, but restoration; not agitation, but adjustment; not surgery, but serenity; not the dramatic, but the dispassionate; not experiment, but equipoise….
‘Normalcy’, a word before unknown in English, made Harding president in 1921.
The concept retains nostalgic potency as its impossibility becomes ever clearer.
The word of today isn’t likely to get anyone elected. But its effects will. Paul Krugman’s Nov. 18 New York Times column begins:
Spend any time around monetary officials and one word you’ll hear a lot is “normalization.”
It is risky proposing a definition for a Nobel Prize winner, but I’d suggest he means a return to the economic cycles of 1946-2008 which central bankers more or less managed by tightening or loosening the money supply in response to the ‘irrational exuberance’ or lack thereof in the business cycle.
Most … accept that now is no time to be tightfisted, that for the time being credit must be easy and interest rates low. Still, the men in dark suits look forward eagerly to the day when they can go back to their usual job, snatching away the punch bowl whenever the party gets going.
But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?
For Prof. Krugman, this is not a new question, and his answer, ‘yes’, has been consistent. What’s new is his supporter.
Lawrence Summers has Krugman’s qualifications (apart from recognition by the Nobel Committee) plus real administrative experience. See HBR editor Justin Fox’s Nov. 15 interview with Summers on the fascinating decision making that resulted in the 2009 auto industry bailout.
Summers made a much-quoted speech on Nov. 8 to the International Monetary Fund. Its major takeaway: ‘secular stagnation’ has replaced the economic cycles of the post WW II era.
Krugman defines ‘secular stagnation [as] a persistent state in which a depressed economy is the norm, with episodes of full employment few and far between’. ‘Secular’ has an ordinary English definition of century-over-century. Amongst economists, it refers to something that is genuinely long-term – not the five to ten years of the financial services industry.
And if Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time.
In a blogpost, Prof. Krugman asserts correctly he’d made Summers’ arguments before Summers but acknowledges ‘…Larry did a better job.’ Krugman’s Nov. 16 blogpost on the Summers speech is considerably more detailed – and well-worth reading – but no different in its conclusion.
We all know the financial crisis we perceive to have caused the present malaise ended four years ago. But according to Krugman, Summers discerns a darker past than most recall.
Before the crisis we had a huge housing and debt bubble. Yet even with this huge bubble boosting spending, the overall economy was only so-so — the job market was O.K. but not great, and the boom was never powerful enough to produce significant inflationary pressure.
Mr. Summers went on to draw a remarkable moral: We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles.
And that trend, Krugman continues, dates to the mid-1980s. Hence the national delusion Summers implies about the good years under Presidents Clinton and Bush II.
The lessons Summers draws are shocking, as Krugman relates:
Why does all of this matter? One answer is that central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt, which run along the lines of “It may not be a problem now, but just wait until interest rates rise.”
More broadly, if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics — in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off — for a long time.
The past’s economic verities are the future’s falsities – and the present’s. No country saved its way out of the Great Depression. President Franklin Roosevelt tried to implement his promise to cut deficits in 1937 and threw the improving economy into reverse.
…saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver….
From City Councils to Congress, we need representatives who understand the new normalcy. And, you must contact your financial adviser – or find one who understands the futility in expecting normalisation.
Update Nov. 19, 2013: Robert Kuttner says ‘Krugman Boots One’, and he corrects by expanding on the Krugman-Summers ‘Secular Stagnation’ view.
Kuttner is spot on when he writes:
The point is that what looks like “secular stagnation” is often nothing but depressed purchasing power combined with the hangover from a financial collapse. And it could indeed continue indefinitely, just as Krugman’s column warns—unless and until the government gets off the austerity kick. I was on a panel with Krugman when he made exactly that point.
1. Russell Baker, “Back To Normalcy,” New York Review of Books, February 12, 2004, p. 14. The opening phrase has been corrected in accordance with Frederick Lewis Allen, Only Yesterday  as reproduced in Only Yesterday & Since Yesterday (New York: Bonanza Books, 1986), pp. 41-42. This is a photo reproduction of the original volume. The unpaginated text is available at Project Gutenberg Australia.