Ken Rogoff has a piece in FT on Oct. 9. The piece is remarkable because it is the output of a mind that is still making itself up. No problem with that. But, do not read the piece expecting clear answers. There is some hair-splitting as well. This is the comment I left on the page:
Ken Rogoff wrote: “Perhaps the most convincing reason to believe that the world’s economic troubles are due to a chronic deficiency of demand is the extraordinarily low level of long-term global interest rates.”
That is the flip side of saying that there is excess supply. Would the behaviour of interest rate be any different if one stated that there is excess supply and not deficient demand? But, perhaps, stated that way, the solutions would look different. Piling on more debt would surely not be the answer nor would it be cutting interest rates below zero as Mr. Rogoff rather shyly advocates.
Just five days before his piece appeared, there was a thoughtful piece in FT written by James Kynge and Jonathan Wheatley (Emerging Asia: ‘The ill-wind of deflation’)
“There is a chance that we are moving towards global deflation,” says Alberto Gallo, head of European macro credit research at RBS, the bank. “We have overleveraged everywhere and, instead of reducing capacity, we are creating a prolonged state of industrial overcapacity that is driving down prices. China is the biggest example.”
“If this is the case, then endless bouts of QE — or “QE infinity” as Mr Gallo describes it — may be exacerbating rather than alleviating the problem of deflation by acting to prolong oversupply through providing cheap credit to companies.”
“By itself, ‘QE infinity’ could be deflationary in the long run because it means that the issue of overcapacity is not resolved but dragged forward,” says Mr Gallo. “This could in turn result in both prolonged deflation and asset price bubbles at the same time.”
So, what does deficient demand mean? Is it deficient investment demand or consumption demand? Excess supply arises from prior excess investment demand and not deficient investment demand.
So, if the answer is to boost consumption demand and not investment demand (which would end up boosting capacity again, when it is not needed), then the answer is to boost wages.
Companies are laying off workers and hence unlikely to pay more in wages. The balance of power is not with labour. Does that need to shift for deficient demand to be addressed? In other words, is it time for the cycle to retrace its path of the last forty to forty-five years?
Would mainstream academic economists offer that solution to policymakers? For them to do so, they need to throw out their outdated tool-box, perhaps.
I should have added the following:
If economists agree that the solution lies in an ideological shift towards labour away from capital, then there is no room for monetary policy experiments, negative interest rates – stuff that excites academic intellectuals because they get to real life experimentation of their flaky theories on an unsuspecting world. The answer would lie in politics, then.