Intellectual Broker: (Trying to) Make Sense of Current (Small) Analytical Disagreements Between Paul Krugman and Larry Summers: Where Is the Can Opener?

Larry Summers tweets:

Where is the deus ex machina? Where is the can opener? Read my blog posting on where my views differ from Krugman: https://t.co/ap4u4RFkFd

— Lawrence H. Summers (@LHSummers) November 2, 2015

David Wessel picks it up:

Larry Summers says Paul Krugman exaggerates… https://t.co/3CDWT4WRXz

— David Wessel (@davidmwessel) November 2, 2015

And I attempt to Twittersplain, with how much success I do not know:

Larry Summers: Where Paul Krugman and I differ on secular stagnation and demand: “Paul Krugman suggests that I have had some kind of change of heart on secular stagnation…

…and converged towards his point of view…. I certainly appreciate the gravity of the secular stagnation issue more than I did…. But I think Paul exaggerates the change in my views considerably. The topic… was: ‘North America faces a Japan-style era of high unemployment and low growth.’ Paul argued in favor. I opposed the motion–not on the grounds that the US economy was in good shape, but on the grounds that our demand deficiency problems should be easier to solve than Japan’s… [because] it is dimensionally much less than the problems that Japan faced in four respects. Japan’s problems were different in magnitude, different in the depth of their structural roots, different in the… perspective… relative to the rest of the world… different in the degree of resilience [of] their system…. Paul responded in part by saying:

The question is, are we going to be stuck in a state of depressed demand of the kind that Larry has talked about. Larry and I agree that that is what has been happening… I think Larry and I agree almost entirely on the economics, on what needs to be done….

I think we have both been focused on demand and the liquidity trap for a long time. There are, though, two areas where I have had somewhat different views from Paul. I believe that structural issues are often important for demand and growth…. Second, I have never related well to Paul’s celebrated liquidity trap analysis. It has always seemed to me be a classic example of economists’ tendency to ‘assume a can opener’. Paul studies an economy in liquidity trap that will, by deus ex machina, be lifted out at some point in the future. He makes the point that if you assume sufficiently inflationary policy after this point, you can drive ex ante real rates down enough to stimulate the economy even before the deus ex machina moment.

This is true and an important insight. But it seems to elide the main issue. Where is the deus ex machina? Where is the can opener? The essence of the secular stagnation and hysteresis ideas that I have been pushing is that there is no assurance that capitalist economies, when plunged into downturn, will over any interval revert to what had been normal. Understanding this phenomenon and responding to it seems the central challenge for macroeconomics in this era. Any analysis that assumes restoration of previous equilibrium is, from this perspective, missing the main issue. I was glad to see Paul recognize this point recently.  I suspect it will lead to more emphasis on fiscal rather than monetary actions in depressed economies.

Paul Krugman: Liquidity Traps, Temporary and Permanent: “Larry Summers reacts to an offhand post of mine, seeking to draw a distinction between our views…

…I actually don’t think our views differ significantly now, but he’s right that what he has been saying differs from the approach I took way back in 1998. And I’ve both acknowledged that and admitted that the approach I took then seems inadequate now…. Japan now looks like an economy in which a negative natural rate is a more or less permanent condition. So, increasingly, does Europe. And the US may be in the same boat, if only because persistent weakness abroad will lead to a strong dollar, and we will end up importing demand weakness. And if we are in a world of secular stagnation–of more or less permanent negative natural rates–policy becomes even harder.

And I commented on Paul’s webpage thus: But, as I was tweeting to David Wessel, you scorn the Confidence Fairy while having some hope for the Inflation-Expectations Imp, while he scorns the Inflation-Expectations Imp but has some hope for the Confidence Fairy, no? And he has more hope for pump-priming small fiscal expansion to trigger virtuous circles and give the economy escape velocity, no? Small differences relative to those of the two of you vis-a-vis Rogoff, Mankiw, Feldstein, Bernanke, and, I think, even Blanchard. But differences, no?…