Forever blowing bubbles?

The past couple of weeks have seen much debate centre on the notion of ‘secular stagnation’ as outlined by Larry Summers in his speech to the IMF. Summers examined whether real interest rates needed for full employment may now be negative. When one looks at the performance from 2008 in the UK and G4 economies this would appear to be the case: (


If this is the new paradigm for mature economies Summers speculates that the economy may actually need bubbles to get somewhere near full employment. Given the absence of inflationary pressures in economies that have had supposedly loose monetary policy there would seem justification to accept this viewpoint.


There are limits to the extent to which an economy whereby growth ultimately rests on bubbles is feasible economically and morally. An asset bubble in property is one thing (and plausibly quite socially detrimental) but a bubble in natural resources, say food or oil, would have disastrous effects on society at large and a disproportionately damaging effect on the most vulnerable members of our society. There is some debate to be had as to whether Summers is offering this theory as an observation or a normative proposition.  


Overall the theory looks to me fairly compelling, This being the case it is worth examining other factors related to this phenomenon.


The mature economies in the neo-liberal consensus period have also seen a massive increase in inequality, increases in private debt and the labour share of national earnings decreasing against capital.


These factors are interrelated and to some extent complementary. The growth in inequality has led to enticing poorer people to borrow more. It also sees the rich able to save more and accrue more earnings via wealth.


To what extent are these elements causes or symptoms of ‘secular stagnation’? It is difficult to assess. However, if one looks at some of the elements surrounding the UK’s period of growth 2003-2007 and the current promising economic indices we can certainly see support for the notion of growth powered by blowing up bubbles. The London property market seems set to float away again and the government are hoping to engineer confidence with their frankly insane commitment to Help to Buy. A delirious connection to demand side fixes to what in Britain is fundamentally a supply side problem. Personal debt levels are on the rise again. The recovery remains perilously imbalanced.


These factors were all, and continue to be, exacerbated by policy decisions.

The privileging of capital (wealth) against income is hard-wired into the UK tax system. The famous example of the hedge fund boss paying less tax than their cleaner due to this disparity has not led to a sufficient levelling of this playing field. Nicholas Ferguson’s comments in 2007 were deemed shocking but were still insufficient to prompt any real action to be taken. If Summers is correct and bubbles are now a feature of the western economy then this situation could worsen as capital gains more via appreciation in asset prices.


As such it should fall upon government to structure the tax regime in a fairer way and in a way that seeks to redress the perilous imbalance being created towards capital. One way in which this may be ameliorated would be to adopt a unitary earnings tax so all earnings whether via income or capital would be taxed at the same rate. This would be equitable, fair and encourage economic performance. Another possible solution would be to massively reduce taxation of income from work and instead raise revenues via a land value tax. This has the benefit of encouraging productive endeavour whilst discouraging land speculation. A Land value tax could be a way in which to prevent the blowing up of one form of bubble.


Further to this the government should examine the growth in inequality that is linked to this type of ‘bubble’ economy. The increase in inequality has seen the earnings of those at the top motor away from the sluggish growth of the median wage earner and into a different stratosphere from those at the bottom end. This group on the wage scale have seen real earnings decline to 2005 levels. ( Meanwhile the average FTSE 100 CEO saw an average 10% increase from 2011 to 2012 as per the Manifest survey on executive pay.


There are two responses to this disparity. The first response, and I think most important, is to raise the pay of the lowest. The second is to strengthen corporate governance to tackle any excesses at the upper end of the scale.


We have seen the purchasing power of the normal British worker deteriorate due to prices increasing at double the rate of wages. Even in the current period we are seeing wages grow at a measly rate of 0.7%. The Economist estimates that 891,000 workers would benefit by £2,500 per annum from an increase to a living wage. Given that those at this end of the earning scale are more likely to spend their money this would have a dramatic effect on demand in the UK economy.


I also think that if we accept the measure of the living wage then it must fall upon us as a society to ensure our workers are paid at that level. Can we as a society really accept the notion that we pay workers below a level at which they can actually live a reasonable existence?


The question then becomes how to make this happen. I think a fiver year forward guidance plan to move towards a living wage would be a reasonable way to achieve this without causing too much turmoil to employers. The minimum wage commission could be tasked with reviewing employment indicators and have the power to defer it to a later date if it looked as though the move would derail employment.


Another way in which to ease the burden on employers would be to implement an employer’s NI tax break on employment of the young. This could be a very promising movement to reform of the labour market that was of benefit to the young and the low paid whilst not being detrimental to business.


The assessment posited by Larry Summers poses interesting questions for the Western economies. I have outlined my preferred response. It will be interesting to see how the UK government chooses to react, if at all.



2 thoughts on “Forever blowing bubbles?

  1. Brendan

    Why is the Secular Stagnation theory so compelling?

    Any policy formed to put this theory into practice would be morally and economically flawed.

    Although G4 economies may appear to have correlated with the model no politician or central bank has actively pursued it (or would admit to).


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