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Has the U.S. Economy Entered a ‘Permanent Slump’?

Daily Ticker

Economists like Larry Summers and Paul Krugman are arguing that the U.S. economy is not, in fact, still struggling to recover from the financial crisis of 2008-2009, but has instead entered a "permanent slump" in which high unemployment and slow growth are the norm.

This stagnation, Krugman argues, will be occasionally interrupted by bubbles that will temporarily create full employment — like the dotcom bubble of the late 1990s and the housing bubble of the mid-200s. But the bubbles will then burst and and plunge the economy back into the depressing new normal.

Why might we have entered a permanent slump?

Because, Krugman and Summers say, we are suffering from "inadequate demand."

In other words, the main engines of economic spending and growth — consumers, companies, and the government — aren't spending as much as they could.

Krugman highlights one reason for inadequate demand — a slowdown in population growth. Each new American creates both spending power and productive capacity, so the rate of population growth affects the growth rate of the economy. As Krugman points out, population growth has slowed in recent years, in part because of the country's immigration policies.

Another reason for slack demand is that American consumers, who account for about 70% of the spending in the economy, are now reducing the amount they borrow instead of increasing it as they did for the three decades leading up to the financial crisis.

Because consumers aren't spending aggressively, the companies that sell to them aren't spending and investing aggressively. Instead, the companies are hoarding their cash, cutting their costs, and maximizing short-term profits.

Government spending cuts, meanwhile, have reduced "demand" from the public sector, which is further dampening economic growth.

The answer, Krugman and Summers suggest, is to somehow persuade consumers, businesses, and the government to start spending more aggressively.

But, especially in the current political environment, that is obviously easier said than done.

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