Izabella Kaminska reports on a “strongly worded” riposte to the secular stagnation hypothesis, in which analysts at Independent Strategy declare that we don’t have inadequate demand, we have debt causing the economy to grow above potential. Unfortunately, the paper itself isn’t available, only Kaminska’s description, so I can’t see how strong the wording is. If her description is accurate, however, some other stuff is … not so strong. For it seems that like so many writers in this area, the authors don’t understand the meaning of potential output.

Once again, potential output is a supply-side concept. Just as structural unemployment is defined as the lowest rate of unemployment consistent with stable low inflation, potential output is defined as the highest level of output consistent with stable low inflation.

If you want to claim that an economy has grown unsustainably above potential, you need to show me the accelerating inflation. In particular, if the Great Moderation era of rising debt was a case of growth above potential, it should be an era that ended with inflation well above where it started. It wasn’t:

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They seem to conclude that growth has been above potential by noting that there were a lot of bad investments made during the bubble. Indeed there were; what does this have to do with this particular question?

I’d also note that their invocation of Germany as an example of how you can avoid secular stagnation despite low population growth is curious. It’s true that Germany is doing OK in terms of sustaining demand — but only by running enormous trade surpluses. In fact, I would cite Germany as an example of why we should take secular stagnation seriously. Germany is not experiencing large private-sector deleveraging; it has near-zero nominal short-term interest rates, and hence strongly negative real rates; yet it is able to achieve more or less full employment only thanks to that gigantic external surplus. Since we can’t all run huge surpluses, this is a bad omen.

Maybe the paper itself is less confused than it seems to be as described — but Kaminska is usually pretty good about such things. But I do find that people have an amazingly hard time keeping the difference between supply and demand in macroeconomics straight, and this sounds like another example.