Secular Stagnation and Two Articles of Faith of the Conventional Wisdom

Kenneth Austin

Published: September 2016

The current discussion of “Secular Stagnation” has generally put disproportionate weight on discussing inadequate investment demand and fiscal stimulus. However, in these discussions two intellectually ungrounded assumptions, or articles of faith, box in mainstream economists:

I. Savings are always beneficial because they allow greater accumulation of capital.
II. Unrestricted international capital movement is always economically efficient and beneficial.

These strong prior beliefs are part of the mental models that may lead economists to reject the conclusions of their own formal models. Awareness of these issues is often implied, but they are rarely addressed directly and not often in policy discussions. Ending counterproductive policies that encourage saving and capital inflows yields better policy prescriptions.

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