Chapter 12
Can Stimulus without Debt Combat Secular Stagnation?
Two possible sources of “secular stagnation” must be distinguished. The first source is chronically insufficient aggregate demand for goods and services; insufficient demand is demand that is less than the potential output of the economy. The second source is slow growth in the potential output of the economy. The US economy has only recently recovered from the Great Recession, so it is too soon to know whether it will suffer from secular stagnation. If secular stagnation occurs due to chronically insufficient demand, a stimulus-without-debt policy that is applied as long as demand would otherwise be insufficient can keep actual output equal to potential output and therefore can achieve and maintain full employment (because potential output is defined as the output that would be produced in a given year if labor were fully employed in that year); every year, the level of output and employment would be equal to potential output instead of being below potential output. Also, as I will explain later in this chapter, keeping actual output equal to potential output each year can slightly increase the growth rate of potential output; 195
