Paul Krugman continues to delve into the depths of sustained secular stagnation asking about the possibility of a prolonged period where the economy does not self-correct to full employment. In the process he takes a sidestep to tell readers that this is not the secular stagnation story of Bill Greider from the 1990s. This one is worth a moment's thought. (Just to be clear, I consider both Krugman and Greider friends, so I don't have a particular ax to grind in this story.)

Greider hit on a number of themes in this book, but at least part of the story was one of the U.S. trade deficit creating a deficiency in aggregate demand. In properly behaved macro models, trade deficits are supposed to be self-correcting as the value of the deficit nation's currency falls and the values of the surplus nations' currencies rise. This makes imports more expensive to the deficit nation and their exports cheaper to people living in other countries. This leads to fewer imports and more exports and therefore more balanced trade.

But this adjustment has not happened, or certainly has not happened quickly. We can blame evil doers at central banks in other countries who are manipulating their currencies or frightened foreigner investors who think dollar denominated assets are the only safe place to store their wealth. The actual cause does not matter, the point is that the dollar has not fallen to correct the imbalance.

As a result, the trade deficit continued to expand through the late 1990s and into the last decade, eventually peaking at almost 6.0 percent of GDP in 2005. It has fallen back somewhat due to the drop in the value of the dollar, decreased energy imports, and the continuing weakness of the economy reducing the demand for imports. However it is still close to 3.0 percent of GDP. Applying a multiplier of 1.5 this implies a loss of demand equal to 4.5 percent of GDP, or close to $700 billion a year in today's economy.

It is worth comparing the size of this demand loss with the amount that can be plausibly attributed to productivity and labor force growth slowdown in Krugman's secular stagnation story. In that story, we are seeing lower investment than if productivity and labor force growth had continued on their prior track. But how large could that effect plausibly be? Would investment be three percentage points higher as a share of GDP if productivity and the labor force had continued on their prior pace? That would put the investment share above the peak it hit during the bubble and the Y2K scare. That doesn't seem like a very plausible counter-factual.

In other words, it seems that the trade deficit has to be pretty central in any serious story of long-term secular stagnation, at least as applies to the United States. It has been and is a very big deal.

(As an aside, Krugman asks if we can deal with sustained secular stagnation by running ever larger government deficits. If we are destined to be forever below potential GDP, it's hard to see why not. Aftar all, it's not as though there is any reason to believe that printing the money to finance the deficits would create inflation.)