Category Archive for: Fiscal Times [Return to Main]

Tuesday, April 08, 2014

Who’s to Blame for the Power Shift at the Fed?

New column:

Who’s to Blame for the Power Shift at the Fed?, by Mark Thoma, The Fiscal Times: Federal Reserve Board governor Jeremy Stein announced that he is stepping down at the end of May. That could leave the Board of Governors severely short-handed. Presently, three of the seven positions on the Board are open. There are nominations for two of the open positions, and the nominees, Stanley Fischer and Lael Brainard, await Senate confirmation. However, President Obama has not yet nominated anyone to fill the third open seat, and if Senate confirmation for Fischer and Brainard does not occur before June, then only three of the seven Board positions will be filled. 
That will alter the balance of power on the committee responsible for setting monetary policy, the all-important Federal Open Market Committee. ...
One problem in filling the open positions on the Federal Reserve Board is that nominations have been blocked in the Senate, and Republicans have been particularly obstructionist. What is the reason for this?
In addition to the desire to block whatever this president tries to do as a way of obtaining political advantage, there are two factors that have helped to motivate the obstructionist tendencies. ...

Tuesday, February 11, 2014

Keynesian Economics in Abnormally Slow Recoveries

We are, as they say, live:

Keynesian Economics in Abnormally Slow Recoveries, by Mark Thoma: In theory, Keynesian stabilization policy should “shave the peaks and fill the valleys.” That is, when the economy falls into a recession the government should use deficit spending to lift the economy back towards the full employment level. It should then pay for the policy – increase revenues or reduce spending – during boom periods when the economy is overheated and needs to be slowed down. But what if, like now, there is no boom following the bust? How should we pay for the programs that were put into place during the recession in that case? ...

Tuesday, January 28, 2014

Sharing the Gains from Economic Growth

I have a new column on inequality:

Sharing the Gains from Economic Growth, by Mark Thoma: President Obama will make reducing inequality a major part of his State of the Union Address according to several reports. But to avoid being accused of waging class warfare, he will talk about creating “ladders of opportunity” instead of focusing directly on the inequality problem.
This shift in emphasis is a mistake because it misses a key part of the inequality problem. ...

The mechanism that distributes goods and services is broken.

Tuesday, January 14, 2014

Why is the Recovery so Agonizingly Slow?

New column:

Why is the Recovery so Agonizingly Slow?, by Mark Thoma: Friday’s employment report underscored just how slow the recovery from the Great Recession has been. When the recession officially ended in June of 2009 the unemployment rate stood at 9.5 percent, and it peaked at 10 percent a few months later.  In the four and a half years that have passed since, the unemployment rate has fallen to 6.7 percent. That is still quite a bit above the full employment level, and the fall in unemployment over that time period has been driven in large part by people leaving the labor force rather than the creation of new jobs. When these discouraged workers are taken into account, the labor market is in poor shape even after more than four years of “recovery”.
Why has the recovery been so slow? ...

Tuesday, January 07, 2014

How to Tell if Fiscal Policy Works

I have a new column:

How to Tell if Fiscal Policy Works: There is a raging debate in the econo-blogosphere concerning the effectiveness of fiscal policy when the economy is in a deep recession. This question is important because monetary policy loses much of its effectiveness in severe downturns. ...

It's about how to determine if fiscal policy is effective, and the importance of establishing defensible baselines.

Tuesday, November 19, 2013

How Yellen Will Shape the Fed’s QE Exit Strategy

I have a new column:

How Yellen Will Shape the Fed’s QE Exit Strategy: After Janet Yellen’s excellent performance before the Senate Banking Committee last Thursday, she will almost surely be confirmed as the next Fed chair. 

Once she’s confirmed, there are several important issues the Fed must address under her leadership such as improving the Fed’s communications with the public, ensuring that the financial sector is properly regulated, taking a stance on whether the Fed should pop bubbles, deciding whether to continue forward guidance in its present form, and so on. But the most important and most immediate problem Yellen will face during her term as chair is guiding the Fed to a smooth exit from its non-conventional policies. ...[continue]...

Tuesday, November 05, 2013

Do People Have Rational Expectations?

New column:

Do People Have Rational Expectations?, by Mark Thoma

Not always, and economic models need to take this into account.

Wednesday, October 23, 2013

'Paper by EU Economist Backs Austerity’s Critics'

Contractionary policy is contractionary:

Paper by EU Economist Backs Austerity’s Critics, by Matina Stevis, WSJ: Coordinated austerity in euro-area countries has stifled economic recovery and deepened the crisis across the currency bloc, according to a new technical paper prepared by an economist at the European Commission.
Spending cuts in Germany in particular have made things worse for the weaker members of the euro area through “spillovers” – the economic impact on economies connected to Germany’s– the paper says, adding that limited stimulus programs in richer countries could help the whole of the currency bloc.
The paper, which doesn’t necessarily represent the views of the powers-that-be at the Commission, presents some inconvenient conclusions for European authorities from one of their own economists. The European Union and national governments have come under fire from outside economists for pursuing austerity across the euro zone. These critics have argued that Germany in particular should be running bigger deficits to help drag the bloc’s weaker members out of their slumps.
The commission paper backs the critics. ...

Tuesday, October 22, 2013

How the Internet is Changing What Economists Do

I have a new column on how the internet is changing the practice of economics:

How the Internet is Changing What Economists Do

Or at least it should be.

Tuesday, October 08, 2013

Inexcusable Republican Tactics Endanger the Economy

New column:

Inexcusable Republican Tactics Endanger the Economy

A better title might have been "Makers, Takers, and the Real Immoral Behavior," or perhaps "Why are Republicans Putting Working Class Households at Risk?"

Tuesday, September 10, 2013

Real and Bogus Reasons for the Slow Recovery

I have a new column:

Real and Bogus Reasons for the Slow Recovery from the Recession

The recovery didn't have to be so slow.

Tuesday, May 07, 2013

Seven Myths about Keynesian Economics

The recent blow-up surrounding Niall Ferguson's comments on Keynes' concern for long-run issues prompted my latest column:

Seven Myths about Keynesian Economics

The claim that Keynesians are indifferent to the long-run is one of many myths about Keynesian economics.

Tuesday, April 09, 2013

'Let the Punishment Fit the Crime of the Recession'

We are, as they say, live:

Let the Punishment Fit the Crime of the Recession, by Mark Thoma: As Paul Krugman observed recently,  “the urge to see depression as a necessary and somehow even desirable punishment for past sins, while inveighing against any attempt to mitigate suffering — is as strong as ever.”  Many of those who see our economic problems in these terms believe the sin we committed is too much debt fueled consumption and government spending. According to this view punishments such as austerity and high levels of unemployment provide a moral lesson that helps to prevent us from making the same mistakes again.
This is bad economics and it has the moral lesson all wrong. ...

Tuesday, March 26, 2013

Why Don’t Politicians Care about the Working Class?

We are live:

Why Don’t Politicians Care about the Working Class?, by Mark Thoma: If we want to ensure that our children and grandchildren have the brightest possible future, the national debt is not the most important problem to address. Reversing the polarization of the labor market – the hollowing out of the middle class and the associated rise in inequality over the last thirty years or so – is much more important. But money driven politics and a political class that has all but forgotten about the working class – Democrats in particular have forgotten who they are supposed to represent – stand in the way of progress on this important problem. ...

Tuesday, February 26, 2013

Our Real Worry Isn’t the Debt, It’s Our Politicians

We are, as they say, live:

Our Real Worry Isn’t the Debt, It’s Our Politicians

The political environment, particularly today's Republican Party, is the biggest threat to future economic growth.

Tuesday, February 12, 2013

What Do Republicans Really Want?

My latest column begins with Eric Cantor's call for Republicans to talk about "helping folks":

For Obama, State of the Union Means State of the People, by Mark Thoma: House Majority Leader Eric Cantor believes that Republicans must show their concern for those struggling in this economy if they want to regain their political footing. “We’ve got to be talking about helping folks,” he said Sunday on Meet the Press, “You’ve got so many millions of Americans who feel that they have become an afterthought.”
There’s a reason people feel that way. Republicans have refused to support any of the jobs proposals president Obama has put forward...

What do Republicans really want?:

Pretending to be on the side of the middle class while enacting policies that help businesses and the wealthy has worked well in the past, so it shouldn’t be surprising to see Republicans try this again. Remember the failed promises of trickle-down economics?

But if Republicans -- and Obama -- want to steer the conversation away from the debt, I'm all for that:

President Obama also wants to change the conversation toward the needs of the millions of Americans who feel abandoned by politicians, and he intends to emphasize jobs and the economy in his State of the Union address. This is a welcome change. Instead of focusing on the debt, we should be discussing what we want the government to do. What are our priorities, what will they cost, and what can we, as a nation, afford? In the short-run, is there room for us to do more to help the unemployed? In the longer run, should government be bigger or smaller...? Can the composition of spending and taxes be improved? How fast does the debt need to be reduced, and should it be reduced through tax increase or spending cuts? As we get richer as a society – income doubles every thirty years or so – should the share of GDP devoted to helping people increase, or should government’s share of output be limited to historical averages as many conservatives argue?

As we discuss these important questions about the size and role of government, we need to remember something that has been forgotten too often amid Republican attempts limit government intervention into the economy. The government has an important role to play in overcoming market failures... The private sector, on its own, will not provide the correct amounts of infrastructure, retirement security, health care spending, protection against monopoly and corruption, unemployment insurance, national defense, environmental regulation, education, food and drug safety, bank regulation, innovation, anti-trust action, safe working conditions, support of basic research, stabilization policy, and so on. Fixing these market failures through government action does not distort private sector economic activity away from the optimal outcome as many on the right would have us believe, it moves us closer to the ideal textbook economy. ...

Full column here.

Tuesday, January 29, 2013

Spending on Infrastructure Can Reduce Our Expected Debt

I couldn't resist one more plea for infrastructure construction:

How Spending on Infrastructure Can Reduce Our Long-Run Debt Burden

Spending more on infrastructure will improve our growth prospects, lower long-term unemployment, and some types of spending can actually save us money in the long-run.

Tuesday, December 18, 2012

What have Monetary and Fiscal Policymakers Learned from the Great Recession?

New column:

What have monetary and fiscal policymakers learned from the Great Recession?

Not enough, particularly fiscal policymakers, but maybe there's a way to do better.

Tuesday, December 04, 2012

Why the GOP Won't Admit That Supply-Side Economics Has Failed

The Bush tax cuts have not delivered the economic growth and widely shared prosperity that were promised, and if the Republican Party was really the party of business it would end our bad investment in supply-side economics:

    Why the GOP Won't Admit That Supply-Side Economics Has Failed - Mark Thoma

But maybe the tax cuts were about something else?

Tuesday, November 20, 2012

The Bigger They Are, the Harder They Fall on the Rest of Us

We are live:

The Bigger They Are, The Harder They Fall on the Rest of Us

The title at the link is about breaking up big banks, but one of the points is that the growing problems associated with size/interconnectedness, including those associated with too big to fail, occur in more than just the financial sector. These problems are getting worse, and the question is, what are we going to do about it?

Tuesday, November 06, 2012

On the Election

A few things on the election I posted elsewhere:

And, at both sides:

There's more, but I'll stop there.

Hurricane Sandy’s Lesson on Preserving Capitalism

We are, as they say, live:

Price-gougingHurricane Sandy’s Lesson on Preserving Capitalism: With long gas lines and other shortages putting people on edge in the wake of Hurricane Sandy, the usual post-disaster debate over the economics and ethics of price-gouging is underway.  However, while the question of whether it is okay, even desirable, for businesses to raise prices after natural disasters is certainly important, there is a larger lesson that can be drawn from this debate. ...

The lesson is about when support for price-allocation systems -- the heart of capitalism -- breaks down. More here.

Tuesday, October 23, 2012

We Should Stop Blaming China For Our Economic Problems

Here's my contribution to the debate over China bashing:

We Should Stop Blaming China for our Economic Problems: The second presidential debate featured Mitt Romney and Barack Obama going nose to nose over who would be tougher on China and other countries over their unfair trade practices. But by adopting a narrative that places the blame for our problems on other countries, President Obama is playing into the hands of those who’d like to make significant cuts to social insurance programs that protect working class households. ...

Here's the bottom line:

Blaming our troubles on external causes and implying that all will be well once these causes are eliminated allows the wealthy winners from globalization to escape the taxes that are needed to provide the social protections workers need in the global economy, and to ensure that the gains from globalization are shared equitably. President Obama needs to make it clear that helping the working class will take a lot more than just forcing China to change its ways... [It] will require us to look inward at our own character as a nation instead of blaming others.
Pointing fingers at other countries and demanding change may be politically effective, but the real change begins at home.
[Read more]

Tuesday, October 09, 2012

How Much Trust Should We have in Economic Data?

We are, as they say, live:

How Much Trust Should We have in Economic Data?: Perhaps it’s not surprising that a political party unable to come to grips with the scientific evidence on global warming would extend its claim that the evidence is politically manipulated to other inconvenient truths. But the attack on the Bureau of Labor Statistics by some Republicans last Friday over its report of an improvement in the unemployment rate was still a bit of a shock.
The charge that employees at the BLS manipulated the employment numbers to favor Obama is nonsense as anyone familiar with the calculation of these numbers can attest, but it does bring up a good question. What factors should be considered when assessing the reliability of economic data? ...[continue reading]...

Tuesday, September 25, 2012

Romney's Misleading Attack on Social Insurance

I have a new column I hope you'll want to read:

Romney's Misleading Attack on Social Insurance

[I shoul dnote that the embedded links are, for the most part, added by the editors.]

Tuesday, September 11, 2012

The Campaign Trail: No Help for the Unemployed

A new column:

 The Campaign Trail: No Help for the Unemployed

The unemployed have, it appears, been hiding from politicians.

Monday, September 10, 2012

Republicans on Infrastructure: We Won’t Build That

A column from two weeks ago (new one tomorrow):

We Won’t Build That, by Mark Thoma: Once the Republican National Convention in Tampa Bay, Florida ends, all eyes will turn to this year’s Federal Reserve conference in Jackson Hole, Wyoming. At the 2010 conference, Chairman Ben Bernanke gave a speech that paved the way for a second round of quantitative easing, and this year’s speech will be closely watched for hints that the Fed is about to ease policy further in an attempt to help the economy recover.

Discussion in the minutes from the last monetary policy meeting points in the direction of further easing, and most analysts expect that Chairman Bernanke will set the stage for further action. I hope they are correct. The unemployment rate is still far too high, there’s no sign that more aggressive policy would cause inflation to become a problem, and the economy can use all the help it can get. Given the slow pace of the recovery, it’s puzzling why the Fed hasn’t done more to help already.

But I also worry that monetary policy has been oversold. It cannot, by itself, cure the economy’s problems when the downturn is as large as the one we have experienced. In severe recessions, fiscal policy is also needed.

Presently, there are two ways that fiscal policy could be used to promote a faster recovery. The first is infrastructure spending. We cannot afford to fall behind the rest of the world in terms of our infrastructure development, but that’s exactly what we are doing. At a time when interest rates are as low as we are likely to see, when labor and other costs are minimal due to lack of demand during the downturn, and when the need is so high, why aren’t we making a massive investment in infrastructure, which is ultimately an investment in our future? There are many, many public investments we could make where the benefits surely exceed the costs – these are things the private sector won’t do on its own even though they are highly valuable to society – so what are we waiting for?

The second thing that is needed is debt relief for households. Losses in home equity, stock investments, and job opportunities have taken a significant toll on household balance sheets. As households attempt to rebuild what has been lost, they save more and consume less and the loss of consumption is a drag on the recovery. So long as this rebuilding continues, and it can take many years to rebuild after such large losses, the economy will continue to be sluggish. Debt relief, or anything else the government can do to help households overcome their losses, would shorten the recovery.

We have used both monetary and fiscal policy to battle this recession, and without the Fed’s actions to limit the downturn things would have been much worse. Fiscal policy in the form of the stimulus package, though too little, too late, and too tilted towards tax cuts, also helped to limit the damage to the economy. But when it comes to promoting a faster recovery, both monetary and fiscal policymakers have failed to do enough to help the economy return to full employment.

Which brings us back to the Republican National Convention. The economy will be the focus at the convention, and we will hear about the supposed failures of the Fed. For example, one of the biggest applause lines at Ron Paul’s rally in Tampa on Sunday was that “Ben Bernanke is a traitor and dictator,” and Mitt Romney has said he will replace Bernanke, presumably with someone anxious to undo the policies the Fed has put into place rather than expand upon them to promote recovery.

We will also hear claims that, despite growing evidence to the contrary, the fiscal stimulus didn’t work. Criticism about the government debt will surely follow, and it will be clear that there’s no room in Republican plans for infrastructure or debt relief programs to speed the recovery.

If there’s any policy Republicans ought to be able to support, it’s infrastructure spending. It’s inherently a supply-side policy, it helps to promote future economic growth, and it’s an investment with large, positive net benefits. But Republicans see a “we won’t build that” approach to infrastructure spending, an approach that is harmful to our prospects for recovery and to our prospects for future economic growth, as a way to reclaim the presidency.

Romney continues to use the “you didn’t build that” quote – misleadingly – to try to argue that Obama is against business, and that this is one of the key factors holding back the recovery. But the real problem has nothing to do with Obama’s view of business. The real problem is the Republican’s opposition to using monetary or fiscal policy to help the economy in any way, and their “we won’t build that” stance on infrastructure spending is a good example of the extent to which their political aspirations stand in the way of a speedier recovery.

Tuesday, August 28, 2012

Republicans: We Won't Build That

I couldn't resist commenting on the economic policies being promoted at the Republican National Convention:

Republicans: We Won't Build That

(The discussion of Republican policy is at the end of the article.)

Tuesday, August 14, 2012

RomneyRyanomics: The Not So Grand Bargain

We are live:

RomneyRyanomics: The Not So Grand Bargain

Romney is doing his best to hide it, but large costs to middle class households cannot be avoided under his economic plan.

Tuesday, July 31, 2012

Starving the Beast in Recessions

We are, as they say, live (this is a different title, the title they chose doesn't do a very good job of conveying what the article is about):

Starving the Beast in Recessions

Unwavering Republican commitment to lower taxes and smaller government -- policies favored by wealthy campaign backers -- makes it impossible for Congress to do more to help middle and lower class households struggling with the recession.

Tuesday, July 17, 2012

Not All Economists are to Blame, But Some Are

A defense of some, but not all economists:

Why Some Economists Failed

I assert that some economists got things mostly right about the recession and what was needed to fix it, but they have been ignored in policy discussions. Conversely, those who got things mostly wrong were given prominent seats at the policy-setting table where they continued to make errant forecasts even as the evidence piled up against them. One attempt at rebuttal is, I suppose, is to ask how we know who was correct? The answer is that unlike the economists who continue to promote austerity, fear of inflation, and so on, the assertion is based upon the empirical evidence on these issues. [See Paul Krugman for a related issue, why fear of inflation, deficits, and so on "resonates with a lot of people no matter how often and how badly the worldview fails in practice." Part of my point is that I don't think economists are free of blame for this.]

Tuesday, July 03, 2012

Physicists in Finance Should Pay More Attention to Economists

New column:

Physicists Can Learn from Economists, by Mark Thoma: After attending last year’s Economics Nobel Laureates Meeting in Lindau, Germany, I was very critical of what I heard from the laureates at the meeting.  The conference is intended to bring graduate students together with the Nobel Prize winners to learn about fruitful areas for future research. Yet, with all the challenges the Great Recession posed for macroeconomic models, very little of the conference was devoted to anything related to the Great Recession. And when it did come up, the comments were “all over the map.” And some, such as Ed Prescott, were particularly appalling as they made very obvious political statements in the guise of economic analysis. I felt bad for the students who had come to the conference hoping to gain insight about where macroeconomics was headed in the future.
I am back at the meetings this year, but the topic is physics, not economics, and it’s pretty clear that most physicists think they have nothing to learn from lowly economists. That’s true even when they are working on problems in economics and finance.
But they do have something to learn. ...

Tuesday, June 26, 2012

The Political Empowerment of the Working Class is the Key to Better Employment Policy

A recent column:

The Political Empowerment of the Working Class is the Key to Better Employment Policy, by Mark Thoma: The high unemployment rate ought to be a national emergency. There are millions of people in need of jobs, the lost income as a result of the recession totals hundreds of billions of dollars annually, and the longer the problem persists, the more permanent the damage becomes.

Why doesn’t the unemployment problem get more attention? Why have other worries such as inflation and debt reduction dominated the conversation instead? As I noted at the end of my last column, the increased concentration of political power at the top of the income distribution provides much of the explanation.

Consider the Federal Reserve. Again and again we hear Federal Reserve officials say that an outbreak of inflation could undermine the Fed’s hard-earned credibility and threaten its independence from Congress. But why is the Fed only worried about inflation? Why aren’t officials at the Fed just as worried about Congress reducing the Fed’s independence because of high and persistent unemployment?

Similar questions can be asked about fiscal policy. Why is most of the discussion in Congress focused on the national debt rather than the unemployed? Is it because the wealthy fear that they will be the ones asked to pay for monetary and fiscal policies that mostly benefit others, and since they have the most political power their interests – keeping inflation low, cutting spending, and lowering tax burdens – dominate policy discussions? There was, of course, a stimulus program at the beginning of Obama’s presidency, but it was much too small and relied far more on tax cuts than most people realize. The need to shape the package in a way that satisfied the politically powerful, especially the interests that have captured the Republican Party, made it far less effective than it might have been. In the end, it had no chance of fully meeting the challenge posed by such a severe recession, and when it became clear that additional help was needed, those same interests stood in the way of doing more.

Republican policymakers give us all sorts of excuses for blocking further action to help the unemployed. We are told the problem is structural – there is a geographical or talent mismatch between labor availability and labor needs – and nothing can be done to help. But something can be done. We can help workers move to where the jobs are, encourage firms to locate in areas where workers are readily available, and help with job retraining. If mismatches are really the problem, why aren’t Republicans leading the charge on these policies? If they care about the unemployed rather than the tax burden of the wealthy, then why are they allowing community colleges – one of the best ways we have of providing job training for new and displaced workers – to be gutted with budget cuts?

We are also told that the deficit is too large already, but there’s still plenty of room to do more for the unemployed so long as we have a plan to address the long-run debt problem. But even if the deficit is a problem, why won’t Republicans support one of the many balanced budget approaches to stimulating the economy? Could it be that these policies invariably require higher income households to give something up so that we can help the less fortunate? Tax cuts for the wealthy are always welcome among Republicans no matter how it impacts the debt, but creating job opportunities through, say, investing in infrastructure? Forget it. Even though the costs of many highly beneficial infrastructure projects are as low as they get, and even though investing in infrastructure now would save us from much larger costs down the road – it’s a budget saver not a budget buster – Republicans leaders in the House are balking at even modest attempts to provide needed job opportunities for the unemployed.

The imbalance in political power, obstructionism from Republicans designed to improve their election chances, and attempts by Republicans to implement a small government ideology are a large part of the explanation for why the unemployed aren’t getting the help they deserve. But Democrats aren’t completely off the hook either. Centrist Democrats beholden to big money interests are definitely a problem, and Democrats in general have utterly failed to bring enough attention to the unemployment problem. Would these things happen if workers had more political power?

When we talk about leveling the playing field, it is generally in terms of economic opportunity. However, leveling the political playing field is just as important, and in the past unions provided workers with a powerful voice in the political arena. But unions have largely faded from the scene leaving workers with very little organized power. Correcting the political imbalance this has created through the renewed political empowerment of the working class must be part of any attempt to improve our response to serious recessions.

Tuesday, June 05, 2012

Why Isn't the Unemployment Problem a National Emergency?

The political power of the working class has diminished in recent decades, and that helps to explain why politicians have not paid enough attention to the unemployment problem:

The Growing Unemployed: A Case of Benign Neglect

It also suggests a solution -- renewed political empowerment of the working class -- but that's easier said than done.

Tuesday, May 22, 2012

Why Have Politicians Neglected the Unemployed?

Republicans didn't always oppose the use of monetary and fiscal policy to stabilize the economy, but they do now. Why the change?:

Why Have Politicians Neglected the Unemployed?

Tuesday, May 08, 2012

Inflation Can Help to Stimulate a Depressed Economy

If inflation begins to increase before the economy has fully recovered, the Fed shouldn't panic:

Federal Reserve Policy: Exceptions Improve the Rule: At some point during the recovery, the Fed may face an important decision. If the inflation rate begins to rise above the Fed’s 2% target and the unemployment rate is still relatively high, will the Fed be willing to leave interest rates low and tolerate a temporary increase in the inflation rate?
Probably not. Even though higher inflation can help to stimulate a depressed economy, Ben Bernanke, Chairman of the Federal Reserve, is not in favor of allowing higher inflation because it could undermine the Fed’s “hard-won inflation credibility.” And recent Fed communications seem to be setting the stage for the Fed to abandon its commitment to keep interest rates low through the end of 2014. This adds to the likelihood that the Fed will raise interest rates quickly if inflation begins increasing above the 2% target even if the economy has not yet fully recovered.
As I’ll explain in a moment, that’s the wrong thing to do. But first, why does the Fed put so much value on its credibility? ...[continue reading]...

Tuesday, April 17, 2012

"Who Wants to Tax and Spend? The IMF"

Jonathan Portes says the IMF is improving its advice about fiscal policy, but the OECD and the European Commission still have a lot to learn:

Who wants to tax and spend? The IMF, that’s who, by Jonathan Portes: I noted at the turn of the year that the IMF, since Christine Lagarde took over, had made it more and more obvious that it thought a number of countries including the US, Germany and (by implication) the UK, were tightening fiscal policy too fast. ...
Today the Fund has released the full WEO [World Economic Outlook]. It makes it still more obvious that the Fund thinks that, in the short-term, the problem is above all a lack of demand, and that excessive austerity is, as Paul Krugman and Brad DeLong have argued, self-defeating...
In other words, the Fund wants us, for standard Keynesian reasons, to spend more on infrastructure (and housing) and increase welfare benefits for poor people (who will spend them), and pay with it by taxing the rich (those with a lower “marginal propensity to consume”. This would raise demand in the short term, without worsening the fiscal position. For those who see the Fund as being both anti-Keynesian on macroeconomic policy, and classically “liberal” on microeconomic policy, this will come as something as a shock. ...
In this the Fund’s approach stands in sharp contrast to the economic illiteracy and political supineness of both the OECD and the European Commission. Although the OECD continues to lead the world in the quality of its comparative microeconomic analysis (especially on labor market policy and immigration), its macroeconomic policy judgment has proved absolutely abysmal – remember that as recently as last May they were advising us all to raise interest rates.  As for the European Commission, my thoughts on the people who brought us Spain and Greece – and youth unemployment over 50% –  are here and here.

I think it's also important to recognize that much of the push for austerity is ideological. The real goal is smaller government by whatever means and the (failed) confidence fairy economic argument -- the idea that cutting the deficit would increase our confidence in the future and cause enough spending to more than compensate for the austerity measures -- is used to justify cutting government spending. This is why those who push for austerity only want to talk about cutting government spending. Increasing taxes, another way to close the budget gap and call the mythical confidence fairy, is completely off the table.

Tuesday, March 13, 2012

Can the Doves Cage the Hawks?

What I think the Fed should do:

Can the Doves Cage the Hawks?

Why does overshooting the inflation target in the short-run induce such fear in so many members of the Fed's monetary policy committee?

Wednesday, February 15, 2012

"Is the Distribution of Income Fair?"

We are live:

Is the Distribution of Income Fair?

Warning: Marx is mentioned. [This post from Tim Taylor provides a good backdrop for the column: Labor's Declining Share of Total Income.]

Thursday, February 02, 2012

How Did the Fed Get Things So Wrong?

[Busy day today -- teaching then travel -- so another quick "hit and run" post.]

A column from a couple of weeks ago:

How Did the Fed Get Things So Wrong?, by Mark Thoma: The public’s faith in the Fed’s ability to protect the economy from economic problems has been shaken by the Fed’s failures before and during the Great Recession. The recent release of the transcripts from 2006 monetary policy meetings where Federal Reserve policymakers discuss and ridicule the suggestion that the economy is threatened by a dangerous housing bubble has undermined its reputation even further.
How did the Fed get things so wrong? How can policy be improved?
The first step in the policy process is for policymakers to be aware that there’s a problem in the economy, and access to reliable, timely, and informative data is critical. Unfortunately, there are substantial lags in the availability of data that indicate where the economy is headed, and it can be six months or longer before key variables such as GDP are known. This is a problem that doesn’t get enough attention, and in the information age we ought to be able to do better.
The fact that these data are not very timely, and are often revised substantially after they are released is not the Fed’s fault. But that doesn’t mean that the Fed can’t do more on its own. The Fed needs to do a much better job than it did before the crisis of using the data at its disposal to construct stress indices, measures of network reliability, price-rent ratios, credit measures, and so on to figure out what is happening in financial markets.
Prior to the crisis, policymakers were not asking the right questions and hence saw no need to collect such data, or to believe what the data they did have was telling them. Policymakers did not believe a severe financial meltdown was possible in modern economies featuring modern policy tools –those problems had been overcome long ago – so they hardly bothered to look for signs of bubble trouble. They are beginning to bring these measures into play now, and seem to have a better understanding of their importance, but only time will tell if they’ve truly learned their lesson.
But even if the Fed recognizes that a problem exists, how it responds to trouble depends critically upon the relative weights it attaches to its goals of low inflation, low unemployment, and financial stability.
When the public looks at the Fed’s recent policy choices, it sees a Fed that appears to place worries about inflation – which is a big concern of finance and business – over the high levels of unemployment that have caused so much misery for the working class. Is there a reason why financial and business interests, banking interests in particular, might be overrepresented at the policymaking table?
Yes, there is. The problem, in large part, is the way in which the presidents of the twelve Federal Reserve District banks are chosen. The district bank presidents, who are an important part of the monetary policymaking committee, are chosen by the Board of Directors for individual banks. The make-up of those boards is dominated by wealthy business and banking leaders, and that leads to suspicions that these interests are overrepresented in monetary policy decisions. The Dodd-Frank legislation recognizes this problem, but it’s not clear that the proposed solution of eliminating bankers from the selection process goes far enough.
A final problem policymakers must confront is the time it takes for policy to have an effect after it is put into place. It can take several months for policy to fully impact the economy after it is enacted, so it’s important for the Fed to react quickly in response to changing economic conditions. Unfortunately, policymakers were far too slow and timid in reacting to problems they encountered as the crisis unfolded. Had the Fed been more concerned about unemployment and less concerned about inflation, there might have been more urgency in its response.
The Fed’s errors can be placed into two broad categories, the failure to ask the right questions before the crisis, and the failure to act quickly and aggressively enough once the crisis began. The first problem had a lot to do with economists’ undue faith in their own models and abilities – the financial meltdown problem had been solved so no need to worry about that – while the second problem is at least partly due to the way in which the public interest is represented on the Fed.
I don’t know how to insulate economists from themselves, every few decades we seem to have the need to declare that we have solved important problems only to be spectacularly wrong, but the representation of the public interest in policy decisions can certainly be improved. That won’t fully overcome the Fed’s tendency to hesitate and take small steps when bold action is needed, but better representation would certainly give more weight to the public’s desire for the Fed to do its utmost to bring an end to the many problems that households face when the economy is operating at subpar levels.

Tuesday, January 17, 2012

How Did the Fed Get Things So Wrong?

We are, as they say, live:

How Did the Fed Get Things So Wrong?

It's about the Fed's mistakes before and during the crisis, and how it might improve going forward.

Wednesday, January 11, 2012

Democrats are Not Anti-Market

A recent column (on the claim that Democrat are anti-market, socialists, see here too):

Democrats are Not Anti-Market, by Mark Thoma: Republican hopefuls are attempting to portray the coming presidential election as a battle between people who believe in free markets and those who want to turn the U.S. into a socialist state. Michele Bachmann has been quite explicit  with this charge, and Mitt Romney Newt Gingrich, and the other leading Republican candidates have made similar claims.

There are certainly those on the left who call for radical change, including the elimination of the market system, just as there are those on the right who have extreme views on a variety of topics. But the Democratic Party is not calling for the overthrow of capitalism, and the claim that Democrats prefer a socialist state is false. Democrats support markets too. The disagreement is about the best way to bring about a well-functioning market system, and whether that system produces an equitable distribution of income and opportunity.

Conservatives believe that markets work best when government involvement is minimal or absent altogether. They don’t deny that individual markets can fail for a variety of reasons, and they acknowledge that the aggregate economy is subject to cyclical swings that bring periods of high unemployment. However, with patience markets and the macroeconomy will fix themselves. If the government steps in and tries to help, on net it will make things worse, not better. Thus it’s almost always best to wait for the economy to heal itself, even if the wait is a long one.

Democrats have different ideas about what it takes for markets to fully realize their potential. They believe that individual markets work best when government takes an active role to prevent market failures. They also believe that monetary and fiscal policies are useful tools to offset cyclical swings in the aggregate economy.

Democrats also differ from Republicans on the need for government to redistribute income. Republicans believe that redistributing income reduces the incentive to pursue economic gains, and this lowers long- run economic growth. Democrats believe that a more equitable distribution of income is desirable in some instances, and that worries about the impact redistribution will have on economic growth are overstated. Democrats also believe there are significant concentrations of political power and market failures that distort the distribution of income, and these distortions should be corrected through government action.

Which of these two visions is correct? Republicans have tried to blame the financial crisis on the government, in particular government programs to support housing for low-income households, but the evidence overwhelmingly refutes this claim.  The problem wasn’t too much government, it was that government did not do enough.

We would be much better off today if government had ignored Alan Greenspan and other advocates of deregulation who argued that financial markets are self-policing, and had instead provided strong regulatory oversight of both the traditional and shadow banking sectors. We would also be better off if the Fed had intervened and popped the housing bubble as it was inflating rather than denying there was a bubble and arguing it could always clean up the mess quickly and neatly in any case.

And in assessing the two views, it’s important to note that the things the government did do were helpful. Though the design of the Bush administration’s bailout of the financial sector left much to be desired, it prevented a much worse outcome. There’s also little doubt that the fiscal stimulus put in place during the Obama administration helped the economy. Things would be better today if we had resisted the austerity minded and done even more to stimulate output and job creation.

In the coming year, we will have to choose between these competing views of the government’s proper role in the economy. The Republican view is that the economy can take care of itself. There’s no need for government to intervene, and the distribution of income – no matter how skewed – should also be left alone.

We’ve already tried Republican policies in recent decades and the promised economic growth, stability, and widely shared prosperity did not materialize. Instead we had a Great Recession, inequality widened substantially, and market and political power became more and more concentrated.

In addition, the recent recession challenges the GOP’s “markets are magic” point of view. During the time when the housing bubble was inflating, markets misdirected resources and too much of our intellectual talent, labor, and raw materials were drawn into housing and finance. Markets also failed to optimally hedge against risks, they have been very slow to self-correct – labor markets in particular – and the fact that the extraordinarily high profits in the financial sector have not been eroded away through new entry is a sign of excessive and persistent market imperfections.

The other view, that of Democrats, speaks directly to these problems. It embraces active oversight of markets to ensure they are operating to maximize social good, it encourages the use of countercyclical monetary and fiscal policies to stabilize output and employment, and it advocates correcting the inevitable inequities in income and opportunity that arise in imperfect, real world market systems.

Thus, contrary to the charge from Republicans that Democrats are anti-market, there’s a strong argument to be made that it’s the policies of Democrats rather than Republicans that do the best job of allowing markets to reach their full potential.

Wednesday, January 04, 2012

Contrary to Republican Claims, Democrats are Not Anti-Market

New column: Republicans charge Democrats with advocating socialist, anti-market policies, but Democrats would do a better job of allowing markets to reach their full potential than Republicans:

GOP Throws Low Blows at Dems over Free Markets

Markets work best when government adopts an active rather than a passive stance.

Tuesday, December 20, 2011

The Great Economic Divide Makes Everyone Poorer

I have a new column:

The Great Economic Divide Makes Everyone Poorer

A divided society is a poorer society.

Tuesday, November 29, 2011

How to Avoid Public Anger over Bank Bailouts

How to avoid public anger over bank bailouts, e.g. the recent uproar over the report from Bloomberg that too big to fail banks made $13 billion on loans from the discount window:

Better than a Bank Bailout: A Federal Lottery

(I'm not sure if I'm serious about this or not, the point is that we need to focus policy on people, not banks.)

Monday, November 21, 2011

Where’s the Super Committee for Job Creation?

I have a new column:

Where’s the Super Committee for Job Creation?

I am not happy with the Democrats.

Tuesday, November 08, 2011

The Financial System Is Rigged in Favor of the Rich

I have a new column (my title was "Help Households and the Banks Will Be Just Fine"):

The Financial System Is Rigged in Favor of the Rich

This passage from Luigi Zingales is a good intro:

...nothing upsets people like the perception that the rules don’t apply equally to everybody..., what many people felt after the 2008 bailouts of the financial system. The system was certainly at risk, and some government intervention was just as certainly necessary. Yet it ... didn’t escape most Americans that TARP was the largest welfare program for corporations and their investors ever created in human history. ... TARP wasn’t just the triumph of Wall Street over Main Street; it was the triumph of K Street over the rest of America.
The way the bailout was conducted damaged Americans’ faith in their financial system, in their government, and in the market economy. ... Their altered feelings weren’t the consequence of any ideological bias against government involvement; on the contrary, a majority of respondents believed that the government should regulate financial markets. They objected, rather, to the specifics of what the government was doing. One reason they objected was their perception that lobbying interests had influenced the intervention: 50 percent of respondents, for instance, thought that Paulson had acted in the interest of Goldman Sachs, not the United States.
But a stronger reason, presumably, was that the bailout made the system suddenly look fundamentally unfair. Why should outsourced workers, whose only fault was to have entered the wrong sector, bear the burden of market discipline, while rich bankers were offered a government safety net? ...

Tuesday, October 25, 2011

Inequality and Mobility

New column:

Income Inequality Is Hobbling the Middle Class

It's on inequality and economic mobility.

Tuesday, October 11, 2011

Raise Taxes on the Wealthy: It’s the Fair Thing to Do

New column:

Why America Should Spread the Wealth

Tuesday, September 27, 2011

How the GOP Assault on the Fed Could Backfire

I have a new column on the need for Federal Reserve independence:

How the GOP Assault on the Fed Could Backfire

I expect disagreement on this one. The emphasis is on the long-run, but I wish I would have had the space to talk more about the short-run, i.e. that the Fed could be more aggressive in the short-run and allow inflation to rise temporarily without abandoning its commitment to long-run price stability. That's implied by the statement that "I don’t think the voice of the unemployed is adequately represented in monetary policy decisions," but it may not be clear. I also wish I would have had the space to talk about why a return to the gold standard -- which is behind some of the attacks on the Fed -- is a bad idea.