Category Archive for: Fiscal Times [Return to Main]

Tuesday, June 02, 2015

To Overcome Rising Inequality, Workers Need More Bargaining Power

I have a new column:

To Overcome Rising Inequality, Workers Need More Bargaining Power: There is widespread agreement that inequality increased over the last several decades, but why that has happened is the subject of considerable debate.
  • Is it because technological change reduced the number of good, middle class jobs?
  • Is it the result of downward pressure on wages due to globalization?
  • Can the changes be traced to the rise of “winner take all” markets?
  • Or is the decline of unions the main reason for the change in the distribution of income?
  • What about the fall in the inflation-adjusted minimum wage, was that a factor?
  • Did immigration have anything to do with it?
  • How much of an impact did the reduction in income and inheritance taxes for those at the very top have on inequality?
  • Should we focus mainly on differential educational opportunities between those at the top and those at the bottom, and the networking opportunities the top schools provide?
  • What role did politics play in undermining unions, altering tax rates, resisting increases in the minimum wage, and failing to support educational initiatives that benefit the disadvantaged?
Some of these are easier to rule out than others based upon the empirical evidence. For example, there’s little evidence that immigration played a significant role in generating rising inequality. And it’s probably the case that there are multiple causes of rising inequality rather than a single factor, and that some of these factors interact. The decline in unions, for example, is related to the threat of offshoring in a globalized economy as well as political factors that undermined union authority.
But there is one factor, the presence of market power in both product and labor markets, that, in my view, does not get enough attention in this debate. ...[continue]...

Tuesday, May 19, 2015

Restoring the Public’s Trust in Economists

I have a new column:

Restoring the Public’s Trust in Economists: The belief that economics has become politicized is a big reason the general public has lost faith in the ability of economists to give advice on important policy questions. For most issues, like raising the minimum wage, the effects of government spending, international trade, whether CEOs deserve their high compensation, etc., etc., it seems as though economists who also happen to be Republicans will mostly line up on one side of the issue, while economists who are Democrats mostly take the other. Members of the general public, not knowing who to believe and unable to rely upon the press to sort it out, either throw up their hands in frustration or follow the side that agrees with their preconceived notions and ideological beliefs.
But why is it so hard to sort out? Why can’t the press do a better job of avoiding “he said – she said” reporting and give the public direct and specific answers to these important policy questions? One reason is the “mathiness” that has infected our economic models, something economist Paul Romer recently identified as a big problem with economic theory. ...

Tuesday, May 05, 2015

Supply-Side Social Insurance

I have a new column:

Supply-Side Social Insurance: David Brooks’ claim that “the federal government spent nearly $14,000 per poor person” in 2013 and his claim that “over the last 30 years the poverty rate has scarcely changed” have both been thoroughly debunked. The responses show very clearly that spending is nowhere near as large as Brooks claims, and that using a measure of poverty that overcomes some of the problems with the standard measure shows a decline in the poverty rate, though the decline has been slower than we’d prefer. ...
Even if the number had been calculated correctly, it would overstate the true cost of social insurance programs due to the failure to consider “dynamic effects.” That is, these programs don’t just provide income to struggling households in times of need, income that can have a valuable stimulative effect during economic downturns; social insurance programs are also an investment in our future. ...

Not sure why "Doesn't Work" was added to the title -- my point is that it does, if only Republicans would support it.

Tuesday, April 14, 2015

Sometimes, Boosting Supply Requires More Demand

I tried to make this point long ago (see below):

Sometimes, Boosting Supply Requires More Demand, by Greg Ip, WSJ: The Federal Reserve, everyone agrees, can boost growth in the short run. But can it do it over the long run? This once heretical concept is the latest argument in favor of the Fed taking its time about raising interest rates.
Traditionally, economists treated supply and demand as separate matters. ... The Fed, in this traditional view, can affect how demand fluctuates around the long-run trend, but it can’t affect the long-run trend itself.
But in real life, supply and demand are not so easily separated. The labor force is a function not just of the number of people of working age (a supply-side factor), but also how long they’ve been unemployed and thus how useful their skills are (a demand-side factor). Business investment in new equipment isn’t just a function of the state of technology (a supply side factor), but what they anticipate sales to be in coming years (a demand side factor).
This means that policies that affect demand in the short run can, conceivably, affect supply in the long run, as well. ...
Jay Powell, a Fed governor, makes the point in a speech last week. ... Mr. Powell suggests, the Fed should not assume capacity is written in stone and immune to monetary policy: “Should we think of this supply-side damage as permanent or temporary?” he said in his speech last week. “It seems plausible that at least part of the damage can be reversed. ...
This means, Mr. Powell says, the Fed should be more skeptical than usual when superficial evidence suggests the economy is approaching capacity. While he dances around the implications for monetary policy a bit, the conclusion is obvious: the Fed should stay easier, for longer, which should “not only help restore some of our economy’s potential,” but get inflation back up to 2% faster.
Mr.  Powell’s logic is quite compelling and provides an important reason why the Fed should err on the side of letting unemployment fall well below traditional measures of the “natural rate” of unemployment before tightening. ...

This post is from March, 2012 (see also David Beckworth's comments on endogenous labor supply):

The Gap In Monetary and Fiscal Policy, by Mark Thoma: One of the big questions for policymakers is how much of the current downturn represents of temporary cyclical fluctuation and how much of it is a permanent reduction in out productive capacity. If the downturn is mostly temporary, then we will eventually bounce back to the old output trend line. Something like this:

SR-LR-AS-1

But if it's mostly permanent, i.e. if the trend has fallen to a lower value and will stay there, then the picture is different:

SR-LR-AS-2

In the first case, highly stimulative policy is appropriate to help the economy get back to the long-run trend as soon as possible. There's still a lot of ground to cover, and policy can help. But in the second case the economy is already back to it's long-run trend at most points in time, or nearly so, and there is no need for policymakers to do much of anything at all. At least that's what we're told.
However, I think this misses part of the story. What it misses is that AS shocks themselves can be both permanent and temporary, and some people may be confusing one for the other. For example, when there as a large AD shock in the form of a change in preferences, say that people no longer like good A as it has gone out of fashion and have now decided B is the must have good, then there will be high unemployment in industry A and excess demand for labor and other resources in industry B. As workers and resources leave industry A, our productive capacity falls and it stays lower until the workers and other resources eventually find their way into industry B. When this process is complete, productive capacity returns to where it was before, or perhaps goes even higher. Thus, there is a short-run cycle in productive capacity that mirrors the business cycle.
A standard business cycle type AD shock will temporarily depress capacity and produce similar effects. Suppose that interest rates go up, taxes go up, government spending goes down, investment falls --pick your story -- causing aggregate demand to fall. When, as a result, businesses lay people off, idle equipment, etc., productive capacity will fall. It can be cranked up again, and will be when the economy recovers, but rehiring labor and taking equipment out of mothballs takes time. In the interim the natural rate of output falls and, just as with a change in the preference for good A versus good B, a negative aggregate demand shock can cause "frictions" on the supply side that temporarily increase the natural rate of unemployment. And there are many other ways this can happen as well.
The point is that there can be short-run cyclical AS effects, and failing to account for these can lead to policy errors. Consider the following diagram:

SR-LR-AS-3

Up until the point where the line splits into three pieces, assume the economy is in long-run equilibrium with output at the natural rate (we can discuss whether the natural rate actually exists another time, I want to work in the standard model for the moment since that is where the policy discussion is centered). Then, for some reason, aggregate demand falls leading the economy into a recession. As AD falls, people are laid off, equipment is stored, factories are shuttered, and so on and the economy's capacity to produce falls in the short-run as shown by the blue line on the diagram.
But this is a temporary, not a permanent situation. Eventually people will be put back to work, trucks in parking lots will be back on the road, factories will reopen -- you get the picture -- and productive capacity will grow as the economy recovers. I believe many people are treating what is ultimately a temporary fall in capacity as a permanent change, and they are making the wrong policy recommendations as a result.
In fact, there's no reason to think productive capacity can't return to its long-run trend just as fast or faster than output can recover. If so, then it would be a mistake to do as many are doing presently and treat the blue short-run y* line as a constraint for policy, conclude that the gap is small and hence there's nothing for policy to do. Capacity will recover, and policymakers must take this into account when looking at whether additional policy can help the economy. If capacity can grow fast as the economy recovers, then it poses little constraint and policymakers should try to return us to the long-run trend as soon as possible. That is, aggressive policy is still called for even if productive capacity is presently relatively low. ...
One last point about the diagram. I drew the long-run line so there is a long-run decline in the trend of our productive capacity after the recession (i.e. a permanent shock). However, it's hard to see because, consistent with my beliefs, I do not think the change in our long-run capacity to produce goods and services will be as negative as many others. So the effect is not large in the diagram (I acknowledge I'm more optimistic on this point than many others that I respect). But even if the long-run trend had fallen by more than shown in the diagram, say by 50%, the points above would still hold. If the capacity to produce recovers as the economy recovers, and does so relatively fast, then policymakers should not be constrained by the belief that the natural rate of output is relatively low at the present time. Aggressive policy is still the best course of action.

If I were to do this today -- several years later -- I would draw the last graph so that the permanent fall in productive capacity is larger (i.e. the Y*LR line would be lower). But, as explained in the last paragraph, the main point still holds.

Tuesday, March 24, 2015

'Macro Wars: The Attack of the Anti-Keynesians'

I have a new column:

Macro Wars: The Attack of the Anti-Keynesians, by Mark Thoma: The ongoing war between the Keynesians and the anti-Keynesians appears to be heating up again. The catalyst for this round of fighting is The Keynesian Illusion by David K. Levine, which elicited responses such as this and this from Brad DeLong and Nick Rowe.
The debate is about the source of economic fluctuations and the government’s ability to counteract them with monetary and fiscal policy. One of the issues is the use of “old fashioned” Keynesian models – models that have supposedly been rejected by macroeconomists in favor of modern macroeconomic models – to explain and understand the Great Recession and to make monetary and fiscal policy recommendations. As Levine says, “Robert Lucas, Edward Prescott, and Thomas Sargent … rejected Keynesianism because it doesn't work… As it happens we have developed much better theories…”
I believe the use of “old-fashioned” Keynesian models to analyze the Great Recession can be defended. ...

Tuesday, January 27, 2015

Taxing the Wealthy Won't Hurt Economic Growth

I have a new column:

Taxing the Wealthy Won't Hurt Economic Growth: I have no idea whether or not Mitt Romney will run for president, and if he does, if he will get the nomination. But many of the issues he ran on when he was a candidate in the last election are likely to reappear this time around no matter whom the candidates turn out to be.
One of the fiercely debated issues in the last presidential election was taxation of the wealthy, and Republican proposals similar to those Romney made when he ran against Obama –– lowering or eliminating the taxes on capital gains, interest, dividends, and inheritances –– will undoubtedly arise again. I expect Republicans will throw a few bones to the middle class in an attempt to get the support of this important constituency, but I also expect the thrust of the proposals to be the same old supply-side policies favoring the wealthy that we have seen in the past.
What I want to focus on, however, is the economic arguments that are made to support the ideological goal of low taxes. ...

Tuesday, January 13, 2015

Full Employment Alone Won’t Solve Problem of Stagnating Wages

I have a new column:

Full Employment Alone Won’t Solve Problem of Stagnating Wages: The most recent employment report brought mixed news. The unemployment rate continues its slow but steady downward path and now stands at 5.6 percent, but wages remain flat. In response, most analysts made two points. First, the lack of wage growth indicates that we are not yet close enough to full employment to generate upward pressure on wages, so policymakers should be patient in reversing attempts to stimulate the economy. Second, once we do get closer to full employment the picture for wages will change and the long awaited acceleration in labor compensation will finally materialize. 
I fear this trust that market forces will eventually raise wages will lead to disappointment. ...

Tuesday, December 16, 2014

How Fiscal Policy Failed During the Great Recession

I have a new column:

How Fiscal Policy Failed During the Great Recession: Fiscal policy failed us during the Great Recession. We did get a fiscal stimulus package shortly after Obama took office, and it helped. But it wasn’t big enough and did not last long enough to make the kind of difference that was needed. Fear of deficits stood in the way, though all the dire predictions that were made about the debt associated with the stimulus package did not come to pass. We could have done so much more. ...

Tuesday, December 02, 2014

Marking Beliefs to Market: What I Got Wrong about the Great Recession

New column:

Marking Beliefs to Market: What I Got Wrong about the Great Recession: It’s the time of year when analysts and pundits begin “marking their beliefs to market” – telling us what they got right or wrong in the previous year. In that spirit, here are some of the things I got wrong about the Great Recession...

With everyone talking about what they got right about the Great Recession, thought I'd do the opposite. [Also, the title of the column is from an editor -- it doesn't fit very well...]

Tuesday, November 04, 2014

What’s Next for the Fed?

I have a new column:

What’s Next for the Fed?: Last week, the Federal Reserve announced an end to its quantitative easing program. This brings up the obvious question, what is next for the Fed? Before getting to that, here are a few notes on quantitative easing and what the Fed’s announcement means for the economy. ...

Tuesday, October 14, 2014

What’s the Best Way to Overcome Rising Economic Inequality?

I have a new column:

What’s the Best Way to Overcome Rising Economic Inequality?: A debate over the use of progressive taxation and redistribution as a means of solving the problem of rising inequality erupted in the last week or so. The debate began with three publications, one from Edward Kleinbard, one from Nezih Guner, Martin Lopez-Daneri, and Gustavo Ventura, and one from Cathie Jo Martin and Alexander Hertel-Fernandez. They argue in turn that “progressive fiscal outcomes do not require particularly progressive tax systems,” “making taxes more progressive taxes won’t raise much revenue,” and “The way a tax system fights inequality isn't just redistribution. It's by generating enough revenue to fund programs and benefits that help middle class, working class, and poor people participate and succeed in the economy. While talk of taxing top earners may make for good political rhetoric on the left, relying on such taxes cannot pay the bills.” This brought responses from Jared Bernstein, Matt Bruenig, and Mike Konczal the three of whom, as Steve Waldman says in a nice summary of this debate, “offer responses that examine what ‘progressivity’ really means and offer support for taxing the rich more heavily than the poor.”
This debate brings up an important question: what is the best way to fight economic inequality? ...[continue]...

Tuesday, September 16, 2014

Rethinking New Economic Thinking

I have a new column:

Rethinking New Economic Thinking: Efforts such as Rethinking Economics and The Institute for New Economic Thinking are noteworthy attempts to, as INET says, “broaden and accelerate the development of new economic thinking that can lead to solutions for the great challenges of the 21st century. The havoc wrought by our recent global financial crisis has vividly demonstrated the deficiencies in our outdated current economic theories, and shown the need for new economic thinking – right now. 
It is certainly true that mainstream, modern macroeconomic models failed us prior to and during the Great Recession. The models failed to give any warning at all about the crisis that was about to hit – if anything those using modern macro models resisted the idea that a bubble was inflating in housing markets – and the models failed to give us the guidance we needed to implement effective monetary and fiscal policy responses to our economic problems. 
But amid the calls for change in macroeconomics there is far too much attention on the tools and techniques that macroeconomists use to answer questions, and far too little attention on what really matters... ...[continue reading]...

Tuesday, August 12, 2014

Why Do Macroeconomists Disagree?

I have a new column:

Why Do Macroeconomists Disagree?, by Mark Thoma, The Fiscal Times: On August 9, 2007, the French Bank BNP Paribus halted redemptions to three investment funds active in US mortgage markets due to severe liquidity problems, an event that many mark as the beginning of the financial crisis. Now, just over seven years later, economists still can’t agree on what caused the crisis, why it was so severe, and why the recovery has been so slow. We can’t even agree on the extent to which modern macroeconomic models failed, or if they failed at all.
The lack of a consensus within the profession on the economics of the Great Recession, one of the most significant economic events in recent memory, provides a window into the state of macroeconomics as a science. ...

Tuesday, July 01, 2014

Are Calls for Income Redistribution Based on Envy or Justice?

New column:

Are Calls for Income Redistribution Based on Envy or Justice?: The redistribution of income and wealth has come to the forefront of discussions about economics and capitalist systems thanks to Thomas Piketty’s book Capital in the Twenty-First Century. Is rising inequality an inevitable feature of capitalist systems, or is it the result of the particular institutions that shape how capitalism expresses itself? What, if anything, should be done to reverse the trend toward rising inequality?
The answer depends upon whether the calls for redistribution are based upon envy as the political right often asserts, or the desire for the justice...

Tuesday, June 17, 2014

The Latest Inflation Worry Is, As Usual, Overblown

I have a new column:

The Latest Inflation Worry Is, As Usual, Overblown, by Mark Thoma: Worries about inflation have been pervasive ever since the Fed began trying to lift the economy out of recession. If the Fed does not tighten policy very soon we have been told repeatedly, an outbreak of inflation is inevitable. But so far, those worries have been unfounded.
The latest round of worries is tied to the belief that labor markets are tighter than it appears from standard statistics such as the unemployment rate. ...

Tuesday, June 03, 2014

Data Problems in Economics

New column:

Why Economists Can’t Always Trust Data, by Mark Thoma, The Fiscal Times: To make progress in economics, it is essential that theoretical models be subjected to empirical tests that determine how well they can explain actual data. The tests that are used must be able to draw a sharp distinction between competing theoretical models, and one of the most important factors is the quality of the data used in the tests. Unfortunately, the quality of the data that economists employ is less than ideal, and this gets in the way of the ability of economists to improve the models they use. There are several reasons for the poor quality of economic data...

Tuesday, May 20, 2014

Why the Fed Should Not Raise Interest Rates

New column:

Why the Fed Should Not Raise Interest Rates, by Mark Thoma: The Fed’s target interest rate has been at the zero lower bound since December of 2008, and Fed watchers are trying to predict when the Fed will begin reversing this policy. The consensus appears to be that the Fed will begin raising the target rate at the beginning of next year, but many economists believe the policy reversal should have already started. There are four main justifications for the call to raise interest rates sooner rather than later, all of which are misguided...

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.