Category Archive for: Fiscal Policy [Return to Main]

Tuesday, November 05, 2013

DeLong on Blinder's 'After the Music Stopped'

Brad DeLong reviews Alan Blinder's new book:

You Got Me Feelin Hella Good So I'm Gonna Keep on Dancing: Alan Blinder: "After the Music Stopped": Tuesday Book Reviews Extended Version Weblogging: A Review of Alan Blinder's After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (New York: Penguin Press), J. BRADFORD DELONG is Professor of Economics at the University of California at Berkeley

Properly edited shorter version in Foreign Affairs, July/August 2013

Alan Blinder is the latest economist out of the gate with an analytical account of the recent economic downturn. His 2013 After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (New York: Penguin) is, I think, the best of accounts--at least the best for those without the substantial background and experience in finance needed to successfully crack the works of Gary Gorton. It is the best for four reasons:

  1. The narrative is very good--it is, from my perspective at least, clear and correct.
  2. Alan Blinder has a deep understanding of macroeconomics--thus he can place the events in context, and explain just how it was that the housing boom and its crash had such catastrophic effects on the American economy while, say, the dot-com boom and its crash did not (and was in fact a net plus for the U.S. economy as a whole: a lot of research and development got done, a lot of useful business-model experimentation took place, and a lot of very valuable twenty-first century virtual infrastructure got built--the housing boom brought us no analogous benefits).
  3. Alan Blinder has a very clear sense of the policy options, both in the past and now: what did work, what would have worked, what might have worked, and what would still work were we to try it to get us out of the current fix we are in.
  4. As noted, the book is very readable, even for those who have not been marinated in finance enough to grasp the technicalities and even for those who find topics like "the fall of the rupee" sensational and interesting. For those who do and have worked in or near Wall Street or it equivalent, I recommend Gary Gorton. For everybody else, I recommend Alan Blinder.The topic is certainly enormously important. The economy is today, still, four and a half years after the crash of 2008, six years after the emergence of the first signs of significant trouble in Wall Street, and seven years after the peak of the housing boom, deeply depressed.

Blinder writes that "policy makers are still nursing a frail economy back to health". I am not so sure that is right. It does not look, to me at least, "frail" and "being nursed back to health". To me, it still looks very sick. Blinder writes: "having the national unemployment rate near 8 percent is a lot better than having it near 10 percent, but it is far from good". Blinder is thinking in terms of an economy in which acceptable (although far from ideal or attainable) employment performance has an unemployment rate of 6 percent, and thus that we are halfway back to economic health.

I see an economy in which the share of American adults who were employed was 63% in the mid-2000s, fell to 58.5% in 2009, and is still 58.5% today. We would have expected the natural aging of America's population to have carried the share of adults at work from 63% down to 62% over the past seven years or so--not to 58.5%. And we would have expected the collapse of people's retirement savings either in housing or in stocks in 2008 to have led many Americans to postpone retirement. Given the collapse in the value of retirement savings and their impact on desired retirements, I see a healthy American economy today as one that would still have the same adult employment-to-population ratio of 63% as the economy of the mid-2000s.

From that perspective, we are not halfway back to health. We had a gap of 4.5% points between actual employment and full employment at the end of 2009. We have a gap of 4.5% points between actual employment and full employment today. We are flatlining. It is true that in late 2009 there were still real and rational fears that things might become worse very quickly, and that that possibility is no longer on the menu. But in my view our "recovery" has taken the form not of things getting better but of having successfully guarded against the possibility that things would get even worse. And that is a very feeble recovery indeed. And, in Europe, things are getting worse right now.

Most economists would say that there is a silver lining, in that this is not a Great Depression. I have been calling the current episode the "Lesser Depression". I now think that most economists are--and that I was--wrong in claiming this silver lining. ...[continue to much, much, much more]...

Wednesday, October 30, 2013

'Cash for Clunkers: An Evaluation'

From Brookings:

Cash for Clunkers: An Evaluation of the Car Allowance Rebate System, by Ted Gayer and Emily Parker: The Car Allowance Rebate System (CARS) or “cash for clunkers” program, launched during the height of the recession with the intention of stimulating the economy, creating jobs, and reducing emissions, was actually far more expensive per job created than alternative fiscal stimulus programs. Ted Gayer and Emily Parker have performed a wide-spread evaluation of the various aspects of the program, from numbers of vehicles traded-in to impact on GDP, cost per job, environmental impact and the types of consumers who took advantage of the program. Among other conclusions, they found that:
  • The $2.85 billion program provided a short-term boost in vehicle sales, but the small increase in employment came at a far higher implied cost per job created ($1.4 million) than other fiscal stimulus programs, such as increasing unemployment aid, reducing employers’ and employees' payroll taxes, or allowing the expensing of investment costs.
  • Total emissions reduction was not substantial because only about half a percent of all vehicles in the United States were the new, more energy-efficient CARS vehicles.
  • The program resulted in a small gasoline reduction equivalent only to about 2 to 8 days’ worth of current usage.
  • In terms of distributional effects, compared to households that purchased a new or used vehicle in 2009 without a voucher, CARS program participants had a higher before-tax income, were older, more likely to be white, more likely to own a home, and more likely to have a high-school and a college degree.

Sunday, October 20, 2013

Ideology and Macroeconomics

Arnold Kling:

Ideology and Macroeconomics, by Arnold Kling: Scott Sumner writes,

I am amazed by how many proponents of fiscal policy don’t understand that it’s symmetrical. Fiscal policy doesn’t mean more government; it means more government during recessions and less government during booms, with no overall change in the average level of government. Anyone who doesn’t even get to that level of understanding, who doesn’t think in terms of policy regimes, is simply not part of the serious conversation.

I agree with the first two sentences, but not with the last.

Yes, in theory, there should be economists who, as they argued for more stimulus in 2009, should at the same time have been arguing for entitlement reform or other reductions in future spending. Other things equal, the bigger debt that we have accumulated over the past five years would make a non-ideological macroeconomist want to propose tighter fiscal policy somewhere down the road.

But “nonideological” and macroeconomics are nearly oxymorons. ...

Huh? See here (from 2005, before the recession had even started):

... To use fiscal policy to stabilize the economy however, you have to spend more or tax less in the bad times (increase the deficit) and then do the hard thing which is to raise taxes or cut spending in the good times (decrease the deficit).  To keep the budget in balance the good has to be matched somewhere by the bad.  If you cut taxes for this disaster, or this recession, or this war, and don’t raise them later, what do you do next time?  Cut again?  Okay, what about the time after that?  It won’t work forever.  The priming of the economy during the bad times must be matched by a slowdown during the good.  Borrow when income is low, pay it back when income is high. 

Furthermore, in stabilization policy, it’s also not possible in the long-run to use both government spending and taxation at opposite points in the business cycle.  That is, suppose you cut taxes during the bad times, then cut spending during the good times to pay it back.  That will work for a recession or two, a hurricane or two, but it won’t work forever because eventually there will be nothing left to cut out of government.  The opposite will not work forever either.  If you increase spending during the bad times then increase taxes during the good, the size of government will grow indefinitely over the long-run.  In more graphic form:

G↑ (rec) → T↑ (boom) →  G↑ (rec)→  T↑ (boom)  → G↑  (rec) → T↑ (boom)  →  bloated government

T↓ (rec) → G↓ (boom) →  T↓ (rec)→  G↓ (boom)  → T↓ (rec) → G↓ (boom)  →  no government

These two policies, or some combination of them (increase G and cut T in recessions, do the opposite in booms) are sustainable:

G↑ (rec) → G↓ (boom) →  G↑ (rec) →  G↓ (boom)  → G↑ (rec) → G↓ (boom)  →  sustainable size of government

T↓ (rec) → T↑ (boom) →  T↓ (rec) →  T↑ (boom)  → T↓ (rec) → T↑ (boom)  →  sustainable size of government

The Democrats are accused of adopting the first strategy and bloating the government.  The Republicans claim to adopt the second strategy to shrink government, but they’ve bloated government themselves (take the second line and change it to T↓ (rec) → G↑ (boom) → etc., a clearly unsustainable path).  Neither party seems willing or able to use either the third and/or the fourth lines as a means of stabilizing the economy.  We are seeing that now, and maybe even less stable budgetary variations.  The WSJ and other members of the GOP seems to advocate T↓ (rec)→ T↓ (boom) → etc. which, without cuts in G, cause deficits rise no matter how much they claim otherwise. 

There are, of course, lots and lots of variations on these basic chains of events, e.g. to adjust the size of government the first or second strategies can be adopted temporarily, and you hope lawmakers would put all their cards on the table as they do so whichever direction government size is to be adjusted.  But fiscal policy that is sustainable in the long-run, through recession after recession, natural disaster after natural disaster, war after war, has to adopt some combination of the third and fourth lines.  ...

Or here (from 2008, a bit afer the recession started):

Short-run stabilization policy for the economy during a downturn involves either cutting taxes to stimulate consumption and investment (and sometimes net exports), or increasing government spending. Which of these is used and the specific policy adopted has important implications for the effectiveness of policy, but no matter how it is done it will raise the deficit, and the increase in the deficit is often used to oppose the policy.
Theoretically, however, there is no reason at all why short-run stabilization policy ought to impact the long-run budget picture. Ideally, the deficits that accumulate during bad times are paid for by raising taxes or cutting spending during the good times so that there is no net change in the budget in the long-run.
Historically, we have been pretty good at spending money in bad times, but not so good at paying for the spending when times are better. But if we are serious about stabilization, that's what we need to do. When output is below the long-run sustainable rate we increase economic activity by deficit spending, and when output exceeds the long-run sustainable rate, we decrease activity by running a surplus. Doing this fills the troughs with the shaved peaks from the booms and keeps the economy closer to the long-run trend value.
I've been wondering if the current crisis will change our attitude about paying for stabilization policy, i.e. if it will make us more willing to raise taxes and cut spending when times are good. One of the problems with the last two boom-bust cycles was unchecked exuberance. Any calls to raise taxes or interest rates were met with howls about how it would cut off the boom, and who would want to do that? But tempering the boom might have helped to reduce the size of the meltdown we are experiencing now and left us much better off.
When the next boom develops, will we be more willing to raise taxes, cut spending, and tighten Fed policy? Will we remember what happened when the previous two booms ended and be more willing to step in and slow down the booming economy, will we be less susceptible to the argument that doing so will eliminate creative and productive innovation (as opposed to misdirecting resources during the mania phase)? This doesn't mean creating a recession or slamming on the brakes so hard we hit our heads, it doesn't mean ending innovative activity, it simply means what it says, bringing the growth rate down to its sustainable rate, and attenuating the exuberance that leads to housing and dot.com bubbles. Will we be more willing to take the necessary steps the next time the economy begins to boom?
I doubt it.
And the problem is that if we aren't willing to pay our bills during the good times, then it will be much harder to spend the money we need to spend when times are bad -- our hands will be tied when it comes to stabilization policy. ...

I could go on, but I'll just simply note that Krugman has been arguing (more than once) that there is little evidence that expansionary fiscal policy in recessions is permanent.

Oh, and since we are talking about unwillingness to reverse policy for ideological reasons, are conservatives arguing that the tax cuts they call for in recessions ought to be reversed when the economy improves? Why aren't those who are so worried about reversing policy in good times only talking about the spending side of the equation? Could it be -- gasp -- that their ideology, there belief that government is too big, is the reason?

Friday, October 18, 2013

Paul Krugman: The Damage Done

Republicans have made the economy worse:

The Damage Done, by Paul Krugman, Commentary, NY Times: The government is reopening, and we didn’t default on our debt. Happy days are here again, right?
Well, no. ...Congress has only voted in a temporary fix, and we could find ourselves going through it all over again in a few months. ...
Beyond that,... it’s important to recognize that the economic damage from obstruction and extortion didn’t start when the G.O.P. shut down the government..., it has been an ongoing process, dating back to the Republican takeover of the House in 2010. ...
A useful starting point for assessing the damage done is a ... report by ... Macroeconomic Advisers, which estimated that “crisis driven” fiscal policy ... since 2010 ... has subtracted about 1 percent off the U.S. growth rate for the past three years. This implies cumulative economic losses ... of around $700 billion. The firm also estimated that unemployment is 1.4 percentage points higher...
Yet ... the report doesn’t take into account ... other bad policies that are a more or less direct result of the Republican takeover in 2010. Two big bads stand out: letting payroll taxes rise, and sharply reducing aid to the unemployed... Both actions have reduced the purchasing power of American workers, weakening consumer demand and further reducing growth. ...
But why have Republican demands so consistently had a depressing effect on the economy?
Part of the answer is that the party remains determined to wage top-down class warfare... Slashing benefits to the unemployed because you think they have it too easy is cruel even in normal times, but it has the side effect of destroying jobs when the economy is already depressed. Defending tax cuts for the wealthy while happily scrapping tax cuts for ordinary workers means redistributing money from people likely to spend it to people who are likely to sit on it.
We should also acknowledge the power of bad ideas. Back in 2011, triumphant Republicans eagerly adopted the concept ... of “expansionary austerity” — ...that cutting spending would actually boost the economy by increasing confidence. Experience since then has thoroughly refuted this concept...
Are all the economy’s problems the G.O.P.’s fault? Of course not. .... But most of the blame for the wrong turn we took on economic policy, nonetheless, rests with the extremists and extortionists controlling the House.
Things could have been even worse. This week, we managed to avoid driving off a cliff. But we’re still on the road to nowhere.

Thursday, October 17, 2013

'What A Drag'

Teaching, then travel today, so just a few quick ones for now. Let's start with Paul Krugman:

What A Drag: ... The now widely-cited Macroeconomic Advisers report estimated the cost of crisis-driven fiscal policy at 1 percentage point off the growth rate for three years, or roughly 3 percent now. More than half of this estimated cost comes from the “fiscal drag” of falling discretionary spending, with the rest coming from a (shaky) estimate of the impacts of fiscal uncertainty on borrowing costs.
I’ve been looking a bit harder at that report, and while I am in broad agreement with its conclusion, I think it’s missing quite a lot. On balance, I’d argue that the negative effect of the crazies has been even worse than MA says. ...
OK, first thing: I’m not too happy with the report’s reliance on the Bloom et al uncertainty index to measure costs. ... It’s really not something you want to lean on, and if you take it out, MA’s estimates of the Republican drag fall. But we shouldn’t stop there, because there are two important aspects of the story that MA leaves out.
First, part of the fiscal cliff deal involved letting the Obama payroll tax cut — a significant, useful form of economic stimulus — expire. (Republicans only like tax cuts that go to people with high incomes.) This led to a surprisingly large tax hike in 2013, focused on workers...
Second, GOP opposition to unemployment insurance has been the biggest factor in a very rapid decline in unemployment benefits despite continuing weak job markets... This hurts the unemployed a lot, but it also hurts the economy, because the unemployed ... surely must have been forced into spending cuts as benefits expired.
The combination of the payroll take hike and the benefit cuts amounts to about $200 billion of fiscal contraction at an annual rate, or 1.25 percent of GDP, probably with a significant multiplier effect. Add this to the effects of sharp cuts in discretionary spending and the effects of economic uncertainty, however measured, and I don’t think it’s unreasonable to suggest that extortion tactics may have shaved as much as 4 percent off GDP and added 2 points to the unemployment rate.
In other words, we’d be looking at a vastly healthier economy if it weren’t for the GOP takeover of the House in 2010.

Tuesday, October 15, 2013

'The GOP Tax'

Paul Krugman:

The GOP Tax: Macroeconomic Advisers has a new report out about the effects of bad fiscal policy since 2010 — that is, since the GOP takeover of the House. ... They say that combined effects of uncertainty in the bond market and cuts in discretionary spending have subtracted 1% from GDP growth. That’s not 1% off GDP — it’s the annualized rate of growth, so that we’re talking about almost 3% of GDP at this point; cumulatively, the losses come to around $700 billion of wasted economic potential. This is in the same ballpark as my own estimates.
And they also estimate that the current unemployment rate is 1.4 points higher than it would have been without those policies (a number consistent with almost 3% lower GDP); so, we’d have unemployment below 6% if not for these people.
Great work all around, guys.

But the master's of the universe -- the wealthy supporters of the GOP and a driving force behind the push for austerity -- are doing great. If they get lower taxes as a result of all this, that's allthat matter, right? Who cares about all the other people who are struggling as a result of cuts to social services, higher unemployment rates, and the like?

Tuesday, October 01, 2013

The Trillion Dollar Coin--or, More Sensibly, 1000 Billion-Dollar Coins--Is the Only Way ...

Brad DeLong:

The Trillion Dollar Coin--or, More Sensibly, 1000 Billion-Dollar Coins--Is the Only Way for Obama to Fulfill His Oath of Office: "I, Barack Hussein Obama, do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States."

The Constitution tells us that to faithfully execute the office the President shall:

from time to time give to the Congress information of the state of the union, and recommend to their consideration such measures as he shall judge necessary and expedient;

he may, on extraordinary occasions, convene both Houses, or either of them, and in case of disagreement between them, with respect to the time of adjournment, he may adjourn them to such time as he shall think proper;

he shall receive ambassadors and other public ministers;

he shall take care that the laws be faithfully executed, and shall commission all the officers of the United States.

The appropriations are lawfully commanded by Congress--to fail to spend them is, since the budget reforms of the 1970s, to break the law--the repayment of the debt is mandated by the Constitution's Article XIV, as is the limitation of the government's authority to take property via taxation or otherwise to the amount lawfully commanded by Congress.

There are two ways in the absence of a debt-ceiling increase for the President not to break the law:

  1. Find some other debt of the U.S. government--like, as Bob Rubin did, the debt of the U.S. government to the Federal Employees' Thrift Savings Plan--where the Trustee will not complain if the government does not pay its debts for a while, and then have the government not pay its debts for a while.

  2. Mint the damned coins already.

(2) look strongly preferable to me--the exercise of the government's not paying its debts to people who can't gain standing to sue and then saying that unpaid debts by the government are not part of the debt subject to limit has always seemed ugly.

From an economic standpoint, yes, this could avoid some very bad economic consequences. But I'm less sure of it from a political standpoint, i.e. that the public would understand and endorse it. I suspect that's true of the administration as well, and politics generally seems to trump economics when push comes to shove within the administration.

Monday, September 30, 2013

'Thank the GOP for the Shutdown and Holding the Economy Hostage'

Dean Baker:

Thank the GOP for the shutdown and holding the economy hostage, by Dean Baker, theguardian.com: Here we go again: the GOP is ready to stall the US economy and shut down the government in a crusade to cut government spending. Proponents of austerity both in the United States and Europe are eager to claim success for their policies. In spite of economies that look awful by normal standards, austerity advocates are able to claim victory for their policies by creating a new meaning for the word.
In Europe, we have the bizarre story of both George Osborne ... and Olli Rehn ... claiming success for their austerity policies based on one quarter of growth. ...
In the United States, we were treated to the Wall Street Journal (WSJ) boasting of the success of the 2011 debt ceiling agreement on the eve of another standoff on the budget and the debt ceiling. The measure of success in this case appears to be that the sequester budget cuts put in place by the agreement are still in place and that the economy has not collapsed as a result. ...
First, it is worth noting that many of the disaster warnings about the sequester from President Obama and the Democrats were grossly exaggerated. ...
However, this doesn't mean that the sequester is harmless. ...
We ... know the sequester will give us deteriorating government services, higher unemployment, and slower economic growth. That's the track record which prompts the Wall Street Journal's boasts – and the GOP's misguided actions – in favor of even more austerity.

But if the real goal of the GOP is to reduce the size of government, particularly social insurance, and if the fact that it comes at the expense of the most vulnerable in society is not that great of a concern, then it's not at all clear that austerity has been a failure (and Republicans have also managed to undermine the public's faith in the ability of government to solve important problems whch could also be added to the success side of the ledger). The GOP often argues in terms of jobs and growth, but it is usually cover for a broader agenda.

Tuesday, September 24, 2013

What's It All About Then?: The Real Reason for the Fight over the Debt Limit

Two from Paul Krugman. The first echoes the point I make in my column today about the attempt to use fear over the debt (and hence the need for austerity) as an excuse to dismantle the welfare state:

What’s It All About Then: Simon Wren-Lewis writes with feeling about the “austerity deception“; what sets him off is a post that characterizes the whole austerity debate as being about “big-state” versus “small-state” people.
Wren-Lewis’s point is that only one side of the debate saw it that way. Opponents of austerity in a depressed economy opposed it because they believed that this would worsen the depression — and they were right.
Proponents of austerity, however, were lying about their motives. Strong words, but if you look at their recent reactions it becomes clear that all the claims about expansionary austerity, 90 percent cliffs and all that were just excuses for an agenda of dismantling the welfare state. ...

But I think growing inequality is a big driving force behind this effort.

And since I've complained in past columns that fiscal policy has not received enough attention (particularly how bad it's been), it's nice to see this:

The Depressed Economy Is All About Austerity: Right now the official unemployment rate is 7.3 percent. That’s bad, and many people — myself included — think it understates the true badness of the situation. ...
But we’re clearly still well below potential. And we’ve also had exactly the wrong fiscal policy given that reality plus the zero lower bound on interest rates, with unprecedented austerity. So, how much of our depressed economy can be explained by the bad fiscal policy?
To a first approximation, all of it. By that I mean that to have something that would arguably look like full employment, at this point we wouldn’t need a continuation of actual stimulus; all we’d need is for government spending to have grown normally, instead of shrinking. ...[does calculations to show this]...
The austerians have a lot to answer for.

The Real Reason for the Fight over the Debt Limit

This shameful attempt to make life even harder for the unlucky and the unfortunate:

The Real Reason for the Fight over the Debt Limit

I argue that inequality -- our increasingly two-tiered society -- is one of the driving forces behind the attack on social insurance.

Monday, September 23, 2013

'How Austerity Wrecked the American Economy'

Kevin Drum:

How Austerity Wrecked the American Economy, by Kevin Drum: With Washington DC's attention focused on the antics of Ted Cruz and the tea partiers, who are threatening to shut down the government unless Obamacare is defunded, it's easy to lose sight of the bigger picture: Aside from Obamacare, the budget battles of the past three years have been exclusively about the Republican obsession with cutting spending while we're trying to recover from the worst recession since World War II.
This is lunacy, and it's the subject of "Death by a Thousand Cuts," my cover story in the current issue of Mother Jones. ... The ... austerity zealots ... remain obsessed with slashing spending despite the fact that (a) this is unprecedented in recent history and (b) the deficit has already been slashed repeatedly over the past three years ...
Government spending at all levels is far below the level of any other recent recovery. Sixteen quarters after the end of the recession, spending during past recoveries has been 7-15 percent higher than it was at the start. This time it's 7 percent lower, despite the fact that the 2008-09 recession was the deepest of the bunch. Reagan, Clinton, and Bush all benefited from rising spending during the economic recoveries on their watches. Only Obama has been forced to manage a recovery while government spending has plummeted.
And there's no end in sight. Ted Cruz will lose his battle to defund Obamacare. But the tea partiers have already won their battle to cripple the American economy and Obama's presidency with it.

Thursday, September 19, 2013

Waste in the Private Sector

Antonio Fatás:

Does competition get rid of waste in the private sector?: It is very common to hear comments about the waste of resources when referring to governments and the public sector. Paul Krugman does his best to argue against this popular view by showing that most of what government do is related to services that we demand and value as a society (it is not about hiring civil servants that produce no useful service). As he puts it, the government is an "insurance company with an army". But critics will argue that even if this is the case, the functioning of that (public) insurance company is extremely inefficient. In fact, we all have our list of anecdotes on how governments waste resources, build bridges to nowhere and how politicians are driven by their own interest, their ambitions or even worse pure corruption. If only we could bring the private sector to manage these services!
In addition to the anecdotal evidence there is something else that matters: we tend to use framework that starts with the assumption that in the private sector competition will get rid of waste. An inefficient company will be driven out of business by an efficient one. An inefficient and corrupt manager will be replaced by one who can get the work done. And we believe that the same does not apply to governments (yes, there are elections but they do not happen often enough plus there is no real competition there).
But is competition good enough to get rid of all the waste and inefficiencies in the private sector? I am sure there are many instances where this is the case but I am afraid there are also plenty of cases where competition is not strong enough. And just to be clear, I am not simply talking about large companies that abuse monopoly power, I am thinking of all the instances where the competitive threat is not enough to eliminate inefficiencies. ...

He goes on to give two examples of private sector waste and inefficiency resulting from insufficient competetive forces, the large amount of waste, destruction, and inefficiency caused by the financial crisis and the large amount of waste in private sector healthcare markets (he shows one estimate that excess costs are 31% of total spending on health care). He concludes with:

But ...[when it comes to].. waste in other sectors, we simply do not know about it, we do not even attempt to measure it (at least at the macro level). And the reason why we do not bother measuring it is because we assume that markets and competition must make this number close enough to zero. Maybe it is time to challenge this assumption.

Tuesday, September 17, 2013

'Is Obama Getting Bad Economic Advice?'

Heidi Moore chronicles the administration's failures in economic policy:

The Larry Summers flop: more proof Obama is getting bad economic advice, by Heidi Moore: Is President Obama the victim of bad economic advice?
The evidence points to "yes". The president's economic initiatives – food stamps, manufacturing, infrastructure, raising the debt ceiling, appointing a new chairman of the Federal Reserve – have mostly ended in either neglect or shambles. After five years, the Obama Administration's stated intentions to improve the fortunes of the middle class, boost manufacturing, reduce income inequality, and promote the recovery of the economy have come up severely short.
Despite this, the president believes he is negotiating his economic agenda with Congress from a position of strength, and almost every speech includes some self-congratulatory note about how far the economy has come. ...
The president could not be more wrong or misleading in the way in which he presents our economic progress. One can perfectly understand economist Dean Baker's horror when he realized, back in August, that Obama's economic team believes it is doing a good job.
It's time to end the delusion that this White House has accomplished even a fraction of what it should be doing to help the economy. It should have been focusing all its efforts on employment, perhaps by boosting job-retraining programs, providing tax incentives for employers or supporting a comprehensive infrastructure effort. Instead, the administration is falling victim to political distractions and lack of follow-through and wasting its meager political capital on the wrong fights.
The latest example is the debacle around Larry Summers. ...
To shut out the opposition to Summers, the president had to have been wearing earplugs. How closed is his economic circle? How well do they fit the profile of honest brokers about our economic situation? Loyalty is a great thing. But that kind of trust is clearly not working for Obama. Maybe he should stop relying on those he knows, and rely instead on those who know what they're doing.

Gridlock in Congress is real, and legislation involving additional fiscal policy measures or job creation would be difficult or impossible. But part of that is due to the administration's failure to lead the conversation, to hammer home at every opportunity how Congress is failing the middle class. The charge that the administration is guilty of "political distractions and lack of follow-through and wasting its meager political capital on the wrong fights" is accurate in my view, particularly the lack of follow through. How many times has the president announced some major effort at job creation, and that's the last we hear about it? I don't think people understand how awful Congress has been where fiscal policy is concerned. I suppose the administration is worried about being blamed for the poor economy, so instead it talks about "how far the economy has come" due to its policies. But why not just tell the truth? Why not point at Congress and call for job creation through infrastructure construction at every opportunity, and let people know that Congress is to blame if it doesn't happen? Yes, the other side will try to blame the administration is if admits the economy is doing poorly, but that will happen anyway and it's a debate the administration ought to be able to win.

Saturday, September 07, 2013

'Government Jobs Are (Still) The Problem'

Speaking of horrid fiscal policy:

Government jobs are (still) the problem, by Neil Irwin: One of the reasons for quiet optimism about the economy over the last few months has been the possibility that state and local governments have finished their long retrenchment and that government hiring might soon contribute to job creation.
Never mind.
From July 2008 to January 2013, the sector shed more than 737,000 jobs. Had the jobs merely been maintained, the unemployment rate would be as much has half a percentage point lower. Indeed, the state and local pullback is one significant reason that this recovery has been weaker than those in the past. ...

Friday, September 06, 2013

Paul Krugman: Years of Tragic Waste

After saying this less than a week ago (see here too) :

I just can't understand why so many people are letting fiscal policymakers off the hook. It's not for lack of time or space -- a considerable amount is written daily about the Fed. We ought to be skewering both politicians and economists who are standing in the way of fiscal policy measures, infrastructure in particular, that could strengthen the economy and put people back to work -- both theory and the empirical evidence are clear on this point -- but instead it's mostly silence. ... Yes. it's politically unlikely that a fiscal policy package could get through Congress, but that doesn't mean we should give up our role in educating the public about just how terrible the performance of fiscal policy has been. And if we speak out, perhaps it could even matter at the margin...

It's nice to see this from Paul Krugman:

Years of Tragic Waste, by Paul Krugman, Commentary, NY Times: In a few days, we’ll reach the fifth anniversary of the fall of Lehman Brothers — the moment when a recession, which was bad enough, turned into something much scarier. Suddenly, we were looking at the real possibility of economic catastrophe.
And the catastrophe came.
Wait, you say, what catastrophe? Weren’t people warning about a second Great Depression? And that didn’t happen, did it? ... The important thing, however, is to realize that ... you can have an immense failure of economic policy that falls short of producing total collapse. And the failure of policy these past five years has, in fact, been immense. ...
Set aside the politics for a moment, and ask what the past five years would have looked like if the U.S. government had actually been able and willing to do what textbook macroeconomics says it should have done... I’ve done a back-of-the-envelope calculation ... It would have been about three times as big as the stimulus we actually got, and would have been much more focused on spending rather than tax cuts.
Would such a policy have worked? All the evidence of the past five years says yes. ... Government spending on job creation would, indeed, have created jobs.
But wouldn’t the kind of spending program I’m suggesting have meant more debt? Yes... But ... the ratio of debt to G.D.P. ... would have been only a few points higher. Does anyone seriously think that this difference would have provoked a fiscal crisis?
And, on the other side of the ledger, we would be a richer nation, with a brighter future...
Look, I know that as a political matter an adequate job-creation program was never a real possibility. And it’s not just the politicians who fell short: Many economists, instead of pointing the way toward a solution of the jobs crisis, became part of the problem, fueling exaggerated fears of inflation and debt.
Still, I think it’s important to realize how badly policy failed and continues to fail. Right now, Washington seems divided between Republicans who denounce any kind of government action — who insist that all the policies and programs that mitigated the crisis actually made it worse — and Obama loyalists who insist that they did a great job because the world didn’t totally melt down.
Obviously, the Obama people are less wrong than the Republicans. But, by any objective standard, U.S. economic policy since Lehman has been an astonishing, horrifying failure.

Wednesday, September 04, 2013

'The Austerian Mask Slips'

Many of us have argued repeatedly that the push for austerity was, for many, nothing more than a means of achieving the ideological goal of a smaller government, hence the opposition to increases in taxes to solve the budget problem and the insistence that it come trhough spending cuts. Paul Krugman highlights evidence that this is true:

The Austerian Mask Slips: Simon Wren-Lewis looks at France, and finds that it is engaging in a lot of fiscal austerity — far more than makes sense given the macroeconomic situation. He notes, however, that France has eliminated its structural primary deficit mainly by raising taxes rather than by cutting spending.
And Olli Rehn [European Commissioner for Economic and Monetary Affairs and the Euro and vice president of the European Commission] — who should be praising the French for their fiscal responsibility, their willingness to defy textbook macroeconomics in favor of the austerity gospel — is furious, declaring that fiscal restraint must come through spending cuts.
As Wren-Lewis notes, Rehn is very clearly overstepping his bounds here: France is a sovereign nation... — and is not, by the way, seeking any kind of special aid from the Commission. So he has no business whatsoever telling the French how big their government should be.
But the larger point here, surely, is that Rehn has let the mask slip. It’s not about fiscal responsibility; it never was. It was always about using hyperbole about the dangers of debt to dismantle the welfare state. How dare the French take the alleged worries about the deficit literally, while declining to remake their society along neoliberal lines?

Saturday, August 31, 2013

'Obama's Economic Team Think They Are Doing a Good Job'

Dean Baker (my comments are at the end):

Scary Thought on Labor Day Weekend: Obama's Economic Team Think They Are Doing a Good Job: Ezra Klein gives us some terrifying news in a Bloomberg column today. President Obama's economic team think they are doing a great job, hence the desire to bring back former teammate Larry Summers as Fed chair. This is terrifying because the economy this Labor Day is described by a set of statistics that can only be described as horrible.
We are almost 9 million jobs below the trend level of employment. The number of people involuntarily working part-time is still up by almost 4 million from its pre-recession level. Wages have been stagnant for a decade and show no signs of increasing any time soon. And, according to the Congressional Budget Office, the economy is still operating more than $1 trillion (6 percent) below its potential. Oh, and by the way, the financial sector is more concentrated than ever, with top honchos drawing the same sort of paychecks they did before the crisis.
I could go on but what's the point? This is an economy that under other circumstances we would all say is awful. ...
The best that can be said is that the crew has been ineffectual in the face of Republican opposition in building any sort of political support for a stronger economic agenda. But ineffectual is not a much better recommendation than incompetent.
And it's hard to blame items like the "pivot to deficit reduction" on the Republicans. If the Obama team has an aggressive plan for turning the economy around that is being stifled by the nasty Republicans they have not done a very good job of even making it known, must less rallying support.
I suppose if they think everything in the economy is just great that would explain why they want Larry Summers back. That's pretty bad news on Labor Day. ...

Paul Krugman, following up on  post from Brad DeLong, makes a point along the same lines:

Bankers, Workers, Obama and Summers: Brad DeLong has an excellent piece distinguishing between two views of central banking. There’s the “banking camp,” which sees the central bank’s job as being to secure the stability of the financial system – full stop. OK, maybe also price stability. And then there’s the “macroeconomics camp,” which sees the central bank’s job as being to achieve full employment; banking stability and even price stability are basically means towards that end.
Brad complains that the Fed has ended up being much more in the banking camp than many macroeconomists would have wanted. See, for example, the harsh criticisms leveled at the Bank of Japan by one Ben Bernanke in 2000, criticisms that apply almost perfectly to the Bernanke Fed of today.
But I think Brad casts his net too narrowly: it’s not just central bankers who fall into these two camps. And one important consequence of this division is an utterly different read on recent history.
Ask yourself: How well did we respond to the crisis of 2008?
If you’re in the banking camp, here’s what you see [graph]... The financial system was in great danger – but catastrophe was averted. We’re heroes!
On the other hand, if you’re in the macroeconomics camp, here’s what you see [graph]... A catastrophic collapse in employment, with only a modest recovery even after all these years. ... We blew it!
Which brings us to what looks more and more like Obama’s decision to choose Larry Summers as Fed chair, passing over Janet Yellen.
As of right now, Summers is clearly not in the banking camp; the stuff he has been writing about fiscal policy makes it clear that he very much believes that the job of economic recovery is not done. On that basis, you would expect him to prod the Fed into doing much more than it is. On the other hand, given Bernanke’s pre-Fed record you would have expected the same thing — maybe even more so... Once at the Fed, however, Bernanke appears to have been assimilated by the Borg, moving much closer to the banking camp.
Would the same thing happen to Summers? I worry. And one of the strong (though probably futile at this point) arguments for Yellen is that she spent years at the Fed without being assimilated, never losing sight of the crucial importance of employment.
While Summers isn’t in the banking camp, however, Obama is. ...
Obviously I’m in the macroeconomics camp, not the banking camp, so this is all depressing, in several senses. It means, among other things, that even if Summers is the right choice — which we’ll never really know — it’s a choice that Obama is making for all the wrong reasons.

I don't like the framing of banking camp versus macroeconomic camp. Even the banking camp thinks it is doing what it can to stabilize the broader economy. I don't think their concern is simply to help bankers, I give them more credit than that. It's just that some members of the Fed do not believe the Fed has much influence over the economy beyond stabilizing the financial system. Once that is done, the Fed's powers are very limited (when at the zero bound) and -- in the eyes of some members of the Fed -- the risks of further aggressive action, e.g. QE, outweigh the potential benefits. So I think both camps have the same goal, stabilizing the macroeconomy, the difference is in the view of how much the Fed can do without risking bubbles, inflation, etc.

I believe the Fed should do more, that it could help some, but I am also doubtful about how much more the Fed can accomplish in helping with the unemployment problem. What we need is sane fiscal policy, that's what could really help the unemployed, but instead we are focused on the Fed chair, dividing economists into camps, etc. We need fiscal policymakers to be in the macroeconomics camp rather than the political/ideological camp that is driving things like austerity, potential government shutdowns over manufactured crises, worries about the debt used to push for smaller government, and so on that are harming the recovery.

DeLong and Summers were trying to help along these lines with their Brookings piece showing the benefits of government spending in deep recessions, but that effort has subsided and for the most part there hasn't been much push from economists on the fiscal policy front. Yes. it's politically unlikely that a fiscal policy package could get through Congress, but that doesn't mean we should give up our role in educating the public about just how terrible the performance of fiscal policy has been. And if we speak out, perhaps it could even matter at the margin, an extra infrastructure project here and there perhaps. Every additional job matters tremendously to families who are still struggling to get back on their feet.

I just can't understand why so many people are letting fiscal policymakers off the hook. It's not for lack of time or space -- a considerable amount is written daily about the Fed. We ought to be skewering both politicians and economists who are standing in the way of fiscal policy measures, infrastructure in particular, that could strengthen the economy and put people back to work -- both theory and the empirical evidence are clear on this point -- but instead it's mostly silence.

Update: Paul Krugman just put up a post about fiscal policy: The Arithmetic of Fantasy Fiscal Policy.

Friday, August 30, 2013

How Stimulatory Are Large-Scale Asset Purchases?

Here's the conclusion to a FRBSF Economic Letter from Vasco Cúrdia and Andrea Ferrero on the question of How Stimulatory Are Large-Scale Asset Purchases?:

... Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation. Research suggests that the key reason these effects are limited is that bond market segmentation is small. Moreover, the magnitude of LSAP effects depends greatly on expectations for interest rate policy, but those effects are weaker and more uncertain than conventional interest rate policy. This suggests that communication about the beginning of federal funds rate increases will have stronger effects than guidance about the end of asset purchases.

The Fed could sure use some help from fiscal policy (instead, we appear to be headed for yet another manufactured crisis over the debt). As Paul Krugman notes today, the fiscal policy measures that we did take were relatively meager, and for too short-lived:

Too Little, Gone Too Soon: One of the things you always heard, back when we were actually talking about stimulus rather than fighting a rearguard action against destructive austerity, was the claim that stimulus spending would inevitably end up becoming a permanent fixture of the economy. This was always said with an air of worldly wisdom — of course that’s how these things work! — even though history said very much the opposite.

But anyway, the invaluable FRED now has a series on exactly that subject, and here’s what it looks like ... calculated as a percentage of the CBO estimate of potential GDP:
Stimulus as percent of potential GDP
Stimulus as percent of potential GDP
So next time someone goes on about how we had this huge stimulus that failed, you can tell him that the “huge” stimulus — in response to the worst financial crisis in three generations — peaked at a whopping 1.6 percent of GDP, and was effectively gone in a bit over two years.

Thursday, August 29, 2013

'Macro Workers and Macro Wars'

This expands on one of the points I tried to make here:

Macro workers and macro wars, by Simon Wren-Lewis: ... Nearly fifteen years ago I began working with DSGE models looking at monetary and fiscal interactions. [1] Doing this work taught me a lot about how fiscal policy worked in New Keynesian models. I understood more clearly why monetary policy was the stabilisation tool of choice in those models, but also why fiscal policy - appropriately designed - was also quite effective in that role if monetary policy was absent (individual countries in the Eurozone) or impaired (the ZLB). Why New Keynesian models? Because if you were interested in business cycle stabilisation, that is the framework that most involved in that area (academics and policymakers) were using. So when we hit the ZLB, the reaction of policymakers in using fiscal stimulus seemed logical, entirely appropriate and fully in line with current theory.
I also found that in these models the basics of Barro’s tax smoothing hypothesis continues to apply, so if you needed to reduce debt, you should do so as gradually as possible. This also seemed like as robust a result as one can get in macro.
The acid test for macro came in 2010. Policymakers, for a variety of reasons, went into reverse with fiscal policy. Austerity replaced stimulus around the world. If academic macroeconomists had been true to their discipline, they would have been united in saying that our standard models tell us this will reduce output and raise unemployment. They would have said that if markets allow, the time to reduce debt is when the ZLB comes to an end, and then it should be done gradually. Many did say that, but many did not. This division at least encouraged policymakers to continue with austerity.
So macroeconomists as a collective failed this test, repeating errors made in the 1930s. But unlike the 1930s, it did not have ignorance as an excuse. 
This is a crucial point that many on both sides tend to ignore. In 2010, the standard business cycle model was the New Keynesian model, and the implications of that model for the efficacy of appropriately designed fiscal policy are clear. So to blame the failure of 2010 on the current dominant macro model is just wrong. You may not like that model, but it cannot be blamed for the widespread adoption of austerity, or the ambivalent attitude of many macroeconomists towards that policy change.
So in my view macroeconomists, not the dominant macroeconomic model, failed. ...

There's quite a bit more in the post.

Wednesday, August 28, 2013

The Great Lesson from the Great Recession

This is live at the Fiscal Times:

The Great Lesson from the Great Recession

Kind of a pessimistic conclusion.

Saturday, August 24, 2013

'Missing the point at the IMF'

Simon Wren-Lewis is frustrated with the IMF (for good reason):

Missing the point at the IMF, by Simon Wren-Lewis: The IMF have just published a working paper entitled: ‘Assessing the Impact and Phasing of Multi-year Fiscal Adjustment: A General Framework’. Or to put it more simply: should austerity be front loaded or delayed? A really important topic and one where the views of the IMF are of some importance.

I guess if you call anything a ‘General Framework’ you are taking a risk. But honestly, if you also write this

“our framework does not explicitly model the monetary policy response, which could have an important impact on output”

then you have no business using the word ‘Framework’, let alone ‘General’. [1]

We need to go through the logic one more time. When monetary policy is not constrained (we are not at the Zero Lower Bound), monetary policy can (and to a first approximation should) completely offset the impact of any fiscal consolidation. The multiplier in that case will be approximately zero. [2] However if we are at the ZLB, then within the current monetary policy framework (essentially inflation targeting), and unless you are really optimistic about unconventional policy, the ability of monetary policy to stimulate aggregate demand is severely compromised. As a result, any fiscal multiplier will be substantially greater than zero.

Now consider two periods. In the first, we are at the ZLB. In the following period, we are not. Consider two fiscal consolidation programs. In the first, everything is front loaded into the first period. In the second, nothing happens in the first period, and all fiscal consolidation takes place in the second. Design the two programs so that we end up with the same debt to GDP ratio by the end of the second period, so they are neutral in this respect.

What is the overall impact on output of the two programs? Frontloading hits output in the ZLB period, with possible hysteresis effects in the second. Delaying consolidation until the second period has no impact on output whatsoever, because any impact on output is offset by monetary policy. Simple. So the choice is a no-brainer - you delay fiscal adjustment until the ZLB period has ended.

You would think that with these very dramatic implications for the optimal path for fiscal consolidation, allowing for monetary policy would have to be part of any ‘general framework’. ...

This is by now such an obvious and basic point I can only wonder why it is not incorporated into the analysis. By ignoring this point, what has been done is just inapplicable to some major economies. I do not like being so critical and blunt, but this is no academic debating point. And I would hate to think that this reasoning has been ignored precisely because its implications about the timing of fiscal consolidation are so clear. ...

Tuesday, August 20, 2013

'Why has the Fed Given up on America’s Unemployed?'

Adam Posen has a question:

Why has the Fed given up on America’s unemployed?: ... There is a rush in the US and Europe to prematurely declare stimulus policies ineffective at reducing unemployment. Much of the persistent joblessness is deemed structural and the costs of addressing long-term unemployment too daunting. Labor regulations and skills mismatches clearly play some role in keeping the jobless out of work, but their impact is exaggerated to excuse inaction. ...
So there is no reason to hold back on trying to drive US unemployment down through monetary and fiscal policy. An elastic supply of labour will keep wage growth low, which will suppress inflationary pressure. ... At present, there is no danger of a 1970s-style wage-price spiral. ...
The costs of pushing a bit too far are small and reversible. But the costs of letting unemployment persist are vast. ... There is no good reason for the Fed to give up on the labor market – and thus no good argument for allowing the de facto tightening of monetary conditions to stand.

I'd also ask why Congress has turned its back on the unemployed, but I think we know the answer to that.

Saturday, August 17, 2013

Manski: Removing Deadweight Loss from Economic Discourse on Income Taxation and Public Spending

Another quick one:

Removing deadweight loss from economic discourse on income taxation and public spending, by Charles F Manski, Vox EU: Economists usually think of taxation as inefficient. This column argues that the anti-tax rhetoric evident in much lay discussion of public policy draws considerable support from the prevalent negative language of professional economic discourse. Optimal income taxation doesn’t have to employ the pejorative concepts of inefficiency, deadweight loss and distortion; and this column argues that it is high time for economists to discard them and make analysis of taxation and public spending distortion-free.

Column here.

Friday, August 02, 2013

'Recent Jobs & Growth Numbers: Good or Bad?'

Jeff Frankel on the jobs report:

Recent Jobs & Growth Numbers: Good or Bad?: This morning’s US employment report for July shows the 33rd consecutive month of positive job gains, by my count. Earlier in the week, the Commerce Department report showed that the 2nd quarter was the 16th consecutive quarter of positive GDP growth. Of course, the growth in employment and income has not been anywhere near as strong as we would like, nor as strong as it could be if we had a more intelligent fiscal policy in Washington. But it is much better than what most other industrialized countries have been experiencing. Many European countries haven’t even recovered from the Great Recession, with incomes currently still below their peaks of six years ago.
 ...
GDP growth has fallen well below 2% in the last three quarters. But I think we know the reason for that: dysfunctional fiscal policy. Washington has been the obstacle to a normal robust recovery, through a combination of such factors as spending cuts in 2011 and 2012, the expiration of the payroll tax holiday in January 2013, the sequester in March, and now needless business uncertainty arising from new time-bombs in the next two months, induced once again by partisan deadlock over passing a budget and raising the debt ceiling. Given all that, it is surprising that private consumption and investment have held up as well as they have.
The right policy bargain, of course, is fiscal stimulus in the short term, not fiscal contraction, combined with steps today to address the entitlements problem in the long-term. That would get us back to solid growth. Our current pattern of pro-cyclical fiscal policy is exactly backwards.
I want to echo and reinforce what he says about fiscal policy, particularly the need for short-term stimulus. [He also compares this recovery to the recovery when Bush was president -- guess which is stronger?]

Thursday, August 01, 2013

State Governments are NOT Roadblocks to Federal Stimulus

In case you missed this from Owen Zidar:

Are State Governments Roadblocks to Federal Stimulus? Evidence from Highway Grants in the 2009 Recovery Act, by Owen Zidar: From Sylvain Leduc and Dan Wilson:

We examine how state governments adjusted spending in response to the large temporary increase in federal grants under the 2009 American Recovery and Reinvestment Act (ARRA). We concentrate our analysis on ARRA highway grants, which were especially likely to crowd out states’ own highway funding given the lack of matching requirements and according to past research on federal highway grants. ... We find that states increased highway spending in 2010 nearly dollar-for-dollar with their apportioned grants, implying little if any crowd-out. Moreover, we find that over the entire 2009- 2011 period, ARRA highway grants crowded in highway spending, resulting in roughly two dollars in spending for each dollar in grants. We show that our results are not unique to the ARRA period, but rather are consistent with a strong effect from grants dating back at least to the early 1980s. This latter result contrasts with earlier research (Knight 2002) and we document the sources of the difference.

This is in contradiction to what John Taylor claims:

Despite its large size, the 2009 U.S. stimulus package failed to increase government infrastructure spending or other government purchases as its promoters had claimed it would. The large federal stimulus grants sent to state and local governments for infrastructure spending were mainly used to reduce borrowing and thus did not result in an increase in purchases. ...

Though Taylor does think infrastructure spending worked as a stimulus mechanism in China (as he explains).

Anyway, full steam ahead with infrastructure spending both as a way to promote recovery and to build a better future (as though Republicans would actually agree to something this sensible).

Wednesday, July 31, 2013

Why Should Government Grow at the Same Rate as GDP?

I have a question. Why should government spending as a percentage of GDP stay constant as GDP grows? It seems that, as we grow wealthier as a society, we would want relatively more of the kinds of goods government provides, e.g. social insurance.

Friday, July 26, 2013

'US Infrastructure UnderInvestment vs Other Developed Nations'

This is via Barry Ritholtz at The Big Picture:

McKinsey: US Infrastructure UnderInvestment vs Other Developed Nations, by Barry Ritholtz:: The United States must raise infrastructure spending by 1 percentage point of GDP to meet future needs
Bigpic
Click to enlarge Source: McKinsey

Tuesday, July 23, 2013

Middle-Out Economics

Has the administration finally realized that we ought to do something about stagnating wages, the millions of unemployed, etc.? Is this a serious effort, or is it, as in the past, mostly just for show (I'll believe it when I see some of it actually happening)?:

President Obama Needs to Ground “Middle-Out” Economics in Broad-Based Wage Growth, by Larry Mishel, EPI: Tomorrow at Knox College, President Obama will kick off a series of speeches outlining his vision for rebuilding the U.S. economy. He is expected to talk about how the economy works best when it grows from the “middle-out,” not from the top down.
Growing from the middle out is indeed the right approach to economic growth. I hope that President Obama will get to the heart of the matter, which is that, adjusted for inflation, wages and benefits for the vast majority of workers have not grown in ten years. This is true even for college graduates, including those in business occupations or in STEM fields, whose wages have been stagnant since 2002. Low and middle-wage workers, meanwhile, have not seen much wage growth since 1979. Corporate profits, on the other hand, are at historic highs. Income growth in the United States has been captured by those in the top one percent, driven by high profitability and by the tremendous wage growth among executives and in the finance sector.
The real challenge is how to generate broad-based real wage growth, which was only present during the last three decades for a few short years at the end of the 1990s.
To generate wage growth, we will need to rapidly lower unemployment, which can only be accomplished by large scale public investments and the reestablishment of state and local public services that were cut in the Great Recession and its aftermath. The priority has to be jobs now, rather than any deficit reduction... Overall, it means paying attention to job quality and wage growth as a key priority in and of itself, and as a mechanism for economic growth and economic security for the vast majority. ...

Sunday, July 21, 2013

'When is the Time for Austerity?'

In case you missed this:

When is the time for austerity? - Alan Taylor

Kevin O'Rourke at the Irish Economy Blog has a succinct explanation of the findings:

The boom, not the slump, is the right time for austerity, by Kevin O’Rourke: Alan Taylor has a piece on Vox today that is a nice contribution to the debate on the output effects of austerity. That debate has largely been about the endogeneity of fiscal policy: the more you take this into account, the more contractionary austerity becomes. He and Oscar Jorda show that if you give less weight to episodes where the austerity/no austerity policy choice was more predictable (i.e. more endogenous) and more weight to episodes where the policy choice was less predictable (i.e. more exogenous) then you find that austerity was extremely contractionary in slumps. This does not mean that fiscal consolidation is never necessary, but that the time for consolidation is when times are good, not when times are bad. It would be nice if Austerians could display a similar recognition that context matters.

Wednesday, July 17, 2013

'Fed Chief Calls Congress Biggest Obstacle to Growth'

I missed the Congressional hearing today, but glad to hear that Ben Bernanke delivered this message:

Fed Chief Calls Congress Biggest Obstacle to Growth, by Binyamin Appelbaum, NY Times: The Federal Reserve’s chairman, Ben S. Bernanke, said Wednesday that Congress is the largest obstacle to faster economic growth, and he warned that upcoming decisions about fiscal policy could once again undermine the nation’s recovery.
“The economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by federal fiscal policy,” Mr. Bernanke said in the opening line of his prepared remarks to a Congressional committee.
Moreover, he said, Congress could make things worse later this year.
“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he said. ...

Barry Ritholtz is right, we need to spend more right now, not less:

...[We have a] once in a lifetime opportunity to finance [infrastructure] at historically low interest rates...:

“Thanks to the Federal Reserve’s zero interest rates and quantitative easing policies, borrowing costs are near generational lows. The costs of funding the repair and renovation of America’s decaying infrastructure are as cheap as they have been since World War II.

But the era of cheap credit may be nearing its end. And thanks to a dysfunctional Washington, D.C., we are on the verge of missing a once-in-a-lifetime opportunity.”

The thinking here is that all of these things will eventually occur — bridges are falling like dominoes — so we might as well do it when the costs are cheaper rather than expensive.

... We do not want to miss the historic opportunity to finance projects at unusually inexpensive rates. Indeed, dysfunction in D.C. has already impacted state and municipal financing vehicles like the Build America Bonds. Sequestration has eliminated most of their special tax credits, and their usage as a financing vehicle has slowed significantly. It is not surprising that the public works projects that these were funding have fallen off dramatically.”

We are fools if we let this opportunity slip by . . .

Very foolish. To add a few recent comments of my own:

...what I don't get is why conservatives have gotten away with opposing infrastructure spending to lift the economy. Infrastructure spending is inherently a supply-side policy, both sides acknowledge that, or should, and some of us believe it also short-run demand effects that are also helpful. But whether or not infrastructure spending impacts aggregate demand, it seems pretty clear given the state of our infrastructure that the benefits of this spending just in terms of the long-run effects more than cover the costs. And the argument that the private sector does it better doesn't hold since most of this spending is on public goods the private sector will not provide in sufficient quantities if it provides them at all. Finally, we can afford to borrow today to fund investment projects that have long-run benefits that exceed the costs.
But yet, here we are with an unemployment crisis, a huge output gap, and big infrastructure needs, record low interest rates, while Congress sits on its hands because conservatives will not agree to fund infrastructure, let alone government consumption spending.
I find it very frustrating.

Monday, July 08, 2013

Paul Krugman: Defining Prosperity Down

Bad policy is standing in the way of the return to full employment:

Paul Krugman: Defining Prosperity Down, by Paul Krugman, Commentary, NY Times: Friday’s employment report wasn’t bad. But given how depressed our economy remains, we really should be adding more than 300,000 jobs a month, not fewer than 200,000. ... Full recovery still looks a very long way off. And I’m beginning to worry that it may never happen. ...
What, exactly, will bring us back to full employment?
We certainly can’t count on fiscal policy. The austerity gang may have experienced a stunning defeat in the intellectual debate, but stimulus is still a dirty word...
Aggressive monetary action by the Federal Reserve, something like what the Bank of Japan is now trying, might do the trick. But far from becoming more aggressive, the Fed is talking about “tapering” its efforts. This talk has already done real damage...
Still, even if we don’t and won’t have a job-creation policy, can’t we count on the natural recuperative powers of the private sector? Maybe not.
It’s true that after a protracted slump, the private sector usually does find reasons to start spending again. ... But that healing process won’t go very far if policy makers stomp on it, in particular by raising interest rates. ...
And... Long-term interest rates ... shot up after Friday’s job report...
Why...? Part of the reason is that the Fed is constantly under pressure from monetary hawks... These hawks spent years warning that soaring inflation was just around the corner. They were wrong, of course, but ... it remains dangerously influential. ...
In short, there’s a real risk that bad policy will choke off our already inadequate recovery.
But won’t voters eventually demand more? Well, that’s where I get especially pessimistic.
You might think that a persistently poor economy ... would eventually spark public outrage. But the political science evidence ... is unambiguous: what matters is the rate of change, not the level.
Put it this way: If unemployment rises from 6 to 7 percent during an election year, the incumbent will probably lose. But if it stays flat at 8 percent..., he or she will probably be returned to power. And this means that there’s remarkably little political pressure to end our continuing, if low-grade, depression.
Someday, I suppose, something will turn up that finally gets us back to full employment. But I can’t help recalling that the last time we were in this kind of situation, the thing that eventually turned up was World War II.

Sunday, July 07, 2013

Government Consumption versus Government Investment

When the economy needs short-term demand stimulus, as it does now, that stimulus can come from spending on infrastructure, i.e. government investment, or it could be from expenditures on something with little long-run benefit such as large fireworks shows held throughout the nation - big extravagant events that spend millions and millions of dollars in the most depressed economic areas (government consumption). In the short-run the goal is to kick start the economy, and a fireworks show is just as good at that task as infrastructure spending if the spending is approximately the same.

Where they differ is in the long-run. The firework show leaves only memories - and sometimes that's enough to justify an expenditure - but let's assume that for the most part the shows were nothing more than an excuse to spend money to get the local economies moving (not that there's anything wrong with that; also, perhaps a series of shows would be better so that the impulse is spread out over time and sustains the economy through the downturn, but the idea is the same). However, infrastructure spending does have long-run benefits and can help the economy grow faster.

Thus, it seems like infrastructure spending is the obvious choice, since it has both short-run and long-run benefits. But there is a further consideration, how fast each type of spending can be put into place. If a "fireworks show" can be put into place very fast, while it takes far longer to get infrastructure spending going, then policy should be a combination of spending that hits the economy right away (government consumption) and spending that hits a bit later, has long-lasting effects, and promotes future growth (government investment).

Then there's the politics. Conservatives often oppose government consumption (e.g. by arguing the multiplier is zero even in depressed economies, by arguing that tax cuts that allow the private sector to spend are more efficient than government spending, or arguing that our debt is too high to spend any more). But what I don't get is why conservatives have gotten away with opposing infrastructure spending to lift the economy. Infrastructure spending is inherently a supply-side policy, both sides acknowledge that, or should, and some of us believe it also short-run demand effects that are also helpful. But whether or not infrastructure spending impacts aggregate demand, it seems pretty clear given the state of our infrastructure that the benefits of this spending just in terms of the long-run effects more than cover the costs. And the argument that the private sector does it better doesn't hold since most of this spending is on public goods the private sector will not provide in sufficient quantities if it provides them at all. Finally, we can afford to borrow today to fund investment projects that have long-run benefits that exceed the costs.

But yet, here we are with an unemployment crisis, a huge output gap, and big infrastructure needs, while Congress sits on its hands because conservatives will not agree to fund infrastructure, let alone government consumption spending.

I find it very frustrating.

Saturday, July 06, 2013

'Austerity Won’t Work if the Roof Is Leaking'

Robert Frank:

Austerity Won’t Work if the Roof Is Leaking, by robert Frank, Commentary, NY Times: I Recently spent a week in Berlin, where the entire city seemed under construction. In every direction, cranes and other heavy equipment dominated the landscape. Although many projects are in the private sector, innumerable others — including bridge and highway repairs, new subway stations and other infrastructure work — are financed by taxpayers.
But wait. Hasn’t Germany been one of the most outspoken advocates of fiscal austerity after the financial crisis? Yes... But they also understand the distinction between consumption and investment. By borrowing, they’ve made investments whose future benefits will far outweigh repayment costs. There’s nothing foolhardy about that. ...
The Germans didn’t become bogged down in debate over stimulus policy, and they didn’t explicitly portray their infrastructure push as stimulus. But that didn’t hamper their strategy’s remarkable effectiveness at putting people to work. ...
Now austerity backers urge — preposterously — that infrastructure repairs be postponed until government budgets are in balance. But would they also tell an indebted family to postpone fixing a leaky roof until it paid off all its debts? Not only would the repair grow more costly with the delay, but the water damage would mount in the interim. ... The logic is the same for infrastructure.
Austerity advocates, who have been wrong at virtually every turn, are unlikely to change their minds about stimulus policy. But... Our best available option, by far, is to rebuild our tattered infrastructure at fire-sale prices. If the austerity crowd disagrees, it should explain why in plain English.

Tuesday, July 02, 2013

'Annoying Anti-Fiscal Stimulus Arguments'

Simon Wren-Lewis:

Annoying Anti-Fiscal Stimulus Arguments Nos. 3 and 4: For numbers 1 and 2, see this post.
Number 3. We must reduce the size of the state.
This argument is often there but unstated, because to say it explicitly involves a deception. ... But as those making the case for austerity get more desperate, I have seen this argument a few times recently.
It involves a deception, because reducing the size of the state has nothing in principle to do with austerity and stimulus. I personally have no strong views about what the size of the state should be: some things are clearly done better by the private sector, while others are done better by the state, and how this eventually pans out for the aggregate I have no idea. But this has almost nothing to do with the need to increase demand when interest rates are at the zero lower bound. ...

The idea that ... temporary [stimulus] is bound to become permanent does not stand up.
4. We must think of the children
This is annoying not because it is wrong in principle. Instead it is wrong because it either ignores who suffers the costs of austerity, or because it is not genuine. The argument that is right in principle is that, by increasing debt, we are ceteris paribus redistributing money from future generations to the current generation. There may be a complete offset if that increase in debt avoids hysteresis effects (or enables investment with beneficial supply side effects). Yet even leaving that aside, there are often very good reasons to redistribute income. When a country suffers a natural disaster, both governments and individuals freely give money to help those involved. We can think about the recession as a similar disaster.
If that does not convince you, ask who is bearing the brunt of this recession. All around the world, youth unemployment has risen by more than unemployment in general. If you asked those who cannot find a job after leaving school or college whether they would be willing to pay higher future taxes in order to get a job today, what do you think their answer would be?

Why do I suspect that this argument is sometimes not genuine? Because some of those who make this case also argue against measures to tackle climate change. Now even if you are sceptical about the science, the potential costs of you being wrong and 98% of scientists being right are so great that if you really cared about future generations you would support measures to reduce carbon emissions. ...

Glad to see point 3 (point 4 too). I've been trying to explain that there is no necessary connection between stabilization policy and the size of government for some time now. This is from 2007, but I first made this point in 2005:

... Want a smaller government? Use tax cuts to stimulate the economy in recessions, and use reductions in government spending to slow the economy when it threatens to overheat and be inflationary. Want a larger government? Do the opposite, increase government spending whenever the economy is lagging, and increase taxes to slow the economy when it begins to overheat.
The point is that stabilization policy - changes in taxes or changes in government spending - does not necessarily change the size of government in any particular direction, that is a policy choice. Traditionally stabilization policy maintains a constant budget balance in the long-run and whether to use tax changes or spending changes is a matter of effectiveness, not a matter of ideology about the size of government. ...

Saturday, June 29, 2013

'The Body Economic: Why Austerity Kills'

I am hosting a Firedoglake Book Salon later today:

Introductory post and discussion (at 2:00 PST/5:00 EST today)

The book is The Body Economic: Why Austerity Kills by David Stuckler and Sanjay Basu.

Saturday, June 15, 2013

IMF Urges Repeal of 'Ill-Designed' Spending Cuts

In case you missed this, the IMF estimates that economic growth would be nearly double what it is now without the "excessively rapid and ill-designed" government spending cuts:

IMF Urges Washington to Repeal ‘Ill-Designed’ Spending Cuts, Reuters: The International Monetary Fund urged the United States on Friday to repeal sweeping government spending cuts and recommended that the Federal Reserve continue a bond-buying program through at least the end of the year.
In its annual check of the health of the U.S. economy, the IMF forecast economic growth would be a sluggish 1.9 percent this year. The IMF estimates growth would be as much as 1.75 percentage points higher if not for a rush to cut the government's budget deficit. ...
"The deficit reduction in 2013 has been excessively rapid and ill-designed," the IMF said. "These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues."
The IMF warned cuts to education, science and infrastructure spending could reduce potential growth. ...
The Fund recommended that the U.S. Federal Reserve keep up its massive asset purchases at least through the end of the year to support the U.S. recovery, but should also prepare for a pull-back in the future. ...

The recovery of output and employment didn't have to be so slow. I'm not saying that reversing these policies (or replacing them with more aggressive fiscal policy measures) would have brought miracles, it was going to be a difficult recovery no matter what polices we pursued. But we certainly could have done better than we did, particularly on the fiscal policy front.

Tuesday, June 11, 2013

Blinder: Fiscal Fixes for the Jobless Recovery

Alan Blinder says "the fiscal cupboard is not bare":

Fiscal Fixes for the Jobless Recovery, by Alan Blinder, Commentary, WSJ: Do you sense an air of complacency developing about jobs in Washington and in the media? ... The Brookings Institution's Hamilton Project ... estimates ... the "jobs gap" ... is 9.9 million jobs. ... So any complacency is misguided. Rather, policy makers should be running around like their hair is on fire. ...
The Federal Reserve has worked overtime to spur job creation, and there is not much more it can do. Fiscal policy, however, has been worse than AWOL—it has been actively destroying jobs. ... So Congress could make a good start on faster job creation simply by ending what it's doing—destroying government jobs. First, do no harm. But there's more.
Virtually since the Great Recession began, many economists have suggested offering businesses a tax credit for creating new jobs. ... You might imagine that Republicans would embrace an idea like that. After all, it's a business tax cut... But you would be wrong. Maybe it's because President Obama likes the idea. Maybe he should start saying he hates it.
Another sort of business tax cut may hold more political promise. ... Suppose Congress enacted a partial tax holiday that allowed companies to repatriate profits held abroad at some bargain-basement tax rate like 10%. The catch: The maximum amount each company could bring home at that low tax rate would equal the increase in its wage payments as measured by Social Security records....
My general point is that the fiscal cupboard is not bare. There are things we could be doing to boost employment right now. That we are not doing anything constitutes malign neglect of the nation's worst economic problem

Friday, May 31, 2013

'The Beginning of the End for Eurozone Austerity?'

The other day I posted a link to an article at Spiegel titled "Austerity About-Face: German Government to Gamble on Stimulus." Here's Gavyn Davies on whether this is really "The beginning of the end for Eurozone austerity?":

Fiscal austerity, a concept which German Chancellor Merkel says meant nothing to her before the crisis, may have passed its heyday in the eurozone.  ...
this may not be the end of eurozone austerity, or even the beginning of the end, but it is the end of the beginning.

Substance here.

Saturday, May 25, 2013

Keynesophobia?

Paul Krugman responds to Brad DeLong's comments on a recent article by Ken Rogoff (Update: DeLong follow-up). Here's another response from Francesco Saraceno:

Living in Terror of Dead Economists, by Francesco Saraceno: Kenneth Rogoff has a piece ... that is revealing of today’s intellectual climate. What does he say? ... In a sentence, intra eurozone imbalances are the source of the current crisis. Could not agree more…

Unfortunately, Rogoff does not stop here, but feels the irrepressible urge to add that

Temporary Keynesian demand measures may help to sustain short-run internal growth, but they will not solve France’s long-run competitiveness problems [...] To my mind, using Germany’s balance sheet to help its neighbors directly is far more likely to work than is the presumed “trickle-down” effect of a German-led fiscal expansion. This, unfortunately, is what has been lost in the debate about Europe of late: However loud and aggressive the anti-austerity movement becomes, there still will be no simple Keynesian cure for the single currency’s debt and growth woes.

The question then arises. Who ever thought that a more expansionary stance in the eurozone would solve the French structural problems? And at the opposite, why would recognizing that France has structural problems make it less urgent to reverse the pro-cyclical fiscal stance of an eurozone that is desperately lacking domestic demand? Let me try to sort out things here. This is the way I see it:

  1. European woes have deep sources. Institutional developments have led to a suboptimal currency area that endogenously created imbalances; as of today only extreme solutions seem to offer a durable solution: Either we cross the ford towards a fully fledged federal entity, with a federal budget (the United States of Europe, just to be adamant); or we go back where we were a few years ago: a common market, in which each country retains its own monetary and fiscal sovereignty (we could call it the British View).
  2. The eurozone structural problems made it fragile, and the crisis exposed them.
  3. Disastrous management, and widespread adherence to the Berlin View have imposed harsh austerity to the periphery and to the core alike, worsening the textbook Keynesian demand slump.
  4. There is little hope that the aggregate fiscal stance in the eurozone turn positive (thus fighting the recession), if  core countries do not make a u-turn in their fiscal policies

...I infer that Rogoff would broadly agree with me on items 1-2. But I do not see why this would lead to deem appropriate the fiscal stance Europe is following today. Claiming that we need to sustain aggregate demand, here and now, in no way impacts on the diagnosis of the structural problems of the EU (even if I suspect that I would not have the same solutions as Rogoff for these problems). If anything, given that the fiscal expansion would mostly happen in the core, it would help, not hamper the necessary rebalancing between core and periphery.

The question remains of why we keep observing eminent economists that bash Keynesian policies even when this is inconsistent with (or irrelevant to) their general argument . Barring bad faith, I can’t find any other explanation than an ancestral aversion to Keynes and to its policy prescriptions (a couple of years ago Paul Krugman coined the term of Keynesophobia): whatever argument you are making , just find a way to slip into it a couple of paragraphs claiming that Keynesian policies would not work. This will keep you safe from hell. ...

Friday, May 24, 2013

Paul Krugman: Japan the Model

If Abenomics works, it could help to overcome the "economic defeatism" that has overtaken policymakers in the US and other countries:

Japan the Model, by Paul Krugman, Commentary, NY Times: A generation ago, Japan was widely admired — and feared — as an economic paragon. ... Then Japan fell into a seemingly endless slump, and most of the world lost interest. The main exceptions were a relative handful of economists... If one big, wealthy, politically stable country could stumble so badly, they wondered, couldn’t much the same thing happen to other such countries?
Sure enough, it both could and did. These days we are, in economic terms, all Japanese...
In a sense, the really remarkable thing about “Abenomics” — the sharp turn toward monetary and fiscal stimulus adopted by the government of Prime Minster Shinzo Abe — is that nobody else in the advanced world is trying anything similar. In fact, the Western world seems overtaken by economic defeatism. ...
It would be easy for Japanese officials to make the same excuses for inaction that we hear all around the North Atlantic: they are hamstrung by a rapidly aging population; the economy is weighed down by structural problems...; debt is too high (far higher, as a share of the economy, than that of Greece). And in the past, Japanese officials have, indeed, been very fond of making such excuses. ...
So, how is Abenomics working? The safe answer is that it’s too soon to tell. But the early signs are good..., with surprisingly rapid Japanese economic growth in the first quarter of this year... You never want to make too much of one quarter’s numbers, but that’s the kind of thing we want to see.
Meanwhile, Japanese stocks have soared, while the yen has fallen..., very good news for Japan because it makes the country’s export industries more competitive. ...
To be sure, Thursday’s sell-off in Japanese stocks put a small dent in that optimistic assessment. But stocks are still way up from last year...
So the overall verdict on Japan’s effort to turn its economy around is so far, so good. And let’s hope that this verdict both stands and strengthens over time. For if Abenomics works, it will serve a dual purpose, giving Japan itself a much-needed boost and the rest of us an even more-needed antidote to policy lethargy.
As I said at the beginning, at this point the Western world has seemingly succumbed to a severe case of economic defeatism; we’re not even trying to solve our problems. That needs to change — and maybe, just maybe, Japan can be the instrument of that change.

Wednesday, May 22, 2013

'Stop Celebrating Our Falling Deficits'

Ezra Klein is correct:

Stop celebrating our falling deficits: It’s time to stop celebrating last week’s Congressional Budget Office report. Our deficits aren’t dropping because we’re doing something right. They’re dropping because we’re doing everything wrong. ...
The CBO is saying that the federal government will be pulling demand out of the economy in 2013, 2014 and 2015. It will then start adding demand back in again — meaning we’ll be increasing the deficit — from 2016 through 2023, and presumably beyond.
That is literally the opposite of what we should want. Textbook economics says the government should add demand when the economy is weak and pull back when the economy is strong. The economy — and particularly the labor market — will remain weaker than we’d like in 2013, 2014 and 2015. That’s when the government should be helping, or at least making sure not to hurt too fast. It should be much stronger from 2016 to 2023. That’s when the government should be backing off. ...

Ben Bernanke also made this point -- yet again -- in his testimony today.

Monday, May 20, 2013

Alesina's 'Fair Sare of Abuse'

Jeff Frankel says:

 ... Alberto Alesina has not been receiving his “fair share of abuse.”  His influential papers with Roberto Perotti  (19951997) and Silvia Ardagna (19982010found that cutting government spending is not contractionary and that it may even be expansionary ...

More here.

Vintage Krugman: Stating the Obvious

Don't say you weren't warned. This is Paul Krugman, just a few days under 10 years ago:

Stating the Obvious, by Paul Krugman, Commentary, NY Times, May 27, 2003: "The lunatics are now in charge of the asylum." So wrote the normally staid Financial Times, traditionally the voice of solid British business opinion, when surveying last week's tax bill. Indeed, the legislation is doubly absurd: the gimmicks used to make an $800-billion-plus tax cut carry an official price tag of only $320 billion are a joke, yet the cost without the gimmicks is so large that the nation can't possibly afford it while keeping its other promises.
But then maybe that's the point. The Financial Times suggests that "more extreme Republicans" actually want a fiscal train wreck: "Proposing to slash federal spending, particularly on social programs, is a tricky electoral proposition, but a fiscal crisis offers the tantalizing prospect of forcing such cuts through the back door."
Good for The Financial Times. It seems that stating the obvious has now, finally, become respectable.
It's no secret that right-wing ideologues want to abolish programs Americans take for granted. But not long ago, to suggest that the Bush administration's policies might actually be driven by those ideologues — that the administration was deliberately setting the country up for a fiscal crisis in which popular social programs could be sharply cut — was to be accused of spouting conspiracy theories.
Yet by pushing through another huge tax cut in the face of record deficits, the administration clearly demonstrates either that it is completely feckless, or that it actually wants a fiscal crisis. (Or maybe both.)
Here's one way to look at the situation: Although you wouldn't know it from the rhetoric, federal taxes are already historically low as a share of G.D.P. Once the new round of cuts takes effect, federal taxes will be lower than their average during the Eisenhower administration. How, then, can the government pay for Medicare and Medicaid — which didn't exist in the 1950's — and Social Security, which will become far more expensive as the population ages? (Defense spending has fallen compared with the economy, but not that much, and it's on the rise again.)
The answer is that it can't. The government can borrow to make up the difference as long as investors remain in denial, unable to believe that the world's only superpower is turning into a banana republic. But at some point bond markets will balk — they won't lend money to a government, even that of the United States, if that government's debt is growing faster than its revenues and there is no plausible story about how the budget will eventually come under control.
At that point, either taxes will go up again, or programs that have become fundamental to the American way of life will be gutted. We can be sure that the right will do whatever it takes to preserve the Bush tax cuts — right now the administration is even skimping on homeland security to save a few dollars here and there. But balancing the books without tax increases will require deep cuts where the money is: that is, in Medicaid, Medicare and Social Security.
The pain of these benefit cuts will fall on the middle class and the poor, while the tax cuts overwhelmingly favor the rich. For example, the tax cut passed last week will raise the after-tax income of most people by less than 1 percent — not nearly enough to compensate them for the loss of benefits. But people with incomes over $1 million per year will, on average, see their after-tax income rise 4.4 percent.
The Financial Times suggests this is deliberate (and I agree): "For them," it says of those extreme Republicans, "undermining the multilateral international order is not enough; long-held views on income distribution also require radical revision."
How can this be happening? Most people, even most liberals, are complacent. They don't realize how dire the fiscal outlook really is, and they don't read what the ideologues write. They imagine that the Bush administration, like the Reagan administration, will modify our system only at the edges, that it won't destroy the social safety net built up over the past 70 years.
But the people now running America aren't conservatives: they're radicals who want to do away with the social and economic system we have, and the fiscal crisis they are concocting may give them the excuse they need. The Financial Times, it seems, now understands what's going on, but when will the public wake up?

Wednesday, May 15, 2013

'How Are American Workers Dealing with the Payroll Tax Hike?'

Basit Zafar, Max Livingston, and Wilbert van der Klaauw examine the impact of the payroll tax cut in 2011 and 2012, and its subsequent reversal:

My Two (Per)cents: How Are American Workers Dealing with the Payroll Tax Hike?, by Basit Zafar, Max Livingston, and Wilbert van der Klaauw, Liberty Street Economics, NY Fed: The payroll tax cut, which was in place during all of 2011 and 2012, reduced Social Security and Medicare taxes withheld from workers’ paychecks by 2 percent. This tax cut affected nearly 155 million workers in the United States, and put an additional $1,000 a year in the pocket of an average household earning $50,000. As part of the “fiscal cliff” negotiations, Congress allowed the 2011-12 payroll tax cut to expire at the end of 2012, and the higher income that workers had grown accustomed to was gone. In this post, we explore the implications of the payroll tax increase for U.S. workers.
The impact of such a tax hike depends on two factors. One, how did U.S. workers use the extra funds in their paychecks over the last two years? And two, how do workers plan to respond to shrinking paychecks? With regard to the first factor, in a recent working paper and an earlier blog post, we present survey evidence showing that the tax cut significantly boosted consumer spending, with workers reporting that they spent an average of 36 percent of the additional funds from the tax cut. This spending rate is at the higher end of the estimates of how much people have spent out of other tax cuts over the last decade, and is arguably a consequence of how the tax cut was designed—with disaggregated additions to workers’ paychecks instead of a one-time lump-sum transfer. We also found that workers used nearly 40 percent of the tax cut funds to pay down debt.
To understand how the tax increase is affecting U.S. consumers, we conducted an online survey in February 2013. We surveyed 370 individuals through the RAND Corporation’s American Life Panel, 305 of whom were working at the time and had also worked at least part of 2012. ...

After a presentation of the survey results, and a discussion of what they mean, the authors conclude:

Overall, our analysis suggests that the payroll tax cut during 2011-12 led to a substantial increase in consumer spending and facilitated the consumer deleveraging process. Based on consumers’ responses to our recent survey, expiration of the tax cuts is likely to lead to a substantial reduction in spending as well as contribute to a slowdown or possibly a reversal in the paydown of consumer debt. These effects are also likely to be heterogeneous, with groups that are more credit and liquidity constrained more likely to be adversely affected. Such nuances may be lost in the aggregate macroeconomic statistics, but they’re important for policymakers to consider as they debate fiscal policy.

In response to arguments that tax cuts wouldn't help because they would be mostly saved, I have argued that there are two ways that tax cuts can help (see Why I Changed My Mind about Tax Cuts). One is to increase spending, and the other is to help households restore household balance sheets that were demolished in the downturn (i.e. the cure for a "balance sheet recession"). The sooner this "deleveraging process" is complete, the sooner the return to normal levels of consumption and the faster the exit from the recession (rebuilding household balance sheets takes a long time and this is one of the reasons the recovery from this type of recession is so slow, tax cuts that are used to reduce debt can help this prcess along). It looks like both effects are present for payroll tax changes (and work in the wrong way with a payroll tax increase).

Tuesday, May 14, 2013

Cyclical and Structural Shocks Require Different Policy Reactions

Steven Pearlstein argues that The case for austerity isn’t dead yet, and that:

austerity by itself won’t solve the problem of high employment and low growth in developed economies. But neither will fiscal stimulus by itself. Neither will work unless incorporated into a program of serious and credible structural reform.

But this is incorrect, and it confuses long-run growth policy with short-run stabilization. Monetary and fiscal policy can be used to stabilize fluctuations in the economy even without reforms that could raise long-run growth (the short-run stabilization policies may help with long-run growth, e.g. by improving labor market conditions and preventing people from permanently leaving the labor force, so the policies are not fully independent, but it's important to keep them conceptually separate). As Antonio Fatás points out in a post that anticipates and counters this argument (this was written before Pearlstein's piece), the idea that monetary and fiscal policy cannot work to stabilize the economy without structural reform is wrong (especially in countries like the US):

Time travel in Euroland: Unfortunately, this is not news by now, but the president of the Euro group, Jeroen Dijsselbloem in an interview with CNBC yesterday dismissed the role that fiscal policy and monetary policy can have to address the economic crisis (emphasis is mine):

"Monetary policy can really not help us out of the crisis. It can take away the pressure, it can accommodate new growth, but what we really need in all countries is structural reforms in the first place. I'd just like to stress the point that in the policy mix of fiscal policy, monetary policy and structural reforms — I'd like the order to be exactly the other way around. Structural reforms in the first place, fiscal policy and viable targets in the mid-term for all regions in second place — and monetary policy can only accommodate domestic economic problems in the short-term."

It is not exactly clear what to make out of his statement but it seems that long-term solutions should come first before we implement those that will help us in the short term. It is surprising that even today there is such a great confusion about long-term versus cyclical problems.

This confusion comes from a basic belief that some hold that there is nothing inherently different in the dynamics of an economy when one looks at the short run and the long run. This is part of a never-ending academic debate but when it comes to policy makers and politicians it seems to be more a matter of beliefs.

What it is not always understood is that we are dealing with two separate problems and therefore we need two different set of tools or solutions to deal with them.

It is possible that irresponsible behavior, excessive spending and accumulation of debt (private or public) are the cause of the Great Recession. And if this is true, it will require future adjustments to spending plans, deleveraging, and fiscal discipline to avoid a repetition of this event in the future.

But once the crisis started we are dealing with a second problem: a recession that moves us away from full employment. This is a cyclical phenomenon that is well described in macroeconomic textbooks and to deal with it we use monetary and fiscal policy. The fact that potentially debt and excessive spending were the cause of this cyclical event does not mean that we need to deal with these imbalances now to get out of the crisis. We are dealing with two separate phenomena that are only related because one possibly led to the second one, but the dynamics associated with each of them are very different and the recipe to get out of them can be, in some cases, the opposite.

This is what we write in all macroeconomics textbooks: what works in the short run might not work in the long run. As an example, we emphasize the importance of saving in the long run to drive investment and growth. But when we talk about the short run we emphasize the importance of spending to understand fluctuations in economic activity. Excessive spending hurts growth in the long run but it is spending and demand what drives growth in the short run.

There will be a day when we will have to debate about whether the cyclical phenomenon has already been addressed because we are back to full employment and therefore all our focus should be on the long term, but it is very hard to argue that this is where Europe is today. My point is not to deny that there are many deep structural issues to be addressed among Euro countries, but to recognize that we are dealing with two set of dynamics that require different solutions and until we invent time traveling the short term still comes before the long term.

Thursday, May 09, 2013

'Economists See Deficit Emphasis as Impeding Recovery'

Another travel day quickie:

Economists See Deficit Emphasis as Impeding Recovery, by Jackie Calmes and Jonathan Weisman: The nation’s unemployment rate would probably be nearly a point lower, roughly 6.5 percent, and economic growth almost two points higher this year if Washington had not cut spending and raised taxes as it has since 2011, according to private-sector and government
After two years in which President Obama and Republicans in Congress have fought to a draw over their clashing approaches to job creation and budget deficits, the consensus about the result is clear: Immediate deficit reduction is a drag on full economic recovery.
Hardly a day goes by when either government analysts or the macroeconomists and financial forecasters who advise investors and businesses do not report on the latest signs of economic growth — in housing, consumer spending, business investment. And then they add that things would be better but for the fiscal policy out of Washington. Tax increases and especially spending cuts, these critics say, take money from an economy that still needs some stimulus now, and is getting it only through the expansionary monetary policy of the Federal Reserve. ...
In all this time, the president has fought unsuccessfully to combine deficit reduction, including spending cuts and tax increases, with spending increases and targeted tax cuts for job-creation initiatives in areas like infrastructure, manufacturing, research and education. That is a formula closer to what the economists propose. But Republicans have insisted on spending cuts alone and smaller government as the key to economic growth. ...

And they keep insisting this is true despite the evidence to the contrary because it supports their ideological goals, and there is little political price for taking this position.

Monday, May 06, 2013

'This is Self-Evidently Absurd'

Jon Chait:

Why Left and Right Economics Can’t Just Agree, by Jonathan Chait: Adam Davidson writes a joint profile of Democratic economist Lawrence Summers and Republican economist Glenn Hubbard for The New York Times Magazine. ...
Hubbard tells Davidson he came to his interest in economics by reading Hayek’s Road to Serfdom. That book warned that centrally planned economies would lead to tyranny. In fact, western governments abandoned central planning after World War II, but conservatives, including Hayek himself, simply transposed the generalized fear of government from central planning onto other forms of government intervention. According to Davidson, Hubbard’s current fear centers around rising federal debt...
But this is self-evidently absurd, given Hubbard’s role in crafting Bush administration policies that transformed a budget that ran a surplus of 2.4 percent of GDP at its peak to one that ran a deficit of 1.2 percent of GDP at its peak. Debt is simply the current way Hubbard expresses his philosophical preference for smaller government. He argues that low taxes are vital for fast economic growth, but twenty years of recent experiences strongly suggest otherwise. ...
It also absurd because the call for lower taxes is inconsistent with the call to reduce the debt (but reducing spending and then "starving the beast" through reduced taxes both work toward the goal of a smaller government). Too few people realize that calls to reduce the debt are really about a "philosophical preference for smaller government" rather than the fear of debt itself. Similarly for lower taxes and claims about economic growth.

Fed Watch: When Deficits Become a Problem

Tim Duy:

When Deficits Become a Problem, by Tim Duy: L. Randall Wray (ht FTAlphaville) thinks that Paul Krugman has made the leap to MMT by acknowledging the ability of the central bank to control interest rates. Wray sees that Krugman was faced with an intellectual roadblock to MMT:

The sticking point has been “crowding out”—the idea that once we get beyond the liquidity trap and return to a more “normal” ISLM world, government deficits will push up interest rates. And that will then reduce private investment, which tends to lower economic growth. Higher interest rates plus lower growth means the government’s deficit and debt ratios grow beyond “sustainable” levels.

Wray argues that ultimately the central bank does not need to fear the bond vigilantes because the Treasury need not issue long-term debt and can instead issue only short term debt. The Fed is assumed to have complete control over rates on short term debt:

But as I explained last week, the short term rate is completely within the control of the Fed....Long term rates depend on the state of liquidity preference plus expectations of future Fed policy. But in any case, the Vigilantes cannot force Treasury to issue long term debt. It can stick to the short end of the maturity structure and then pay whatever rate the Fed targets.

Actually, I would go one step further than Wray and argue that the Fed's expectations tools coupled with large-scale asset purchases allows them to influence the entire yield curve. Wray then explains that this means the danger is not the vigilantes, but the Federal Reserve:

The real danger is not that the Vigilantes go all vigilant on Uncle Sam, but rather that the Fed decides to do a Volcker (raise the overnight rate to 20%). Congress can stop that by legislating that the Fed cannot act like a Vigilante. Or, alternatively, Treasury can stay on the short end. Both of these are policy choices, completely outside the influence of Vigilantes.

Wray takes Krugman's post today as evidence that Krugman believes that crowding out is not a issue either in a liquidity trap or at potential output. The Krugman quote:

the short-term interest rate is set by the Bank of England. And the long-term rate, to a first approximation, is a weighted average of expected future short-term rates. Unless markets believe that Britain is going to default — which it isn’t, and they won’t — this is more or less an arbitrage condition that ties down the long run rate no matter what happens to confidence.

Wray's interpretation:

All he has to do is to carry that analysis beyond the current downturn. This can go on forever, of course. Keep short term interest rates low, or keep Treasury out of long maturities.

Wray seems to believe that this means Krugman has departed from his earlier story:

I could go on, but you get the point: once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation. And no amount of talk about actual financial flows, about who buys what from whom, can make that point disappear: if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.

But I don't see anything inconsistent between the Krugman of the past and that of today. The crowding out argument is a simply a bit more nuanced than in Wray's description. Wray seems to want to overlook the inflation part of Krugman's position. Specifically that in a more "normal" ISLM world, which I would interpret as near potential output, then additional government spending would tend to increase interest rates and crowd out private spending or - and this is an important or - that the Federal Reserve could accommodate the increased government spending and hold interest rates low, but that the end result would be higher inflation.

In other words, I doubt that Krugman fears the bond vigilantes even at potential output, but that he would expect the Federal Reserve to allow interest rates to increase to prevent inflation. Presumably this crowds out private investment, and shifts the mix of demand toward the government sector.

Does this mean that additional debt lowers growth in a Rogoff/Reinhart sense? No, but it does mean that the Fed will not allow output to exceed potential due to inflation concerns. The claim that crowding out leads to lower potential growth in the long-run is generally a supply-side type story in which an excessive level of government spending reduces the rate of resource (labor/technology/capital) growth.

In short, I doubt that Krugman's acknowledgement of the Federal Reserve's control over interest rates implies that he now believes that government deficits do not matter or that he will make such an intellectual leap. Krugman appears to have always believed that the Fed can control interest rates, thus leaving the bond vigilantes impotent. And there is nothing in his blog today to suggest that he no longer believes that at some point (hopefully) inflation - and by extension, interest rates - will once again be a concern. Believe it or not, it is not logically inconsistent to believe that concerns about rising interest rates are not valid today, but might be valid at some point in the future.

Update: I see Ed Harrison is writing on Krugman and the bond vigilantes as well, and sees the difference in not the so much the outcome

Of course running enormous deficits when the economy is operating at full capacity causes inflation to go haywire. Of course it does.

But in the rhetorical approach:

The difference is he straw-manned the deficit as an exogenous policy variable in 2011 when it simply isn’t one. 

Harrison (correctly) views the deficit as largely endogenous. When the economy improves, then the deficit will dissapear (or at least be greatly reduced). So arguing about the deficit's impact on interest rates is pointless:

This could only happen if our politicians went mad and added yet more fiscal stimulus to the economy even after it was overheating.

The key point is inflation:

Wait until inflation starts to creep up. Then the bond vigilantes can get going. But this is a long way off.

Paul Krugman: The Chutzpah Caucus

When will we ever learn?:

The Chutzpah Caucus, by Paul Krugman, Commentary, NY Times: At this point the economic case for austerity ... has collapsed. ... Yet calls for a reversal of the destructive turn toward austerity are still having a hard time getting through. Partly that reflects ... widespread, deep-seated cynicism about the ability of democratic governments, once engaged in stimulus, to change course in the future.
So now seems like a good time to point out that this cynicism, which sounds realistic and worldly-wise, is actually sheer fantasy. Ending stimulus has never been a problem — in fact, the historical record shows that it almost always ends too soon. ...
Still, even if you don’t believe that stimulus is forever, Keynesian economics says not just that you should run deficits in bad times, but that you should pay down debt in good times. And it’s silly to imagine that this will happen, right?
Wrong. The key measure you want to look at is the ratio of debt to G.D.P... And if you look at United States history since World War II, you find that of the 10 presidents who preceded Barack Obama, seven left office with a debt ratio lower than when they came in. Who were the three exceptions? Ronald Reagan and the two George Bushes. So debt increases that didn’t arise either from war or from extraordinary financial crisis are entirely associated with hard-line conservative governments.
And there’s a reason for that association: U.S. conservatives have long followed a strategy of “starving the beast,” slashing taxes so as to deprive the government of the revenue it needs to pay for popular programs.
The funny thing is that right now these same hard-line conservatives declare that we must not run deficits in times of economic crisis. Why? Because, they say, politicians won’t do the right thing and pay down the debt in good times. And who are these irresponsible politicians they’re talking about? Why, themselves.
To me, it sounds like a fiscal version of the classic definition of chutzpah — namely, killing your parents, then demanding sympathy because you’re an orphan. Here we have conservatives telling us that we must tighten our belts despite mass unemployment, because otherwise future conservatives will keep running deficits once times improve.
Put this way, of course, it sounds silly. But it isn’t; it’s tragic. The disastrous turn toward austerity has destroyed millions of jobs and ruined many lives. And it’s time for a U-turn.

Monday, April 29, 2013

Risk of Debt?

Brad DeLong on when government debt is problematic, and when it's not -- a short excerpt from a much longer discussion:

Risks of Debt?: Extended Version, by Brad DeLong: ... The principal mistake Reinhart and Rogoff committed in their analysis and paper--indeed, the only significant mistake in the paper itself--was their use of the word "threshold".

It and the graph led very many astray. It led the usually-unreliable Washington Post editorial board to condemn the "new school of thought about the deficit…. 'Don’t worry, be happy. We’ve made a lot of progress', says an array of liberal pundits… [including] Martin Wolf of the Financial Times…" on the grounds that "their analysis assumes steady economic growth and no war. If that’s even slightly off, debt-to-GDP could… stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." (Admittedly, experience since the start of the millennium gives abundant evidence that the Washington Post needs no empirical backup from anybody in order to lie and mislead in whatever way the wind blows.)

It misled European Commissioner Olli Rehn to claim that "when [government] debt reaches 80-90% of GDP, it starts to crowd out activity in the private sector and other parts of the economy." Both of these--and a host of others--think that if debt-to-annual-GDP is less than 90% (or, in Rehn's case, 80%, and I have no idea where the 80% comes from) an economy is safe, and that only if it is above 90% is the economy's growth in danger.

And in their enthusiasm when they entered congressional briefing mode it led Reinhart and Rogoff themselves astray. ...

Matthew O'Brien relays Tim Fernholz of Quartz's flagging of the following passage from Senator Tom Coburn:

Johnny Isakson, a Republican from Georgia and always a gentleman, stood up to ask [Reinhart and Rogoff] his question: "Do we need to act this year? Is it better to act quickly?"

"Absolutely," Rogoff said. "Not acting moves the risk closer," he explained, because every year of not acting adds another year of debt accumulation. "You have very few levers at this point," he warned us.

Reinhart echoed Conrad's point and explained that countries rarely pass the 90 percent debt-to-GDP tipping point precisely because it is dangerous to let that much debt accumulate. She said, "If it is not risky to hit the 90 percent threshold, we would expect a higher incidence."

And O'Brien quotes Reinhart and Rogoff writing in Bloomberg View:

Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP…. The biggest risk is that debt will accumulate until the overhang weighs on growth…

Yet the threshold at 90% is not there. In no sense is there empirical evidence that a 90% ratio of debt-to-annual-GDP is in any sense an "important marker", a red line. That it appears to be in Reinhart and Rogoff's paper is an artifact of Reinhart and Rogoff's non-parametric method: throw the data into four bins, with 90% the bottom of the top bin. There is, instead, a gradual and smooth decline in growth rates as debt-to-annual-GDP increases. 80% looks only trivially different than 100%. ...