Tuesday, February 26, 2013
Thursday, November 08, 2012
A few thoughts on economic policy during Obama's second term. I'm a bit worried that unemployment is going to remain a persistent problem:
[There were a few edits I wouldn't have made, e.g. the phrase "Now that we know it will be Obama on the economic tiller," but nothing substantive.]
Tuesday, November 06, 2012
A few things on the election I posted elsewhere:
- The election and the Fed: Why it matters who wins today
- RomneyRyanomics: A Bad Deal for the Working Class
- The 47 percent: Romney's Misleading Attack on Social Insurance
- Romney and the GOP on infrastructure: We Won't Build That
And, at both sides:
Tuesday, April 24, 2012
Tuesday, April 03, 2012
More on Rigid Nominal Wage Growth, By Tim Duy: Paul Krugman looks at the evidence on nominal wage rigidities here and sees additional reason to believe the primary economic challenge is a demand shortfall. He concludes with this point:
Oh, and someone is sure to chime in and say that this proves that the solution to unemployment is to make wages more flexible. No, it isn’t: in a liquidity trapped, deleveraging economy lower wages would actually worsen the situation.
It is important to emphasize this point, and Japan provides a good example. Via the Financial Times:
..Bonuses have been coming under heavy pressure in Japan for years as part of a wider effort to restrain incomes.
And while workers around the developed world have been complaining of a squeeze on incomes over the past two decades, in Japan thinner pay packets fuel wider deflation. That makes it even harder for the government to rein in its runaway debt and for the central bank to use monetary policy to boost growth...
...While policymakers bemoan the salary squeeze, political pressure is growing for heavy cuts to public sector pay as a quid pro quo for a proposed doubling of Japan’s 5 per cent consumption tax. Shortly after becoming prime minister last year, Yoshihiko Noda – already Japan’s poorest premier on record – gave himself a 30 per cent pay cut.
I think the role of role of bonuses in driving Japan's deflation is underappreciated. The bonus system allows for more flexible wages, thus allowing for the real possibility of negative nominal wage growth and thus deflation. In contrast, downward nominal wage rigidities in the US reduce the likelihood of deflation, but lessen the resolve of monetary policymakers to stimulate activity - for example, see the efforts by St. Louis Federal Reserve President James Bullard to argue that existence of low rates of inflation is evidence that the economy is operating at potential rather than see the flattening of the relationship between unemployment and inflation as a straightforward outcome of downward nominal wage rigidities.
Wednesday, March 28, 2012
One of the editors asked for comments on a new survey of business executives about what is holding back the economy:
No surprise that, as with other surverys like this, the most common factor cited is lack of demand.
Thursday, February 02, 2012
Tax increases will be needed to close the budget gap:
Will Tax Increases to Close the Deficit Harm Economic Growth?, by Mark Thoma, CBS News: Politicians want you to believe tax increases will kill the economy. They won't.
COMMENTARY The CBO's latest Budget and Economic Outlook showing the magnitude of the long-run budget problem we face is another reminder that the considerable long-run deficit problem we face cannot be solved by program cuts alone -- the cuts required would be too deep to be acceptable -- an increase in revenues is needed.
If that's true, why are politicians, particularly those on the right, taking such a strong stance against tax increases of any kind? Taking a hard line on tax increases and insisting on program cuts is an attempt to make as much of the adjustment as possible accord with their ideological preference for smaller government. But politicians understand that enhanced revenue will be part of the final package even if their political posturing suggests otherwise.
But there is another reason for this posturing against tax increases beyond the hope for a smaller government. The resistance to tax increases is also over who will end up paying the increased revenue. Will it be tax increases for the wealthy, closing deductions such as mortgage interest, tax increases for the middle class, etc.? Who, exactly, will foot the bill?
This is evident in the testimony of Doug Elmendorf before Congress today explaining the CBO's findings. From the Atlantic:...it's no surprise that Doug Elmendorf's appearance before Congress today was dominated by political grandstanding, as members asked extremely loaded questions designed to get Doug Elmendorf to say that we should close the hole by either raising taxes or cutting spending. Elmendorf ably ducked these attempts to lead him, but you could see him steeling himself every time a new congressman took their turn.
As this issue heats up, you will hear again and again that tax increases, particularly on the wealthy, will depress economic growth. However, as I detailed in a previous article, there's very little evidence that tax changes of the magnitudes and types being considered will have a significant impact on economic activity:Economic theory helps us to determine which types of taxes are best in terms of efficiency, but the equity of taxes -- who pays them and whether it's fair -- also matters. Questions of equity must be resolved in the political arena, economics cannot help here, and equity is one of the factors that determines whether a tax is feasible. If allowing the Bush tax cuts to expire for the wealthy is the only acceptably equitable way to raise taxes in this political environment, then there is little evidence that this will be harmful. The cost of allowing these tax cuts to expire is low, and there is much to be gained in terms of reducing our long-term budget problem.
There are ways to produce negative effects from tax increases, and there are ways to harm growth through program cuts as well, I don't mean to imply otherwise. But despite the concerted attempts to make people think their jobs are on the line if certain types of tax increases, e.g. for the wealthy, are put into place, given the plans on the table this is fundamentally a political issue about the size of government and how to pay for it equitably rather than an issue about avoiding economic harm. In fact, if avoiding harm to individual households in one form or another is an important objective alongside deficit reduction, as I think it should be, we should worry just as much about program cuts as tax increases.
Wednesday, January 25, 2012
My response to the economic policies discussed by president Obama in the State of the Union address (no link yet):
SOTU: The president's economic proposals, Commentary, CBS News: Prior to president Obama's State of the Union address I said he should do two things, defend the administration's economic policies to date, and talk about what will be done from this point forward to solve the nation's economic problems.
However, except for the bailout of the auto industry and a brief mention of a few other successful initiatives such as financial reform, the president didn't say much about his administration's past economic policies. In retrospect, that was probably wise. Trying to convince people that the stimulus and bailout policies were more effective than they realize simply brings these issues into the limelight. The policies were very unpopular, and arguing with the public about their success is a losing proposition. It's better to look ahead. As Obama said in the speech:
I want to speak about how we move forward, and lay out a blueprint for an economy that's built to last -- an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values.
The president began the discussion of his economic initiatives by outlining a proposal to revive manufacturing in the US. The plan is to use tax breaks to encourage companies to locate in the US, to keep jobs at home by eliminating tax advantages for companies that move offshore, to lower corporate taxes in the US, and to appeal to the goodwill of US companies (who should do what they can do to bring jobs back to this country).
He also wants to boost exports. To this end, he proposed more trade agreements (and lauded those the administration has already put into place), and he highlighted the creation of a "Trade Enforcement Unit that will be charged with investigating unfair trade practices in countries like China."
Finally, the plan to revive economic growth and employment also involves more support of small businesses, e.g. tax cuts and a reduced regulatory burden, support for research and development (particularly in energy related areas), mortgage refinancing for "responsible" homeowners," an extension of the payroll tax cut, and a plan to repair crumbling infrastructure.
The plan the president outlined is fine as far as it goes, but I wanted a jobs plan that was big and bold. I wanted a plan that puts immediate job creation at the forefront. However, this plan is largely tax cuts, it's piecemeal, and it's mostly directed at our long-run problems. Bringing business home doesn't happen overnight, R&D takes time, so does infrastructure, and so on. Millions of people need jobs now, not later. They don't have time to wait, for example, for manufacturing to move from China back to the US, and there's no certainty that will happen in any case. What was missing from the speech is a strong, coherent plan to create jobs immediately. Don't get me wrong, we need to address our long-run problems. But we also need to get people back to work as soon as possible.
Obama's education initiatives also deal with long-run rather than short-run issues. His call to improve education at all levels, and to make sure higher education is available to everyone is certainly welcome and it would help us in the long-run, but it won't create many jobs over the next few months. He does call for improved job retraining programs, and "a national commitment to train two million Americans with skills that will lead directly to a job," but even those programs will take time to put into place.
He also mentioned other issues in the speech such as the budget deficit and the need to regulate markets, financial markets in particular. The most notable proposals are his plan to impose a minimum 30 percent tax rate for incomes over a million dollars per year, and the surprisingly strong commitment to pursue financial fraud. The administration will create "a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people's investments." Obama will also ask the Attorney General "to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis." This is very much needed, and should have been done long ago.
Finally, in my list of recommendations I also mentioned the need to hammer Republicans over obstructionism, and on this topic the president said "I intend to fight obstruction with action." I'm not exactly sure how that works, but at least he mentioned the issue.
Right now, there are millions of people unemployed. That's a poor state of the union -- we have an employment crisis -- and putting people back to work ought to be treated as a national emergency. Though I am less enthusiastic than the administration about an export led strategy for economic growth, the speech hit many of the right notes where our structural problems are concerned. And there were certainly nods toward our short-run problems as well. But a strong sense of urgency about our immediate employment problem was missing from the speech. It's probably wise politically not to promise to create jobs between now and November. That could backfire if unemployment falls sluggishly or not at all (and if unemployment falls at a relatively fast pace, the administration can still claim credit). Nevertheless, I would have preferred a more concerted and detailed effort to deal with our immediate employment problems.
Monday, December 19, 2011
This is something I wrote on Friday for CBS on how long it will take the economy to recover, but it didn't get posted until today:
I noted that policy can speed the recovery, and that we are not doing enough -- hence the forecast for a slow recovery. But I wish I would have emphasized the point made by Christina Romer a bit more, i.e. that even though the recession is due to a financial collapse, and recovery from this type of recession is notoriously slow, we are not destined to have our own lost decade. Effective policy can shorten the recovery time. But as things stand now, including the forecast for (the lack of aggressive) policy, it's hard to see how things can turn around anytime soon.
Tuesday, December 13, 2011
A few comments on today's FOMC decision:
Thursday, October 27, 2011
I have some comments on the GDP report:
The main message is that even though the number improved over last quarter, "policymakers should not conclude that they are off the hook."
Sunday, October 09, 2011
To state the obvious, we need to create a lot more jobs per month than we have so far. If we continue at present rates, the unemployment rate will stay constant or increase even further. Even if we duplicate the performance of the economy prior to the recession, it will take four years to reach an unemployment rate of 7%. Thus, to get out of this in a reasonable amount of time we need job creation to accelerate considerably, and it's hard to see that happening without help from Congress. Unfortunately, Congress pretends to "feel your pain," but they don't seem to really understand how hard it is for those who are struggling with unemployment -- that this is a crisis requiring immediate, agressive action -- and it's hard to imagine that Congress will give labor markets the amount of help they need. So no need to hold on to your hats, it looks like we're headed for a very slow ride:
Two more job market charts, macroblog: ...Payroll employment growth has averaged about 110,000 jobs a month since February 2010, the jobs low point associated with the crisis and recession. This growth level compares, unfavorably, with the 158,000 jobs added per month during the last jobs recovery period from August 2003 (the low point following the 2001 recession) through November 2007 (the month before the recent recession began). One hundred and ten thousand jobs a month compares favorably, however, to the 96,000 job creation pace so far this year.
Are these sorts of differences material? ...[W]ith a few assumptions, such as the presumptions that the labor force will grow at the same rate as census population projections (for the aficionados, my calculations also assume that the ratio of household employment to establishment employment is equal to its average value since January of this year), the unemployment rates associated with job growth of 158,000, 110,000, and 96,000 per month would look something like this:
These paths are just suggestive, of course, but I think they tell the story. The same jobs recovery rate of the prerecession period would get the unemployment rate down below 7 percent in four years or so. But at the pace we have been going this year, things get worse, not better.
Friday, September 02, 2011
There is a lot of discussion on how the Fed will react to the jobs report in its meeting this month, e.g. here and here. My view is that if the Fed is moved to action by the report -- and it is not at all certain that they will be -- they will do the least they possibly can while still looking like they are doing something about the problem.
What is the least they can do while still satisfying the demand for action? One option is to change the average duration of the assets they hold on their balance sheet by trading short-term for long-term assets (i.e. lengthen the average duration of the portfolio). This could bring down the long end of the yield curve a bit -- not much as there isn't all that much room for long-term rates to fall -- and perhaps stimulate economic activity. However, it's hard to see how a fall in long-term interest rates of such a small magnitude will produce a change in investment and a change in the consumption of durables such as cars and refrigerators of the magnitude that is needed. If there is a response from consumers and businesses to a small drop in the long-term rate, it will be far, far short of what we need.
Another option would be to cut the rate the Fed is paying on reserves held in banks. Ben Bernanke has stated this would disrupt the overnight federal funds market, so I think this is unlikely, but it could be cut, say in half from its current level of 0.25%, or even to zero. Any change in this rate can be reversed quickly if needed, so it's not a very risky option -- that's why I think it is one potential response -- but again I don't think it would do a lot of good. The problem isn't the supply of loans, it's the demand, and this wouldn't do much to stimulate new demand.
The Fed has already used up another option that doesn't require much actual action -- committing to low interest rates for an extended period of time -- but so far that hasn't seemed to have helped much. The options after that such as QE3 or adopting (and then trying to hit) a higher inflation target require much more action from the Fed and are likely to be resisted.
But things are much worse than the Fed thought they would be, the green shoots they keep pointing to whither away as soon as they depend upon them, and it's time -- way past time actually -- to quit hoping things improve and take the possibility of an extended period of stagnation seriously. I blame fiscal policymakers more than the Fed, fiscal policy is our best hope for job creation and we should have had a large job creation program in place long ago. But we need both policy barrels pointed at this problem, it's too large to solve without both policies working together, and it's time for the Fed to quit hoping a miracle saves them from the hard decisions they need to make and to move forward with more aggressive policy.
Tuesday, August 09, 2011
Here's my reaction to today's the FOMC meeting:
"For once, I'd like to see the Fed get out in front of the problem, and with the recent emergent signs of weakness on so many fronts, now would have been a great time for the Fed to show it can do more than look in the rear view mirror."
Wednesday, July 20, 2011
The editors at MoneyWatch asked for a comment on the "Gang of Six" deficit reduction proposal:
Will the Return of the Gang of Six End the Debt Ceiling Showdown?: As I explain, I don't think so, but the Gang of Six proposal may help to guide the actual agreement, and the size of the immediate cuts in the proposal ($500 billion) is worrisome given the state of the economy.
Thursday, June 30, 2011
[This borrows from an op-ed in the local paper: Interest rates not the only way the Fed boosts economy, by Tim Duy and Mark Thoma.]
Tuesday, June 28, 2011
The editors at MoneyWatch asked me to comment on the tax repatration proposal that's been floated as a way to increase investment and create jobs:
Wednesday, June 22, 2011
Here's my reaction to the Fed's press release from the FOMC meeting that ended today:
The statement was expected, but not at all what I wanted to hear.
I just added some comments on Bernanke's press conference.
Update on Bernanke's Press Conference: Bernanke all but ruled out QE3. In response to a question about whether the Fed is considering further easing, Bernanke noted that this is a committee decision, it's not his to make alone, but he gave two main reasons why the Fed is reluctant to pursue additional asset purchases. First, when the Fed decided to put QE2 in place, there were substantial worries about deflation. Thus, the Fed was missing both elements of its dual mandate by a wide margin, and further easing would help to increase inflation and stimulate output. Now, however, although the output gap is still large, the Fed is starting to see signs of inflation. Bernanke stated that most people underestimate the negative impact inflation can have on growth and employment, and this indicates the Fed will not be willing to increase the risks that inflation will become a problem.
The other reason he gave for being wary of further easing is that the Fed is starting to increases in wages. Thus, the Fed is worried about an emerging wage-price spiral, and it is determined to stop this from happening. A wage-price spiral was a big problem in the 1970s and the beginning of the 1980s, and memories of this episode make the Fed unlikely to do anything that might cause it to happen again.
In the past, Bernanke has also stated that the Fed is in unfamiliar territory with the inflated balance sheet from QE1 and QE2, and that creates a lot of uncertainty about how much inflation risk the Fed has created. This also works against further easing.
Finally, in his presentation of the Committee's forecasts of where the economy is headed, Bernanke noted that most committee members expect relatively strong output growth next year, and that is another reason why the committee is thinking more about when to begin tightening than it is about further easing.
There were many questions about this, i.e. when the Fed might begin tightening policy, but Bernanke was very careful not to tip his hand. He said it will depend on how the recovery progresses, but as noted above most Committee members expect relatively strong growth next year.
If the economy weakens considerably, anything is possible, but there's no indication at this time that the Fed has any inclination toward further easing.
One more thing. As I've said a couple of times recently, I think it's a mistake for the Fed to look past the current slowdown in the recovery (it should ask itself how often it has had to downgrade its forecasts in the past). This is a critical point in the recovery, and if the Fed makes the wrong choice, it could make things worse than they need to be. I didn't expect to hear news of further easing at this meeting, but I did hope to hear a bit more willingness to consider it.
Tuesday, June 07, 2011
Bernanke is scheduled to give a speech today:
Friday, June 03, 2011
One of the editors at CBS MoneyWatch asked me what I thought of this story at Foxnews.com:
The story claims that foreign aid to countries like China creates a dangerous "co-dependency" where we give foreign aid in rerurn forpurchasing our debt.
I'm not sure I got this right, so (constructive) comments are welcome.
Monday, May 23, 2011
I don't say anything particularly novel, it's just another futile attempt to prevent us from repeating the errors of the past.
Tuesday, May 10, 2011
The editors at MoneyWatch wanted someone to talk about reports that John Boehner will demand spending cuts that equal or exceed any increase in the debt ceiling, in particular how it might affect the recovery. I took the bait and did some rough, back of the envelope calculations of the impact on output and employment:
Wednesday, May 04, 2011
Wednesday, April 27, 2011
Monday, April 18, 2011
At MoneyWatch, I have a few comments on the the S&P’s threat that there's a one in three chance it will have to downgrade US Debt -- it cites political gridlock as the problem -- but the post is mainly comprised of extracts of comments from others:
Tuesday, April 12, 2011
At my blog at MoneyWatch:
Tuesday, March 15, 2011
At MoneyWatch, I have a brief reaction to the Fed's decision to leave policy unchanged:
Friday, February 11, 2011
A very quick -- probably too quick -- response to the administration's proposals for Fannie and Freddie (the editors wanted to know how it would affect mortgage rates -- they'll likely go up, but how much is hard to say):
I hope to say more about the economics of these proposals when I have a bit more time.
Tuesday, February 08, 2011
Thursday, January 27, 2011
Here's a reaction to today's news that new claims for unemployment insurance increased substantially last week:
Wednesday, January 26, 2011
A quick reaction to the FOMC's decision to maintain current policy objectives. There wasn't much to say -- the Fed did just as expected -- but I said it anyway:
Update: From Tim Duy:
Quick FOMC Response, by Tim Duy: The FOMC statement was largely as expected – sticking to the current policy path. That means maintaining the current asset purchase program while holding interest rates low for an extended period. Some specifics:
No Dissents: Kansas City Fed President Thomas Hoenig is no longer a voting member, and none of the new voting members took up his dissent. Completely unsurprising. While some policymakers such as Philadelphia Fed President Charles Plosser believe that QE2 was a mistake, they see the costs –market disruption and loss of credibility – of undoing that mistake as greater than the benefits.
Additional Flexibility: Note the change in the first sentence. From:Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.To:Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions.
A focus on a specific data point – unemployment – was replaced with the more general “labor market conditions.” This could signal a willingness to roll back the balance sheet expansion if nonfarm payrolls were growing rapidly but, as workers return to the labor force, unemployment rates remain persistently high. I have difficulty seeing the Fed raise rates as long as unemployment is high, but a return to allowing the balance sheet to contract naturally or directly would not be out of the question.
Commodity Prices: As expected, the FOMC is not poised to follow the path of ECB Head Jean-Claude Trichet and fret about headline inflation. In contrast, the FOMC will focus on the pass-through to core inflation, if any, and the path of longer term inflation expectations.
Bottom Line: No real surprises in this FOMC statement, with the exception of a slight change in language on labor markets that suggests an effort to create additional flexibility.
Friday, January 07, 2011
I have a reaction to the employment report at MoneyWatch:
Wednesday, December 22, 2010
At MoneyWatch, a few comments in reaction to today's upward revision in the third quarter GDP growth rate from 2.5% to 2.6%:
Wednesday, December 08, 2010
At CBS MoneyWatch, does the tax deal satisfy the "three T's" for good policy?:
Tuesday, November 16, 2010
Posted at MoneyWatch:
QEII is explained through its effects on the yield curve.
Friday, November 12, 2010
I have a new post at MoneyWatch:
My reaction is negative.
Wednesday, November 03, 2010
The editors at MoneyWatch asked me to look at how the election might impact efforts to reform the financial sector:
What Impact Will the Election Have on Financial Reform?: How will the takeover of the House of Representatives by Republicans affect recent regulation to reform the financial sector, in particular the Dodd-Frank bill and the recent Basel III agreement?
Since the Senate remains in Democratic hands, we shouldn’t expect any significant changes to the Dodd-Frank bill, particularly since Obama would likely veto any attempts to significantly alter the bill if it somehow reached his desk.
But the election does bring to mind questions about potential changes in financial regulation over the next few years, and over the longer-run, particularly if this is a sign of larger Republican gains in the future. One question is whether existing changes to financial regulation in the Dodd-Frank bill that appear to be working to restrict financial markets will be preserved. A second is whether we’ll be able to fix holes in the existing regulatory structure that Dodd-Frank left unfilled. And a third question concerns the extent to which we will continue to participate on the international stage as we did in the Basel III process. ...[continue]...
Tuesday, October 26, 2010
At MoneyWatch, I have a new post:
It gives three reasons to worry if Republicans make significant gains in the midterm elections.
Friday, October 08, 2010
Here's a quick reaction to the employment report:
Monday, October 04, 2010
Thursday, September 30, 2010
I have a new post at MoneyWatch:
Depression Economics Needs to Become a Regular Part Macroeconomics: ... In recent decades, people studying short-run stabilization policy have focused mainly on how monetary policy can be used to fine tune the economy during relatively normal times. Fiscal policy and "depression economics" were not part of the mainstream research agenda.
But how to manage the economy during severe recessions and depressions -- a time when fiscal policy is generally a key component of the policy response -- needs to be an integral part of the research agenda in macroeconomics, and a larger part of the curriculum at the graduate and undergraduate levels. ...
But will that happen?
Tuesday, September 28, 2010
Tuesday, September 14, 2010
Friday, August 27, 2010
My reaction to Bernanke's speech:
What would you add?
Tuesday, August 17, 2010
I see that the issue of structural versus cyclical unemployment is rearing its head again. Here's something I posted at MoneyWatch a couple of weeks ago on this topic:
Is the Unemployment Problem Cyclical or Structural?: As I noted in a previous post, economists define three types of unemployment: frictional, structural, and cyclical:
Frictional unemployment is defined as the unemployment that occurs because of people moving or changing occupations. Demographic change can also play a role in this type of unemployment since young or first-time workers tend to have higher-than-normal turnover rates as they settle into a long-term occupation. An important distinguishing feature of this type of unemployment, unlike the two that follow it, is that it is voluntary on the part of the worker.
Structural unemployment is defined as unemployment arising from technical change such as automation, or from changes in the composition of output due to variations in the types of products people demand. For example, a decline in the demand for typewriters would lead to structurally unemployed workers in the typewriter industry.
Cyclical unemployment is defined as workers losing their jobs due to business cycle fluctuations in output, i.e. the normal up and down movements in the economy as it cycles through booms and recessions over time.
In a recession, frictional unemployment tends to drop since people become afraid of quitting the job they have due to the poor chances of finding another one. People that already have another job lined up will still be willing to change jobs, though there will be fewer of them since new jobs are harder to find. However, they aren't counted as part of the unemployed. Thus, the fall in frictional unemployment is mainly due to a fall in people quitting voluntarily before they have another job lined up.
But the drop in frictional unemployment is relatively small and more than offset by increases in cyclical and structural unemployment. One of the big questions right now is whether the US economy is suffering, for the most part, from structural or cyclical unemployment. If it's cyclical, then there's a good chance that government intervention can help. If it's structural, i.e. a decline in automobile production and manufacturing more generally, a decline in home construction, and a decline in the financial industry all of which free workers that need to be absorbed elsewhere in the economy, there's less that can be done and some do not think that government can do much at all about this type of problem (though as I note below, I disagree). Thus, the debate is between those who say our current unemployment problem is largely cyclical and hence we need more government action, and those who say it's structural and hence there's very little that government can do. We will just have to wait for the structural changes to take place, and that takes time.
I don't think this debate can be answered by moving close to the polar extremes and declaring it's mainly a structural or cyclical problem. For me, it seems obvious that part of the problem is structural. The real question is how large the structural component is and what can be done about it. But no matter how large it is -- take a very liberal estimate of the size -- I don't think there's any way to deny that there is a substantial cyclical component on top of it that demands government action. It's true that the size of the government action to offset the the cyclical downturn should be connected to the size of the cyclical unemployment problem, but the problem is big enough that politicians won't come anywhere near to overdoing it. The most optimistic view of what Congress might do would still leave them short of what is needed. We don't know the exact structural-cyclical breakdown, but the cyclical problem is certainly larger than any imaginable Congressional response. So the excuse for inaction based upon the "it's all structural" claim isn't persuasive.
What about the structural problem, does government have any role to play, or does it have to rely upon the private sector to solve this problem by itself? Several points on this. First, even if the problem is mostly structural, the government can still provide people with jobs to bridge the gap until the structural changes are complete. To me, this is better than simply extending unemployment compensation since it allows individuals to contribute something (e.g. work on a project the local community needs). And by giving people jobs, or at least government aid through unemployment compensation, we increase aggregate demand and the that helps firms to do better and speeds the transition.
Second, government can ease the structural problem by making it easier for businesses and individuals to relocate. People are understandably reluctant to leave the place they have lived for years and years, but government incentives to relocate (tax breaks, subsidies, etc.), can help. So can efforts to provide individuals in communities suffering from high unemployment with information about where job prospects are better, as can retraining programs (though these aren't always as effective as hoped). In a deep, widespread recession places that need workers may be hard to find, but not always and knowing where there are better opportunities for employment can be helpful. Businesses can also be induced to relocate through tax and other incentives, though the tax competition that accomplishes this may strip local governments of needed tax revenue, so I'd prefer these programs originate at the federal level. And there can also be government encouragements to speed the investments that are needed to complete the transition.
But the main things I want to emphasize are that no matter how large the structural problem is, cyclical unemployment is also a big problem, so the claim that government is powerless because it's all structural doesn't hold. And the claim that the existence of a structural problem means there's nothing the government can do is also incorrect. If nothing else, the government can help workers during the transition. In addition, though the opportunities here are more limited, there are also things the government can do to make the transition happen sooner rather than later.
Thursday, August 05, 2010
I have a new post at MoneyWatch:
If it's mainly cyclical, does that mean the government is powerless to help?
Monday, July 26, 2010
Some thoughts on why the administration did not fight very hard for more stimulus, and the cost of that decision:
I'm disappointed to see the administration, and more importantly the economy, in a position that could have been avoided.
Thursday, July 08, 2010
I have a new post at MoneyWatch:
It responds, briefly, to today's report on new claims for unemployment insurance, but the main discussion follows up on a post from Paul Krugman and looks at how effective further monetary policy initiatives might be.
Sunday, June 20, 2010
I don't have anything to post, so until I do, here's something I posted at MoneyWatch a few days ago. The post addresses the latest proposal for financial reform, in particular the proposal to change the way the District Bank presidents are chosen in an attempt to reduce the power banks have over monetary policy. One part of the proposal was to have the NY Fed president chosen by the president rather than the NY Fed's Board of Directors because of the NY Fed's special role in the implementation of national monetary policy. One question I ask at the end of this post is whether the NY Fed needs to have a special role in monetary policy and be elevated above all other District Banks. Why can't the execution of monetary policy be housed in a separate agency under the control of the FOMC (or, alternatively, the Board of Governors)? There was a time when proximity to Wall Street was essential, but that has changed in the last 70 years, and, in any case, the agency could be located as close to Wall Street as needed. Communication with Washington, to the extent it's needed, could us digital technology. This would put the NY Fed on a more equal footing with the other Fed's, and solve the problem of how to represent both regional and national interests in the selection of the NY Fed president:
Reducing the Influence Banks Have over Monetary Policy: There's some news on the Dodd proposal for financial reform, something I wrote about when the details of the proposal initially came out.
Wednesday, June 09, 2010
This is a post that appeared on my MoneyWatch blog, but upon further reflection, I'm not so sure about this one -- maybe I was in too much of a rush. I was supposed to be traveling to a conference in Europe today, and I needed posts that I could set to appear automatically while I was traveling, so I figured I'd set this one for about the time I was taking off for Budapest. That way, I'd have a good reason to ignore the inevitable comments telling me what an idiot I am -- even if I tried, travel would make it hard to get to them. However, I had to cancel the trip at the last minute, and I thought about canceling this post too. But what the heck, I'm never satisfied with posts after the fact, so I'll post it anyway. Maybe it's OK after all.
The post argues that perhaps we were in too much of a rush to pass financial reform legislation, and that explains the disappointing outcome. But what made me reconsider was an argument I read somewhere along the lines that "it took all this time to get legislation done, and this is the best they could do?" I still think that in legislative time, this was undertaken relatively quickly, that more patience might have helped, but it has been several years since we knew their were big problems to solve so it's not as though the legislation was rushed from day one. In any case, the main question I want to take up now is the quality of the legislation we're likely to get:
Reconsidering the Rush to Reform the Financial Sector, Maximum Utility: I wish I could say that the financial reform legislation that is under consideration in Congress makes the best possible attempt to insulate the financial system from problems in the future, but I can't make that claim. The legislation still needs to go through reconciliation to bring the House and Senate versions together, but the reforms that appear set to be enacted feel like a hodgepodge of measures rather than a set of consistent laws and regulations designed to counteract the fundamental failures within the financial system. The policies that emerged seemed to depend on what was possible rather than an overriding sense of the fundamental issues that needed to be addressed.
I had hoped that financial legislation would proceed by first identifying the major problems that caused the crisis or amplified its effects, and then by putting specific measures into place designed to fix those problems. But that's not how it went. Instead, it seemed like it was a little bit of this and a little bit of that with no real sense of overall purpose.
Maybe we were in too much of a hurry. I was one of those who made the following argument:
Kashyap and Mishkin ... may be right that now is not the time to change regulations because it could create additional destabilizing uncertainty in financial markets, and that waiting will give us time to see how the crisis plays out and to consider the regulatory moves carefully. But as we wait, passions will fade, defenses will mount, the media will respond to the those opposed to regulation by making it a he said, she said issue that fogs things up and confuses the public as well as politicians. By the time it is all over there's every chance that legislation will pass that is nothing but a facade with no real teeth that can change the behaviors that go us into this mess.
I thought that if we didn't hurry up and do something, we wouldn't get anything done at all (as passions fade, etc.), so it was better to go forward and perhaps get imperfect legislation than to wait and get nothing at all.
I wanted to strike while the iron was hot, but what I underestimated is the ability of politicians to heat things up. That's what politicians do, they create the passions that allow legislation to go forward (or to block it as the case may be). I am not claiming that the timing of the announcement of the Goldman Sachs investigation was politically motivated, i.e. connected to the reform legislation that was being considered in Congress, but it did show how easily passions can be inflamed with the right triggers. Politicians and their allies in the media are experts at finding and exploiting those triggers, so perhaps I was in too much of a hurry to push financial regulation forward. Patience may not have been so costly in terms of waning support as I first thought, and it may have allowed us to better identify the problems in the financial sector and then find the solutions that are needed to insulate it from further problems.
We couldn't have waited too long. It's still true that things fade over time, including the ability of politicians to whip up passion on an issue, but perhaps a little more patience would have produced legislation that does a better job at first identifying the problems that need to be fixed, and then crafting specific, workable regulatory solutions to those problems. I'm still not fully convinced that waiting longer was the right thing to do. I still worry that it gives the opposition too much time to put up obstacles to reform -- the opposition can whip up the public's passion too -- and that the public's anger fades over time. But seeing the legislation that actually emerged, and having the sense that it is not as effective as it could be due to the somewhat ad hoc way it was put together, I'm much more open to arguments that patience would have produced a better outcome than I was before.
I'm clearly not all that impressed with the legislation. I don't think the leverage restrictions are tough enough, I don't understand why we allow firms with enough political and economic power to manipulate their environment to persist, the ratings agencies need reform (though there is some progress here), there are incentive problems throughout mortgage and financial markets that need to be fixed, and the legislation is not as focused, cohesive, and encompassing as it should be.
What's your view on the legislation that is likely to emerge from reconciliation? Is it as good as we can expect, or is it far short of what could and should have been accomplished?