Money is by nature symbolic - representing the erratic value of goods and
services - but will it become entirely electronic? Some digital evangelists,
touting the frictionlessness of cashlessness, think so. E-transactions are
burgeoning along with the capabilities and reach of the Internet. Software
engineering has fused with financial engineering and online communities are
creating new forms of digital currency. Yet cash in circulation is also
rising. Hand-held currency is an easy, uncomplicated means to know what you
have and get what you want, which is all the more appealing in an era of
economic insecurity and bitcoin chaos. Why rely on intermediaries and
invisible transactions? Why trust if one can't readily verify? This panel
will explore the forces that are changing money and, at the same time,
keeping it in its traditional forms.
Blogging is a bit like teaching the same class year after year; inevitably
there are moments when you feel exasperated at the class’s failure to grasp
some point you know you explained at length — then you realize that this was
last year or the year before, and it was to a different group of people.
So, I gather that the old core inflation bugaboo is rearing its head again —
the complaint that it’s somehow stupid, dishonest, or worse to measure
inflation without food and energy prices, often coupled with the claim that
the statistics are being manipulated anyway. So, time for a refresher. ...
Hs refresher is
here. Let me offer one of my own (from 2008):
Why Do We Use Core Inflation?: There is a lot of confusion over the Fed's
use of core inflation as part of its policy making process. One reason for
confusion is that we using a single measure to summarize three different
definitions of the term "core inflation" based upon how it is used.
First, core inflation is used to forecast future inflation. For example,
this recent paper uses a "bivariate integrated moving average ... model ...
that fits the data on inflation very well," and finds that the long-run trend
rate of inflation "is best gauged by focusing solely on prices excluding food
and energy prices." That is, this paper finds that predictions of future
inflation based upon core measures are more accurate than predictions based upon
Second, we also use the core inflation rate to measure the current trend
inflation rate. Because the inflation rate we observe contains both permanent
and transitory components, the precise long-run inflation rate that consumers
face going forward is not observed directly, it must be estimated. When food and
energy are removed to obtain a core measure, the idea is to strip away the
short-run movements thereby giving a better picture of the core or long-run
inflation rate faced by households. I should note, however that this is not the
only nor the best way to extract the trend and the Fed also looks at other
measures of the trend inflation rate that have better statistical properties.
Thus while the first use of core inflation was for forecasting future inflation
rates, this use of core inflation attempts to find today's trend inflation rate
[There is a way to combine the first and second uses into a single conceptual
framework that encompasses both, but it seemed more intuitive to keep them
separate. In both cases, the idea is to find the inflation rate that consumers
are likely to face in the future.]
Let me emphasize one thing. If the question is "what is today's inflation
rate," the total inflation rate is the best measure. It's intended to measure
the cost of living and there's no reason at all to strip anything out. It's only
when we ask different questions that different measures are used.
Third, and this is the function that is ignored most often in discussions of
core inflation, but to me it is the most important of the three. The
inflation target that best stabilizes the economy (i.e. best reduces the
variation in output and employment) is a version of core inflation.
In theoretical models used to study monetary policy, the procedure for
setting the policy rule is to find the monetary policy rule that maximizes
household welfare (by minimizing variation in variables such as output,
consumption, and employment). The rule will vary by model, but it usually
involves a measure of output and a measure of prices, and those measures can be
in levels, rates of change, or both depending upon the particular model being
In general, a Taylor rule type framework comes out of this process (
i.e. a rule that links the federal funds rate to measures of output and prices). However, in the
policy rule, the best measure of prices is usually something
that looks like a core measure of inflation. Essentially, when prices are
sticky, which is the most common assumption driving the interaction between
policy and movements in real variables in these models, it's best to target an
index that gives most of the weight to the stickiest prices (here's
an explanation as to why from a post that echoes the themes here).
That is, volatile prices such as food and energy are essentially tossed out of
the index used in the policy rule.
The indexes that come out of this type of theoretical exercise often includes both output and input
prices, and occasionally asset prices as well. That is, a core measure of
inflation composed of just output prices isn't the best thing for policymakers
to target, a more general core inflation rate combining both input and output
prices works better. ...
Finally, there is also a question of what we mean by inflation conceptually.
Does a change in relative prices, e.g. from a large increase in energy costs,
that raises the cost of living substantially count as inflation, or do we
require the changes to be common across all prices as would occur when the money
supply is increased? Which is better for measuring the cost of living? Which is
a better target for stabilizing the economy? The answers may not be the same.
For a nice discussion of this topic, see this speech given yesterday by Dennis
Lockhart, President of the Atlanta Fed:
The popular treatment of inflation in our sound bite society risks
confusing inflation with relative price movements and the cost of living. By
cost of living, I'm referring to the costs you and I incur to maintain our
level of consumption of various goods and services including essential items
such as food, gasoline, and lodging.
Relative price movements occur continuously in an economy as individual
prices react to market forces affecting that good or service. Neither
relative price movements nor sustained high living costs constitute
inflation as economists commonly use the term....
And I think I'll end with this part of his remarks:
Attempts to measure the aggregate rate of price change—no matter how
sophisticated—remain imperfect. As a result, when it comes to measuring
inflation, judgment is needed to distinguish persistent price movements that
underlie overall inflation from the relative price adjustments. Separating
the inflation signal from noise involves much uncertainty—especially when
making decisions in real time. Discerning accurately the underlying trend is
difficult. It is essential for those of us who have responsibility for
responding to these trends to use a wide variety of core measures and
inflation projections to make the most informed judgment we can.
This shouldn't be overly surprising, but Nouriel Roubini is pessimistic about the global economy (bubble/boom for two
years, then a big crash):
Lunch Panel: Global Overview
Monday, April 29, 2013 12:00 PM - 1:45 PM
Introduction By: Michael Klowden, CEO, Milken Institute
Pierre Beaudoin, President and CEO, Bombardier Inc.
Scott Minerd, Managing Partner and Global Chief Investment Officer,
Nouriel Roubini, Chairman and Co-Founder, Roubini Global Economics;
Professor of Economics and International Business, Stern School of Business,
New York University
Geraldine Sundstrom, Partner and Portfolio Manager, Emerging Markets
Strategies Master Fund Limited, Brevan Howard
Paul Gigot, Editorial Page Editor and Vice President, The Wall Street
As mid-2013 comes into view, the crisis sparked by the international
mortgage meltdown is receding into memory, spreading a sense of relief. In
the eurozone, the debate is about austerity versus spending, but not
dissolution. Meanwhile, living conditions are rising in many parts of the
globe as millions join a swelling middle class. The expanding availability
of healthcare could have a profound effect as well. Yet some regions
continue to struggle. In our annual big-picture look at the world economy,
we'll discuss whether China and the U.S. can pull other players along and
how the debt bomb can be defused. What are the most potent trends steering
capital markets? Which industries are rising, which are fading, and what
governments are demonstrating they know how to solve problems? Can the
flare-up in the Middle East be contained and give way to democracy and
“Should public resources go to the group most likely to take full advantage
of them, or to the group that is most desperately in need of assistance?”:
Are we purging the poorest?, by Peter Dizikes, MIT News Office: In
cities across America over the last two decades, high-rise public-housing
projects, riddled with crime and poverty, have been torn down. In their
places, developers have constructed lower-rise, mixed-use buildings. Crime
has dropped, neighborhoods have gentrified, and many observers have lauded
the overall approach.
But urban historian Lawrence J. Vale of MIT does not agree that the
downsizing of public housing has been an obvious success.
“We’re faced with a situation of crisis in housing for those of the very
lowest incomes,” says Vale, the Ford Professor of Urban Design and Planning
at MIT. “Public housing has continued to fall far short of meeting the
demand from low-income people.”
Take Chicago, where the last of the Cabrini-Green high-rises was torn down
in 2011, ending a dismantling that commenced in 1993. Those buildings — just
a short walk from the neighborhood where Vale grew up — have been replaced
by lower-density residences. But where 3,600 apartments were once located,
there are now just 400 units constructed for ex-Cabrini residents. Other
Cabrini-Green occupants were given vouchers to help subsidize their housing
costs, but their whereabouts have not been extensively tracked.
“There is a contradiction in saying to people, ‘You’re living in a terrible
place, and we’re going to put massive investment into it to make it as safe
and attractive as possible, but by the way, the vast majority of you are not
going to be able to live here again once we do so,’” Vale says. “And there
is relatively little effort to truly follow through on what the life
trajectory is for those who go elsewhere and don’t have an opportunity to
return to the redeveloped housing.”
Now Vale is expanding on that argument in a new book, “Purging the Poorest:
Public Housing and the Design Politics of Twice-Cleared Communities”...
“Chicago and Atlanta are probably the nation’s most conspicuous experiments
in getting rid of, or at least transforming, family public housing,” Vale
explains. However, he notes, “It’s hard to find an older American city that
doesn’t have at least one example of this double clearance.”
Essentially, Vale says, these cities exemplify one basic question: “Should
public resources go to the group most likely to take full advantage of them,
or to the group that is most desperately in need of assistance?”
Vale sees U.S. policy as vacillating between these views over time. At
first, public housing was meant “to reward an upwardly mobile working-class
population” — making public housing a place for strivers. Slums were cleared
and larger apartment buildings developed, including Atlanta’s Techwood
Homes, the first such major project in the country.
But after 1960, public housing tended to be the domain of urban families
mired in poverty. “The conventional wisdom was that public housing
dangerously concentrated poor people in a poorly designed and poorly managed
system of projects, and we are now thankfully tearing it all down,” Vale
says. “But that was mostly a middle phase of concentrated poverty from 1960
Over the last two decades, he says, the pendulum has swung back, leaving a
smaller number of housing units available for the less-troubled, which Vale
calls “another round of trying to find the deserving poor who are able to
live in close proximity with now-desirable downtown areas.”
Vale’s critique of this downsizing involves several elements. Projects such
as Cabrini-Green might have been bad, but displacing people from them means
“the loss of the community networks they had, their church, the people doing
day care for their children, the opportunities that neighborhood did
provide, even in the context of violence.”
Demolishing public housing can hurt former residents financially, too. “Techwood
and Cabrini-Green were very central to downtown and people have lost job
opportunities,” Vale says. Indeed, the elimination of those developments,
even with all their attendant problems, does not seem to have measurably
helped many former residents gain work...
“We don’t have very fine-tuned instruments to understand the difference
between the person who genuinely needs assistance and the person who is
gaming the system,” Vale says. “Far larger numbers of people get demonized,
marginalized or ignored, instead of assisted.” ...
Ultimately, Vale thinks, the reality of the ongoing demand for public
housing makes it an issue we have not solved.
“The irony of public housing is that people stigmatize it in every possible
way, except the waiting lists continue to grow and it continues to be very
much in demand,” Vale says. “If this is such a terrible [thing], why are so
many hundreds of thousands of people trying to get into it? And why are we
reducing the number of public-housing units?”
Central Banks: Is Quantitative Easing Becoming Quantitative
Monday, April 29, 2013 3:30 PM - 4:30 PM
James McCaughan , CEO, Principal Global Investors
Cliff Noreen, President, Babson Capital Management LLC
Tad Rivelle, Chief Investment Officer, Fixed Income, TCW
Aram Shishmanian, CEO, World Gold Council
Kevin Warsh, Distinguished Visiting Fellow, Hoover Institution; Former
Member, Federal Reserve Board of Governors
Moderator: David Zervos, Chief Market Strategist, Jefferies LLC
Among the monetary measures central banks have taken to address the
lingering impact of the 2008 financial rupture, keeping interest rates
artificially low has been a primary aim. The term "financial repression" has
become associated with that policy. Such measures were launched in the hope
of not only stimulating economic activity but to ease the pressure of
servicing onerous public debt. Concern is growing, however, that
quantitative easing has distorted markets by interfering with the proper
pricing of risk and, by extension, obscuring the true cost of capital. Our
panel of experts will explore the possible effects of sustained QE and the
quest for financial stability. For instance, are bubbles inflating? Will
these effects be similar or will they vary from market to market? What costs
will long-tem financial repression impose on the Federal Reserve and other
central banks? What tools can be employed as alternatives?
It was stacked. Pretty much unanimous thumbs down on QE. Even the
moderator is noting how one-sided the discussion is. It's making things
worse! (e.g. QE drives up gas prices and holds back the economy). One
is even complaining that interest rates are too low, and no other
disagrees. They couldn't find anyone to defend the Fed's current
Someone to address all the questionable claims this panel is making?
Wow. They are giving the Fed credit for stepping in saving markets when problems first
financial markets, but seem to think we'd be better off if the Fed had
less. Sorry, but we wouldn't be. The Fed was slow to react and overly
at every stage of the crisis. We needed more, not less, and still do.
(Weird, the guy arguing that QE made things worse is now arguing that the recovery has been much stronger than most people are aware, e.g. unemployment not so bad as we hear...).
Anyway, think I've had enough of the Fox News version of a debate (actually, Fox would at least have an ineffective defender to tear apart). Time to move on.
[The video from each session will be posted
here several hours after the session ends. I'll add the video to this (and other posts) once it appears (Update: video added).]
In light of the current review of benefits and costs, one member judged
that the pace of purchases should ideally be slowed immediately. A few
members felt that the risks and costs of purchases, along with the improved
outlook since last fall, would likely make a reduction in the pace of
purchases appropriate around midyear, with purchases ending later this year.
Several others thought that if the outlook for labor market conditions
improved as anticipated, it would probably be appropriate to slow purchases
later in the year and to stop them by year-end. Two members indicated that
purchases might well continue at the current pace at least through the end
of the year.
The center of the FOMC appeared to be shifting toward agreement that large
scale asset purchase program would likely be wrapped up by year end. Of course,
they included a caveat:
It was also
noted that were the outlook to deteriorate, the pace of purchases could be
Since the last FOMC meeting, it has become clear that the economy continues
along a suboptimal path, as illustrated by the disappointing 2.5 percent GDP
growth for the first quarter; just a few weeks ago,
Macroeconomic Advisors was anticipating a 3.6 percent growth rate. In
addition, both employment and manufacturing reports have been less than
Calculated Risk for his take on today's Dallas Fed numbers and the
implications for the ISM report). Moreover, fiscal austerity continues to bite:
The end result is that investors have concluded, rightly, that FOMC members
looking forward to cutting the pace of purchases by mid-year were overly
optimistic. Consequently, the 10-year yield was bid down to just 1.67 percent
this afternoon, well below the 2.05 in early March.
Probably more important, at this juncture is that disinflation is again
evident, with headline and core PCE up just 1.0 and 1.1 percent, respectively,
compared to last year:
In an April 17 Wall Street Journal
interview, St. Louis Federal Reserve President James Bullard highlighted the
possibility that a deteriorating inflation trend might require additional
easing. Other policymakers have joined him in this concern. From
“I’d of course be giving serious thought” to additional stimulus if
disinflation persists, Richmond Fed President Jeffrey Lacker, who voted
against the bond program last year, said last week -- while adding he
doesn’t think that will happen. The Minneapolis Fed’s Narayana Kocherlakota
also said this month weaker inflation may be reason to consider more
The important point is that low inflation prompts concern even among
policymakers who think the Fed can have little impact on employment growth. For
this group, high unemployment is distressing but not actionable. But low
inflation is both distressing and actionable. Thus, at a minimum, the low
inflation numbers should push the FOMC back to avoiding a premature end to
quantitative easing. In addition, it is easy to argue that the Fed should be
thinking about additional easing. Not only are they missing on the employment
mandate, but increasingly it looks like they are missing on the price stability
mandate as well. A policy failure all around.
Bottom Line: The FOMC statement should shift to indicate the softer economy
and falling inflation numbers; I am watching for how much emphasis they place on
the latter as a signal as to the likelihood of easing further in future
meetings. Like most, I don't anticipate an expansion of the program at this
juncture. I doubt the FOMC would see the current data as justifying a leap from
thinking about ending the program to expanding the program just six weeks later.
It would be interesting if Kansas City Federal Reserve President Esther George
pulls her dissent. Her objection has been that the Fed's policy stance risks
financial stability for little economic benefit. Pulling her dissent in
response to falling inflation would signal that disinflation concerns run deep
in the FOMC.
Debt and the Deficit: What's Really on the Table?
Monday, April 29, 2013 2:15 PM - 3:15 PM
Bob Corker, U.S. Senator
David Cote, Chairman and CEO, Honeywell; Steering Committee Member,
Campaign to Fix the Debt
Maya MacGuineas, Head, Campaign to Fix the Debt; President, Committee
for a Responsible Federal Budget
Peter Orszag, Vice Chairman, Corporate and Investment Banking,
Citigroup; former Director, Office of Management and Budget
Moderator: Steven Rattner, Chairman, Willett Advisors; former Counselor and
Lead Auto Advisor to the U.S. Secretary of the Treasury
With outsize debt putting the stability of credit markets and the pace of
economic growth at risk, will Americans embrace shared sacrifice to set the
country on a path toward fiscal health? Or is the problem essentially the
result of gridlock in Washington? And what does "shared sacrifice" actually
mean? Who will bear the heavier burden: the rich, the elderly, the middle
class? Are Simpson and Bowles still relevant? Our panel will examine the
economics and politics around our accumulating public debt and annual
deficit, with an eye toward palatable and realistic solutions. Can we grow
our way out of the mess? How will we cope with the twin hazards of graying
demographics and healthcare inflation? Back to the credit markets: Are
Treasuries as safe as they seem?
There was remarkably little discussion of increasing revenues through tax rate increases. There was some
discussion of increasing revenue, but it was mainly about eliminating deductions like
home interest rather than increasing tax rates. Instead, most of the
focus was on, surprise, "entitlement reform" with only Orszag being careful to
point to health care costs as the main problem to solve.
The most entertaining moment was when the business guy on the panel, David
Cote, said that unlike in business where what you think, say, and do must align, for Congress
these are different decisions. Senator Corker said he was offended by
that comment and went on to defend Congress (e.g. saying many people in business
don't understand that politicians have to represent a diverse constituency). Ha.
A Republican fighting with a business rep, then defending government. Too bad he
wants to cut the crap out of it.
Other than that, the degree of hawkery and the implicit assumption that the only way to solve problems with our long-run budget picture is to cut social insurance programs the working class relies upon was, in fact, irritating. The continued discussion about deficit reduction as the key to spurring private sector growth was similarly irritating. It's exactly what we heard about the Bush tax cuts, and we know how that turned out. A huge increase in the debt load with little (if any) increased growth to show for it.
Finally, as far as I recall, the word "unemployment" did not come up. In the short-run, deficit hawkery is what's standing in the way of doing more to help with the unemployment problem. The key question -- whether the concern in the short-run with the debt rather than the unemployed is justified in the short-run (it isn't in my view) -- was not even discussed.
[Listening to Nouriel Roubini's pessimism about the future during the lunch panel as I do this -- the video of the panel discussing the state of the global economy should be available later today.]
Nancy Folbre objects to the "gendered language" used in the debate over social
insurance programs, and to the conclusion that "cuddly" capitalism is bad for innovation:
The Welfare Queen of Denmark, by Nancy Folbre, Commentary, NY Times:
...In short, the Danish record offers no support for the
social-spending-hurts-growth position. That doesn’t mean that some
economists can’t figure out a way to make that argument anyway. For
instance, Daron Acemoglu, James A. Robinson and Thierry Verdier have
devised a theoretical model to show why what they term “cuddly” capitalism
of the Danish sort may just be free-riding on the “cutthroat” capitalism of
the United States sort.
The model posits that cutthroat levels of inequality, as in the United
States, promote high levels of technological innovation. The benefits of
these innovations cross national borders to help Danes and other
Scandinavians achieve growth. In other words, they may be able to get away
with being “cuddly,” but some country (like the United States) just has to
be tough enough to reward risk-taking, even if it leads to hurt feelings.
The gendered language deployed in this model echoes a general tendency to
view social spending in feminine terms: women like to cuddle and are often
described as more risk-averse than men. It’s not uncommon to see the term
“nanny state” used as a synonym for the welfare state.
Call the Scandinavians sissies if you like, but plenty of evidence in the
latest World Competitiveness Report testifies to high levels of overall
innovation there — as you might expect in economies even more
export-oriented than our own. Danes are world leaders in renewable energy
technology, especially wind power. ...
As I've noted before, "an enhanced safety net -- a backup if things go wrong -- can give people the security they need to take a
chance on pursuing an innovative idea that might die otherwise, or opening a
small business. So it may be that an expanded social safety net encourages
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
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
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%.
One quick first impression based upon the schedule of sessions. In the last few years, two or three years ago more
so than last year, there were quite a few "soul-searching" sessions from
the financial industry. How did financial markets fail, how can they be fixed,
etc. That's not to say that there wasn't a lot of resistance to regulation from
the industry, but they were at least dealing with the main issues, there was an attempt at an honest appraisal from many, and there
were quite a few sessions on the topic.
There are sessions on regulation this year -- I'm currently in one called
"Global Financial Regulation" (usual TBTF discussion so far, just turning to leverage) -- but compared to previous years the main concern
now appears to be where we are headed in the next few years, opportunities for
investment, etc. I suppose that's good news for the economy, but for financial
stability? There's still a lot of work to be done, and an eroding will to do it.
The Story of Our Time, by Paul Krugman, Commentary, NY Times: Those of
us who have spent years arguing against premature fiscal austerity have just
had a good two weeks. Academic studies that supposedly justified austerity
have lost credibility; hard-liners in the European Commission and elsewhere
have softened their rhetoric. The tone of the conversation has definitely
My sense, however, is that many people still don’t understand ... the nature
of our economic woes, and why this remains a very bad time for spending
Let’s start with ... what happened after the financial crisis of 2008. Many
people suddenly cut spending, either because they chose to or because their
creditors forced them to; meanwhile, not many people were able or willing to
spend more. The result was a plunge in incomes that also caused a plunge in
employment ... that persists to this day. ...
So what could we do to reduce unemployment? The answer is, this is a time
for above-normal government spending, to sustain the economy until the
private sector is willing to spend again. The crucial point is that under
current conditions,... government spending doesn’t divert resources away
from private uses; it puts unemployed resources to work. Government
borrowing doesn’t crowd out private investment; it mobilizes funds that
would otherwise go unused. ...
Now, just to be clear,... let’s try to reduce deficits and bring down
government indebtedness once normal conditions return... But right now we’re
still dealing with the aftermath of a once-in-three-generations financial
crisis. This is no time for austerity. ...
Is the story really that simple, and would it really be that easy to end the
scourge of unemployment? Yes — but powerful people don’t want to believe it.
Some of them have a visceral sense that suffering is good, that we must pay
a price for past sins (even if the sinners then and the sufferers now are
very different groups of people). Some of them see the crisis as an
opportunity to dismantle the social safety net. And just about everyone in
the policy elite takes cues from a wealthy minority that isn’t actually
feeling much pain.
What has happened now, however, is that the drive for austerity has lost its
intellectual fig leaf, and stands exposed as the expression of prejudice,
opportunism and class interest it always was. And maybe, just maybe, that
sudden exposure will give us a chance to start doing something about the
depression we’re in.
Public and Private Sector Payroll Jobs: Bush and Obama by Bill McBride:
...several readers have asked if I could update the graphs comparing public
and private sector job losses (or added) for President George W. Bush's two
terms (following the stock market bust), and for President Obama tenure in
office so far (following the housing bust and financial crisis).
Important: There are many differences between the two periods. ...
The first graph shows the change in private sector payroll jobs from when
Mr. Bush took office (January 2001) compared to Mr. Obama's tenure (from
January 2009). ...
Click on graph for larger image.
The employment recovery during Mr. Bush's first term was very sluggish, and
private employment was down 946,000 jobs at the end of his first term.
At the end of Mr. Bush's second term, private employment was collapsing,
and there were net 665,000 jobs lost during Mr. Bush's two terms.
The recovery has been sluggish under Mr. Obama's presidency too, and there
were only 1,933,000 more private sector jobs at the end of Mr. Obama's first
term. A couple of months into Mr. Obama's second term, there are now
2,282,000 more private sector jobs than when he took office.
A big difference between Mr. Bush's tenure in office and Mr. Obama's
presidency has been public sector employment.
The public sector grew during Mr. Bush's term (up 1,748,000 jobs), but the
public sector has declined since Obama took office (down 718,000 jobs).
These job losses have mostly been at the state and local level, but they are
still a significant drag on overall employment. ...
I've was making this argument long before the crisis hit, I was among the
first to say that monetary policy would not be enough to solve our problems,
aggressive fiscal policy would also be needed, and nothing that's happened
during the recession has changed my mind. I eventually tired of the debate and
assumed everyone was tired of hearing me say we needed more fiscal stimulus --
arguing with monetarists won't change any minds anyway and
policymakers weren't about to do more fiscal stimulus - - so I moved on to other
things (mostly talking about the need for job creation through more aggressive
policy of any type):
Monetarism Falls Short:
... Sorry, guys, but as a practical matter the Fed – while it should be doing
more – can’t make up for contractionary fiscal policy in the face of a
Paul Krugman says the biggest problem with George Bush wasn't the things he
did, it was how he did them:
The Great Degrader: ...I sort of missed the big push to rehabilitate
Bush’s image; also..., I’m kind of worn out on the subject. But it does need
to be said: he was a terrible president, arguably the worst ever, and not
just for the reasons many others are pointing out.
From what I’ve read, most of the pushback against revisionism focuses on
just how bad Bush’s policies were, from the disaster in Iraq to the way he
destroyed FEMA, from the way he squandered a budget surplus to the way he
drove up Medicare’s costs. And all of that is fair.
But I think there was something even bigger, in some ways, than his policy
failures: Bush brought an unprecedented level of systematic dishonesty to
American political life, and we may never recover.
Think about his two main “achievements”, if you want to call them that: the
tax cuts and the Iraq war, both of which continue to cast long shadows over
our nation’s destiny. The key thing to remember is that both were sold with
lies. ... Basically, every time the Bushies came out with a report, you knew
that it was going to involve some kind of fraud, and the only question was
which kind and where.
And no, this wasn’t standard practice before. ... There was a time when
Americans expected their leaders to be more or less truthful. Nobody
expected them to be saints, but we thought we could trust them not to lie
about fundamental matters. That time is now behind us — and it was Bush who
The media also echoed the Bush talking points on tax cuts and the war without
giving them the scrutiny and skeptical eye they deserved (I got so tired of
hearing the false claim that the Bush tax cuts would pay for themselves). There
has been an admission that, well, maybe a few mistakes were made, but has the
media learned its lesson? The ability of Republicans to use the same tactics in
recent political debates suggests the answer is no.
Economic and demographic changes may severely impair the value of a home when
it’s time to sell, a decade or more in the future. Will a particular home still
be fashionable then? Will social and economic shifts tilt demand toward new
designs and types of communities —even toward renting rather than an outright
purchase? Any of these factors could affect home prices substantially. ...
His bottom line is that:
Forecasting is indeed risky, because of factors like construction
productivity, inflation, and the growth and bursting of speculative bubbles in
both home prices and long-term interest rates. The outlook is so ambiguous that
there is no single answer to the question of housing’s potential as a long-term
... it may be wisest to choose the housing that best meets your personal needs,
among the choices you can afford.
Another long travel day today, so for now a quick post via Brad DeLong:
Global Inequality: Saturday Twentieth Century Economic History Weblogging:
Those economies relatively rich at the start of the twentieth century have
by and large seen their material wealth and prosperity explode. Those
nations and economies that were relatively poor have grown richer, but for
the most part slowly. The relative gulf between rich and poor economies has
grown steadily over the past century. Today it is larger than at any time in
humanity’s previous experience...
This glass can be viewed either as half empty or as half full. The glass is
half empty: we live today in a world that is nearly the most unequal world
ever. Only the world of the 1970s and 1980s—with standards of living in
China greatly depressed by the legacy of Mao, his Great Leap Forward, and
his Cultural Revolution and with standards of living in India depressed to a
lesser extent by the License Raj of the Nehru Dynasty—was more unequal than
ours is, even today. The glass is half full: most of the world has already
made the transition to sustained economic growth; most people live in
economies that (while far poorer than the leading-edge post-industrial
nations of the world’s economic core) have successfully climbed onto the
escalator of economic growth and thus the escalator to modernity. The
economic transformation of most of the world is less than a century behind
the of the leading-edge economies...
On the other hand, one and a half billion people live in economies that have
not made the transition to economic growth, and have not climbed onto the
escalator to modernity. It is hard to argue that the median inhabitant of
Africa has a higher real income than his or her counterpart of a generation
From an economist’s point of view, the existence, persistence, and
increasing size of large gaps in productivity levels and living standards
across nations seems bizarre. We can understand why pre-industrial
civilizations had different levels of technology and prosperity: they had
different exploitable nature resources, and the diffusion of new ideas from
civilization to civilization could be very slow. Such explanations do not
apply to the world today. The source of the material prosperity seen today
in leading-edge economies is no secret: it is the storehouse of
technological capabilities.. Most of it is accessible to anyone who can
read. Almost all of the rest is accessible to anyone who can obtain an M.S.
in Engineering. Because of modern telecommunications, ideas today spread at
the speed of light. Governments, entrepreneurs, and individuals in poor
economies should be straining every muscle ... to do what Japan began to do
in the mid-nineteenth century: acquire and apply everything in humanity's
storehouse of technological capabilities.
This “divergence” in living standards and productivity levels is another key
aspect of twentieth century economic history: economies are, by almost every
measure, less alike today than a century ago in spite of a century’s worth
of revolutions in transportation and communication. Moreover, there seems to
be every reason to fear that this “divergence” in living standards and
productivity levels will continue to grow in the future. ...
This is a potential source of great danger, because today’s world is
sufficiently interdependent—politically, militarily, ecologically—that the
passage to a truly human world requires that we all get there at roughly the
There is stagnation and growing inequality in "usual wage income" (no
overtime, bonuses, investment income, etc.):
Wage Disparity Continues to Grow: The median pay of American workers has
stagnated in recent years, but that is not true for all workers. When
adjusted for inflation, the wages of low-paid workers have declined. But the
wages for better-paid workers have grown significantly more rapidly than
The Labor Department last week reported the levels of “usual weekly
wages”... with details on the
distribution of wages available since 2000. ... The national median wage in
the first quarter of this year was $827 a week. In 2013 dollars, the median
wage 13 years before was $819, so the increase is about 1 percent. The
figures include all workers over the age of 25.
The department said that ... to earn more money than 90 percent of those
with jobs ... a person needed to earn $1,909 a week. That figure was nearly 9
percent higher than in early 1980. To reach the 10th percentile ... required an income of $387 a
week. After adjusting for inflation, that figure is down 3 percent from
Put another way, in 2000 a worker in the 75th percentile made 48 percent
more than a worker at the median, or 50th percentile. Now, a worker in that
group earns 58 percent more. ...
If wage stagnation and growing inequality somehow caused flight delays and other inconveniences for those who are doing okay -- the people with the most political power -- maybe we'd put more effort into doing something about it.
Gross Domestic Product Report Has Good News and Bad News:
This morning's gross domestic product (GDP) report showed that the
economic recovery continued through the first quarter of this year, growing
at 2.5%. That's a reasonable (though not great) rate of growth, although a
bit below expectations, which were for something closer to 3%. There's
good news and bad news buried in the detail. The good is that consumers seem
interested in spending again. We'll see whether that holds up over coming
months. The bad is that firms aren't so optimistic, and investment was
Government spending continues to detract from economic growth, as it has for
10 of the past 11 quarters. This report also provides the latest
reading on the core PCE deflator, which is the rate of inflation targeted by
the Fed. This measure shows inflation running at 1.2%, well below the Fed's
target. Let's not get lost in the detail. This GDP report provides a
soon-to-be-revised and noisy indicator of what happened in the economy a few
months back. The bigger picture is that we have a fledgling recovery
which needs help, but isn't getting it: Fiscal policy is set as a drag on
growth, and monetary policy delivering below-target inflation.
The 1 Percent’s Solution, by Paul Krugman, Commentary, NY Times:
Economic debates rarely end with a T.K.O. But the great policy debate of
recent years between Keynesians, who advocate sustaining and, indeed,
increasing government spending in a depression, and austerians, who demand
immediate spending cuts, comes close... At this point, the austerian
position has imploded; not only have its predictions about the real world
failed completely, but the academic research invoked to support that
position has turned out to be riddled with errors, omissions and dubious
Yet two big questions remain. First, how did austerity doctrine become so
influential in the first place? Second, will policy change at all now that
crucial austerian claims have become fodder for late-night comics?
On the first question:... the two main studies providing the alleged
intellectual justification for austerity ... did not hold up under scrutiny.
... Meanwhile, real-world events ... quickly made nonsense of austerian
Yet austerity maintained and even strengthened its grip on elite opinion.
Part of the answer surely lies in the widespread desire to see economics as
a morality play... We lived beyond our means ... and now we’re paying the
inevitable price. ... But... You can’t understand the influence of austerity
doctrine without talking about class and inequality,... a point documented
in a recent research paper... The ... average American is somewhat worried
about budget deficits, which is no surprise given the constant barrage of
deficit scare stories in the news media, but the wealthy, by a large
majority, regard deficits as the most important problem we face. ... The
wealthy favor cutting federal spending on health care and Social Security —
that is, “entitlements” — while the public at large actually wants to see
spending on those programs rise.
You get the idea: The austerity agenda looks a lot like a simple expression
of upper-class preferences, wrapped in a facade of academic rigor. What the
top 1 percent wants becomes what economic science says we must do. ...
And this makes one wonder how much difference the intellectual collapse of
the austerian position will actually make. To the extent that we have policy
of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new
justifications for the same old policies?
I hope not; I’d like to believe that ideas and evidence matter... Otherwise,
what am I doing with my life? But I guess we’ll see just how much cynicism
Evidence and Economic Policy: Henry Blodget says that the economic
debate is over; the austerians have lost and whatshisname has won. And
it’s definitely true that in sheer intellectual terms, this is looking like
an epic rout. The main economic studies that supposedly justified the
austerian position have imploded; inflation has stayed low; the bond
vigilantes have failed to make an appearance; the actual economic effects of
austerity have tracked almost exactly what Keynesians predicted.
But will any of this make a difference? The story of the past three years,
after all, is not that Alesina and Ardagna used a bad measure of fiscal
policy, or that Reinhart and Rogoff mishandled their data. It is that
important people’s will to believe trumped the already ample evidence that
austerity would be a terrible mistake; A-A and R-R were just riders on the
The cynic in me therefore says that after a brief period of regrouping, the
VSPs will be right back at it — they’ll find new studies to put on
pedestals, new economists to tell them what they want to hear, and those who
got it right will continue to be considered unsound and unserious.
But maybe I’m wrong; maybe truth will prevail. Here’s hoping
Although the newly discovered errors in Reinhart and Rogoff’s 2010 paper
(“Growth in a Time of Debt”) are embarrassing, they do not alter one of its
main conclusions: High debt and low economic growth often go together.
Paul Krugman responds
here, Dean Baker
here. Krugman makes a key point:
And anyway, the important story isn’t about the sins of the
economists; it’s about our warped economic discourse, in which important
people seize on academic work that fits their preconceptions.
“One thing that experts know, and that non-experts do not, is that they
know less than non-experts think they do.”
It comes from Kaushik
Basu, currently chief economist at the World Bank and one of the world’s
most thoughtful expert-economists.
Economists would be so much more honest (with themselves and the world) if
they acted accordingly – letting their audience know that their results and
prescriptions come with a large margin of uncertainty. Public
intellectuals would do so much less damage if they did likewise. And if
experts are not aware of the limits of their knowledge – well, they do not
deserve to be called experts or intellectuals.
The real point, though, is that the other side – journalists, politicians,
the general public -- always has a tendency to attribute greater authority and
precision to what the experts say than the experts should really feel
comfortable with. That is what calls for compensating action on the part
of the experts.
So if you are an expert hang this gem from Basu prominently on your wall.
And next time you talk to a journalist, advise a politician, or take to the
stage in a public event, repeat it to yourself beforehand a few times.
This is asking a lot. My experience is that researchers really, really
believe their own results so a call to temper enthusiasm will not work. They
don't think they are overselling. So the cautions will have to come from
people other than the authors of the work. That could help, but Krugman's point is,
I think, more
relevant. People have an interest in selling certain pieces of research that promote their political goals. For
example, Reinhart and Rogoff played very well with those who wanted a
smaller government and they helped to sell these results. Even if Reinhart
and Rogoff had been quite humble about their findings, the correlations they
found still would have
likely been seized upon by those with an interest in using them to make
progress toward ideological goals. Not sure how to solve this problem, but asking whether somebody has an interest in promoting a particular piece of research is a place to start.
Why gold and bitcoin make lousy money: A desirable property of a
monetary instrument is that it holds its value over short periods of time.
Most assets do not have this property: their purchasing power fluctuates
greatly at very high frequency. Imagine having gone to work for gold a few
weeks ago, only to see the purchasing power of your wages drop by 10% in one
day. Imagine having purchased something using Bitcoin, only to watch the
purchasing power of your spent Bitcoin rise by 100% the next day. It would
Is it important for a monetary instrument to hold its value over long
periods of time? I used to think so. But now I'm not so sure. While I do not
necessarily like the idea of inflation eating away at the value of fiat
money, I don't think that a low and stable inflation rate is such a big
deal. Money is not meant to be a long-term store of value, after all. Once
you receive your wages, you are free to purchase gold, bitcoin, or any other
asset you wish. (Inflation does hurt those on fixed nominal payments, but
the remedy for that is simply to index those payments to inflation. No big
I find it interesting to compare the huge price movements in gold and
Bitcoin recently, especially since the physical properties of the two
objects are so different. That is, gold is a solid metal, while Bitcoin is
just an abstract accounting unit (like fiat money).
But despite these physical differences, the two objects do share two
 They are (or are perceived to be) in relatively fixed supply; and
 The demand for these objects can fluctuate violently.
The implication of  and  is that the purchasing power (or price) of
these objects can fluctuate violently and at high frequency. Given , the
property , which is the property that gold standard advocates like to
emphasize, results in price-level instability. In principle, these wild
fluctuations in purchasing power can be mitigated by having an "elastic"
money supply, managed by some (private or public) monetary institution. This
latter belief is what underlies the establishment of a central bank managing
a fiat money system (though there are other ways to achieve the same
The key issue for any monetary system is credibility of the agencies
responsible for managing the economy's money supply in a socially
responsible manner. A popular design in many countries is a politically
independent central bank, mandated to achieve some measure of price-level
stability. And whatever faults one might ascribe to the U.S. Federal Reserve
Bank,... since the early 1980s, the Fed has at least managed to keep
inflation relatively low and relatively stable.
And this was during a period of as free markets as one could practically
get. This undermines at least three "free market" explanations for
- "Welfare benefits mean the unemployed have little incentive to get work."
In the 19th C, though, the only state
support the unemployed got was in the Workhouse -
and even as late as in my lifetime, this was spoken of with terror.
- "Big government and taxes deter job creation." But public spending in this
time averaged only around 10%
of GDP, and labour market regulation except for a few Factory Acts was
nugatory by modern standards.
- "Wages are too rigid". But wages fell in nominal terms in 13 of the 59
years here, and in real terms in 12 of these years. Average nominal wages
fell by 9% between 1874 and 1879, which is consistent with some sectors
seeing very large falls.
There is, though, an alternative theory that fits these data. It's that a
free market will see large swings in aggregate demand and employment, and
that unemployment cannot be prevented by wage reductions alone. This was
pointed out most famously - well famous in my house anyway - by Michal
Kalecki in 1935... [long quote] ...
There's a good reason why almost all major economies abandoned free market
economics. It's that such economies didn't and couldn't avoid mass
I'll concede - much more than most lefties - that there's a big place for
free market economics. But the labour market ain't it.
...the sequester is throwing around 600,000 people out of work according to
the Congressional Budget Office. These are people who have the necessary
skills to fill jobs in the economy but who will not be working because
people in Washington lack the skills to design policies to keep the economy
near full employment.
In 1816, the net
public debt of the UK reached 240 per cent of gross domestic product.
This was the fiscal legacy of 125 years of war against France. What economic
disaster followed this crushing burden of debt? The industrial revolution.
Yet Carmen Reinhart and Kenneth Rogoff of Harvard university argued ... that
growth slows sharply when the ratio of public debt to GDP exceeds 90 per
cent. The UK’s experience in the 19th century is such a powerful
I agree with the critics for reasons given by Gavyn Davies. The argument that data covering a long period of high debt should count for more than data covering a short one is persuasive. ...
[A]fter a financial crisis, a huge excess of desired private savings is
likely to emerge... In that
situation, immediate fiscal austerity will be counterproductive. ... This is
why I was – and remain – concerned about the intellectual influence in favor
of austerity exercised by profs Reinhart and Rogoff, whom I greatly respect.
The issue here is not even the direction of causality, but rather the costs
of trying to avoid high public debt in the aftermath of a financial crisis.
In its latest World Economic Outlook, the IMF notes that direct fiscal
support for recovery has been exceptionally weak. Not surprisingly, the
recovery itself has also been feeble. One of the reasons for this weak
support for crisis-hit economies has been concern about the high level of
public debt. Profs Reinhart and Rogoff’s paper justified that concern ...
This was a huge blunder. It is still not too late to reconsider.
Only Richest 7% Saw Wealth Gains From 2009 to 2011, by Neil Shah: ...
From 2009 to 2011, the average wealth of America’s richest 7% — the 8
million households with a net worth north of about $800,000 — rose nearly
30% to $3.2 million from $2.5 million, according to a Pew Research
Center report... By contrast, the average wealth of America’s remaining 93%,
some 111 million households, actually dropped by 4% to $134,000 from
The findings show that America’s economic recovery has been not just
sluggish, but painfully uneven in its benefits. Rallying stock and bond
markets have boosted the wealth of America’s most affluent... The upper 7%
of households held 63% of the nation’s wealth at the end of 2011, up from
56% in 2009.
As the article notes, "the one-sidedness of the U.S.’s recovery ... has been
supported by low-interest-rate policies from the Federal Reserve that have
helped push asset prices higher."
One of the things we need to think a lot harder about is how to improve the distributional effects of monetary policy. I'd feel better about taking care of the top 7 percent if it had somehow
trickled down to more jobs for struggling households, or if we had used fiscal policy to address the
unemployment problem to a far greater degree than we did.
Kindleberger’s third lesson ... has to do with the importance of hegemony,
defined as a preponderance of influence and power over others, in this case
over other nation states. Kindleberger argued that at the root of Europe’s
and the world’s problems in the 1920s and 1930s was the absence of a
benevolent hegemon: a dominant economic power able and willing to take the
interests of smaller powers and the operation of the larger international
system into account by stabilizing the flow of spending through the global
or at least the North Atlantic economy, and doing so by acting as a lender
and consumer of last resort. Great Britain, now but a middle power in
relative economic decline, no longer possessed the resources commensurate
with the job. The rising power, the US, did not yet realize that the
maintenance of economic stability required it to assume this role. In
contrast to the period before 1914, when Britain acted as hegemon, or after
1945, when the US did so, there was no one to stabilize the unstable
economy. Europe, the world economy’s chokepoint, was rendered rudderless,
unstable, and crisis- and depression-prone. ...
It might be hoped that something would have been learned from this
considerable body of scholarship. Yet today, to our surprise, alarm and
dismay, we find ourselves watching a rerun of Europe in 1931. Once more,
panic and financial distress are widespread. And, once more, Europe lacks a
hegemon – a dominant economic power capable of taking the interests of
smaller powers and the operation of the larger international system into
account by stabilizing flows of finance and spending through the European
The ECB does not believe it has the authority: its mandate, the argument
goes, requires it to mechanically pursue an inflation target – which it
defines in practice as an inflation ceiling. It is not empowered, it argues,
to act as a lender of the last resort to distressed financial markets... The
EU, a diverse collection of more than two dozen states, has found it
difficult to reach a consensus on how to react. And even on those rare
occasions where it does achieve something approaching a consensus, the
wheels turn slowly, too slowly compared to the crisis, which turns very
The German federal government, the political incarnation of the single most
consequential economic power in Europe, is one potential hegemon. It has
room for countercyclical fiscal policy. It could encourage the European
Central Bank to make more active use of monetary policy. It could fund a
Marshall Plan for Greece and signal a willingness to assume joint
responsibility, along with its EU partners, for some fraction of their
collective debt. But Germany still thinks of itself as the steward is a
small open economy. It repeats at every turn that it is beyond its capacity
to stabilize the European system: “German taxpayers can only bear so much
after all”. Unilaterally taking action to stabilize the European economy is
not, in any case, its responsibility, as the matter is perceived. The EU is
not a union where big countries lead and smaller countries follow docilely
but, at least ostensibly, a collection of equals. Germany’s own difficult
history in any case makes it difficult for the country to assert its
influence and authority and equally difficult for its EU partners, even
those who most desperately require it, to accept such an assertion.
Europe, everyone agrees, needs to strengthen its collective will and ability
to take collective action. But in the absence of a hegemon at the European
level, this is easier said than done.
The International Monetary Fund, meanwhile, is not sufficiently well
capitalized to do the job even were its non-European members to permit it to
do so, which remains doubtful. Viewed from Asia or, for that matter, from
Capitol Hill, Europe’s problems are properly solved in Europe. More
concretely, the view is that the money needed to resolve Europe’s economic
and financial crisis should come from Europe. The US government and Federal
Reserve System, for their part, have no choice but to view Europe’s problems
from the sidelines. A cash-strapped US government lacks the resources to
intervene big-time in Europe’s affairs in 1948; there will be no 21st
century analogue of the Marshall Plan... Today,... the Congress is not about
to permit Greece, Ireland, Portugal, Italy, and Spain to incorporate in
Delaware as bank holding companies and join the Federal Reserve System.
In a sense, Kindleberger predicted all this in 1973. ... It was fear of this
future that led Kindleberger to end The World in Depression with the
observation: “In these circumstances, the ... alternative of international
institutions with real authority and sovereignty is pressing.”
The Jobless Trap, by Paul Krugman, Commentary, NY Times: F.D.R. told us
that the only thing we had to fear was fear itself. But when future
historians look back at our monstrously failed response to economic
depression, they probably won’t blame fear, per se. Instead, they’ll
castigate our leaders for fearing the wrong things.
For the overriding fear driving economic policy has been debt hysteria...
After all, haven’t economists proved that economic growth collapses once
public debt exceeds 90 percent of G.D.P.?
Well, the famous red line on debt, it turns out, was an artifact
of dubious statistics, reinforced by bad arithmetic. ... But while debt
fears were and are misguided, there’s a real danger we’ve ignored: the
corrosive effect, social and economic, of persistent high unemployment. ...
Five years after the crisis, unemployment remains elevated, with almost 12
million Americans out of work. But what’s really striking is the huge number
of long-term unemployed, with 4.6 million unemployed more than six months
and more than three million who have been jobless for a year or more. Oh,
and these numbers don’t count those who have given up looking for work
because there are no jobs to be found. ...
The key question is whether workers who have been unemployed for a long time
eventually come to be seen as unemployable, tainted goods that nobody will
buy. ... And there is, unfortunately, growing evidence that the tainting of
the long-term unemployed is happening as we speak. ... So we are indeed
creating a permanent class of jobless Americans.
And let’s be clear: this is a policy decision. The main reason our economic
recovery has been so weak is that, spooked by fear-mongering over debt,
we’ve been doing exactly what basic macroeconomics says you shouldn’t do —
cutting government spending in the face of a depressed economy.
It’s hard to overstate how self-destructive this policy is. Indeed, the
shadow of long-term unemployment means that austerity policies are
counterproductive even in purely fiscal terms. Workers, after all, are
taxpayers too; if our debt obsession exiles millions of Americans from
productive employment, it will cut into future revenues and raise future
Our exaggerated fear of debt is, in short, creating a slow-motion
catastrophe. It’s ruining many lives, and at the same time making us poorer
and weaker in every way. And the longer we persist in this folly, the
greater the damage will be.
If the objective of monetary policy is a combination of low inflation and
unemployment, I think it is difficult to argue that the Federal Reserve pursued
an overly loose policy stance in the periods of the internet and housing
bubbles. Indeed, it is arguable that asset price bubbles were integral in
fostering low unemployment.
With this in mind, consider this conclusion from Minneapolis Federal Reserve
President Narayana Kocherlakota,
speaking at the 22nd Annual Hyman P. Minsky conference:
In this way, unusually low real interest rates should be expected to be
linked with inflated asset prices, high asset return volatility and
heightened merger activity. All of these financial market outcomes are often
interpreted as signifying financial market instability. And this observation
brings me to a key conclusion. I’ve suggested that it is likely that, for a
number of years to come, the FOMC will only achieve its dual mandate of
maximum employment and price stability if it keeps real interest rates
unusually low. I’ve also argued that when real interest rates are low, we
are likely to see financial market outcomes that signify instability. It
follows that, for a considerable period of time, the FOMC may only be to
achieve its macroeconomic objectives in association with signs of
instability in financial markets.
This sounds like Kocherlakota believes that it is not possible for the
Federal Reserve to accomplish its dual mandate in the absence of asset bubbles,
excessive credit growth, etc. This leads to issue of how should the Federal
Reserve deal with such instability:
To answer this question, the Committee will need to confront an ongoing
probabilistic cost-benefit calculation. On the one hand, raising the real
interest rate will definitely lead to lower employment and prices. On the
other hand, raising the real interest rate may reduce the risk of a
financial crisis—a crisis which could give rise to a much larger
fall in employment and prices. Thus, the Committee has to weigh the certainty of
a costly deviation from its dual mandate objectives against the benefit of
reducing the probability of an even larger deviation from those
In other words, if they raise interest rates, the will clearly deviate from
their objectives, but if they don't there is only a chance of suffering a larger
deviation. So they should refrain from addressing financial instability
(through raising interest rates) until it is clearly evident that it poses a
significant risk to the dual mandate.
But how might one measure financial instability? A
new paper by Claudio Borio, Piti Disyatat, and Mikael Juselius offers a
fresh look at potential output that incorporates information about the financial
cycle. Note that traditional measures of potential output focus on
the inflationary consequences of level of actual output. If inflation remains
contained or falling, then by definition actual output is equal to or less than
potential output. Borio et al, however, note that the economy may be on an
unsustainable path even when inflation remains contained. Arguably, measures of
potential output should incorporate information about financial factors that
might signal the economy is on such a path.
Why might be expect that we might be on a unsustainable path even under
conditions of low and stable inflation? The authors summarize:
There are at least four reasons for this. One is that unusually strong
financial booms are likely to coincide with positive supply side shocks (eg
Drehmann et al (2012))....A second reason is that the economic expansions
may themselves weaken supply constraints. Prolonged and robust expansions
can induce increases in the labour supply, either through higher
participation rates or, more significantly, immigration....A third reason is
that financial booms are often associated with a tendency for the currency
to appreciate, as domestic assets become more attractive and capital flows
surge. The appreciation puts downward pressure on inflation. A fourth,
underappreciated, reason is that unsustainability may have to do more with
the sectoral misallocation of resources than with overall capacity
constraints. The sectors typically involved are especially sensitive to
credit, such as real estate.
Thus, unsustainable financial booms can be especially treacherous, as it
is all too easy to be lulled into a false sense of security. Economic
activity appears deceptively robust. Financial and real developments mask
the underlying financial vulnerabilities that eventually bring the expansion
to an end...
The author's estimate what they describe as "finance neutral" output gaps via
an expanded version of an H-P filter. Among their findings is that applying a
Taylor rule to their output gap suggests that the Federal Funds rate was set too
low during much of the 2000's, and possibly now as well. Still, the authors
stop short of advocating that interest rate policy should be used to lean
against financial headwinds. Tighter monetary policy might ease financial
instabilities, but aggravate recovery from a balance sheet recession.
Arguably, the current environment is a case where it would be imprudent to
lean against potential financial instabilities. The Federal Reserve
is holding interest rates low for a protracted period and thus fueling fears
they are laying the groundwork for the next financial crisis. But raising rates
doesn't seem like an appropriate option considering the economy is far from
fully recovered from the recession. This speaks to Kocherlakota's comment. And
those of Federal Reserve Chairman Ben Bernanke as said
in a recent speech:
One might argue that the right response to these risks is to tighten
monetary policy, raising long-term interest rates with the aim of
forestalling any undesirable buildup of risk. I hope my discussion this
evening has convinced you that, at least in economic circumstances of the
sort that prevail today, such an approach could be quite costly and might
well be counterproductive from the standpoint of promoting financial
stability. Long-term interest rates in the major industrial countries are
low for good reason: Inflation is low and stable and, given expectations of
weak growth, expected real short rates are low. Premature rate increases
would carry a high risk of short-circuiting the recovery, possibly
leading--ironically enough--to an even longer period of low long-term rates.
Only a strong economy can deliver persistently high real returns to savers
and investors, and the economies of the major industrial countries are still
in the recovery phase.
Admitedly, this is frustrating. It is as if we we are faced with a tradeoff
between economic recovery and financial stability. But this begs an even
greater question. Why do we have to make this tradeoff? Why is maintaining
full-employment dependent on destabilizing asset bubbles? Commenting on this
speech, Ryan Avent asks if the current dynamics are a result of the
Fed's never-ending pursuit of low inflation:
...one very clear implication...price stability is keeping nominal rates
low and is therefore an impediment to financial and macroeconomic stability.
One has to weigh costs and benefits, of course, but one cannot miss the
trade-off: the more you worry about low rates the less low and stable
inflation should look like a good thing...
...It is perhaps premature to declare the existence of a new monetary
trilemma, that over the medium-term central banks can choose at most two of
the following: low inflation, low unemployment, and financial stability. But
if Mr Bernanke continues arguing this effectively in favour of higher
inflation, we may need to ask why he isn't pursuing it as an explicit goal.
Has the pursuit of low inflation brought us to a point where we can maintain
the Fed's dual mandate only at the presence of financial instability?
That unless we allow for somewhat higher inflation, we are making a deliberate
choice to follow only "inflation-neutral" measures of the output gap and ignore
"finance-neutral" measures? And, importantly, might it not be the case that the
costs of somewhat higher inflation are in fact less than the costs associated
with the financial instabilities that seem to be part and parcel of the current
Bottom Line: If Kocherlakota is correct and monetary policy can only pursue
the dual mandate in the context of financial - and, by extension - macroeconomic
instability, then we really need to consider which part of the dual mandate
needs to be loosened to reduce the reliance on financial instability. My fear
is that if Fed policy makers were asked this question, they would unanimously
answer that it is the full-employment portion of the mandate that should be
There will be a big revision of macroeconomic data in July:
Data shift to lift US economy by 3%, by Robin Harding, FT: The US
economy will officially become 3 per cent bigger in July as part of a
shake-up that will for the first time see government statistics take into
account 21st century components such as film royalties and spending on
research and development. ...
In an interview with the Financial Times, Brent Moulton, who manages the
national accounts at the Bureau of Economic Analysis, said the update is the
biggest since computer software was added to the accounts in 1999.
“We are carrying these major changes all the way back in time – which for us
means to 1929 – so we are essentially rewriting economic history,” said Mr
The changes will affect everything from the measured GDP of different US
states to the stability of the inflation measure targeted by the US Federal
Reserve. They will force economists to revisit policy debates about
everything from corporate profits to the causes of economic growth. ...
The changes are in addition to a comprehensive revision of the national
accounts that takes place every five years... Steve Landefeld, the BEA
director, said it was hard to predict the overall outcome given the mixture
of new methodology and data updates. ... But while the level of GDP may
change,... “I wouldn’t be looking for large changes in trends or cycles,”
said Mr Landefeld. ...
When working with macroeconomic data, we don't generally assume that there are large measurement errors in the data when assessing the significance of the results. Maybe we should.
The piece ... goes on to describe the extent of the Danish welfare state
with its 56 percent top marginal income tax rate, telling readers:
"But few experts here believe that Denmark can long afford the current perks.
So Denmark is retooling itself, tinkering with corporate tax rates, considering
new public sector investments and, for the long term, trying to wean more people
— the young and the old — off government benefits."
Hmmm, it would be interesting to know what data the experts are looking at. According
to the IMF, Denmark had a ratio of net debt to GDP at the end of 2012 of 7.6
percent. This compared to 87.8 percent in the United States. Its deficit in 2012
was 4.3 percent of GDP, but almost all of this was do the downturn. The IMF
estimated its structural deficit (the deficit the country would face if the
economy was at full employment) at just 1.1 percent of GDP. Furthermore, the
country had a huge current account surplus of 5.3 percent of GDP in 2012... This
means that Denmark is buying up foreign assets at a rapid rate. ...
If there is something unsustainable in this picture, it is not the sort of
data that economists usually look at. Is marijuana legal in Denmark?
Then we find the real problem is that no one in Denmark is working:
"In 2012, a little over 2.6 million people between the ages of 15 and 64 were
working in Denmark, 47 percent of the total population and 73 percent of the 15-
"While only about 65 percent of working age adults are employed in the United
States, comparisons are misleading, since many Danes work short hours and all
enjoy perks like long vacations and lengthy paid maternity leaves, not to speak
of a de facto minimum wage approaching $20 an hour. Danes would rank much lower
in terms of hours worked per year."
So in spite of the generous Danish welfare state a higher percentage of its
working age population works than in the United States. (Actually Denmark ranks
near the top of the world in employment to population ratios.) Yet, somehow this
doesn't really count because people in Denmark get vacations, work shorter
hours, and have a higher effective minimum wage.
This ranks pretty high in the non sequitur category, apparently when you want
to bash the welfare state, the rules of logic apparently do not apply. Danes,
like most Europeans, have opted to take much of the gains in productivity growth
over the last three decades in the form of shorter work years rather than higher
income. (One interesting result of this practice is that we have some hope to
save the planet from global warming -- greenhouse gas emissions are highly
correlated with income.) Of course Danes still work about 8 percent more hours
on average than hard-working Germans, according
to the OECD. If there is a problem in this picture, the NYT might want to
devote a few paragraphs to telling readers what it is.
As far as the $20 an hour effective minimum wage, isn't the problem of a high
minimum wage supposed to be that it creates unemployment. But the NYT just told
us that Denmark has higher employment... (My brain
Okay, we get it. The NYT doesn't like Denmark's welfare state. It doesn't
really have any data to make the case that Denmark's welfare state is falling
apart and leading to all sorts of bad outcomes, but they can wave their arms
really fast and hey, they are the New York Times.
As John Maynard Keynes shrilly stated back in 1926:
Let us clear… the ground…. It is not true that individuals possess a
prescriptive 'natural liberty' in their economic activities. There is no
'compact' conferring perpetual rights on those who Have or on those who
Acquire. The world is not so governed from above that private and social
interest always coincide. It is not so managed here below that in practice
they coincide. It is not a correct deduction from the principles of
economics that enlightened self-interest always operates in the public
interest. Nor is it true that self-interest generally is enlightened…
individuals… promot[ing] their own ends are too ignorant or too weak to
attain even these. Experience does not show that… social unit[s] are always
less clear-sighted than [individuals] act[ing] separately. We [must]
therefore settle… on its merits… "determin[ing] what the State ought to take
upon itself to direct by the public wisdom, and what it ought to leave, with
as little interference as possible, to individual exertion".
The management of economies by governments in the twentieth century was at
best inept. And, as we have seen since 2007, little if anything has been durably
learned about how to regulate the un-self-regulating market in order to maintain
prosperity, or ensure opportunity, or produce substantial equality.
Before the start of the nineteenth century, there were markets but there
was not really a market economy—and the peculiar dysfunctions that we have
seen the market economy generate through its macroeconomic functioning were,
if not absent, at least rare and in the background of attention. Wars,
famines, government defaults were threats to life and livelihood. The idea
that Alice might be poor and hungry because Bob would not buy stuff from her
because Bob was unemployed because Carl wanted to deleverage because Dana
was no longer a good credit risk because Alice had stopped paying rent to
Dana--that and similar macroeconomic processes are a post-1800 phenomenon.
The problems of economic policy in the modern age are, speaking very
broadly, threefold: first, the problem of attempts to replace the market
with central planning--which is, for reasons well-outlined by the brilliant
Friedrich von Hayek, a subclass of the problem of twentieth-century
totalitarian tyranny--second, the problem of managing what Karl Polanyi
called "fictitious commodities"; and, third, the problem of managing
aggregate demand. ...[much
The yen fell sharply against other major currencies on Friday after the
Japanese finance minister said Japan’s monetary policies had not met with
resistance at the G20 group of nations in Washington.
This interpretation of the meeting helped sink the Yen to almost 100. More
specifically, from the statement:
In particular, Japan’s recent policy actions are intended to stop
deflation and support domestic demand.
Still, there remains a pro-austerity contingent:
Japan should define a credible medium-term fiscal plan.
I think the only credible medium-term plan for fiscal consolidation first
involves higher near-term growth. More broadly than just Japan, but including
We will continue to implement ambitious structural reforms to increase
our growth potential and create jobs.
How do these pieces fit together? I tend to see room for all three policy
tools - monetary, fiscal, and structural - in fighting weak growth and outright
recessions, although the weighting will vary according to circumstances. For
instance, I don't deny the need for structural changes in the European periphery
or Japan. Those changes, however, need to be cushioned with expansionary
monetary and fiscal policy to yield a positive growth trajectory.
With this in mind, consider this
recent post by Ed Harrison. He expands the Reinhart/Rogoff debate to
current events in Japan:
This is the takeaway in Japan: stimulus without reform leads to a policy
cul-de-sac. Monetary and fiscal stimulus is not a cure-all for economies or
Japan would be the model and it most assuredly is not the model. If you want
to use stimulus, then you need to have reform policies as well. It’s a
three-pronged approach. The supply side matters. And that is the promise of
Abenomics, isn’t it: fiscal and monetary stimulus as bridges to sustainable
growth due to economic reform. Supposedly, this is what Abenomics is all
about. And the Wall Street Journal told us yesterday that this reform, the
third leg of this stool is now being put into place. Be sceptical, of
course. Let’s just see what happens.
Mixing the RR debate and the Japanese and European experiences leads him to
Take a cue from Japan. The lesson is not to stimulate
and deficit spend like mad and hope this succeeds in reflating the economy.
That’s just a risk shift onto the public balance sheet. And the Japanese
experience shows that people are uncomfortable with these kinds of deficits
and will always work to reduce them irrespective of the consequences. You
need supply side fixes too.
Take a cue from the euro zone. The lesson is also
certainly not to undergo painful – and front-loaded – austerity like the
euro zone. The Europeans have tied their hands with the euro. There is no
currency sovereignty there and the ECB is legally forbidden to be
politically aligned with any national government. The threat of insolvency
is real. But Britain doesn’t have to go down this path. They have a lot more
policy space. The bond vigilantes are a myth.
"Overcoming the crisis and the crisis effects will remain a challenge
over the next decade," he said in an interview from his conference room
at Bundesbank's headquarters overlooking Frankfurt's financial
district, contrasting recent comments from European Commission President
José Manuel Barroso that the worst of Europe's crisis is over.
An aging society and the time needed to work through its debt crisis
will keep growth in Europe subdued for years to come, German Finance
Minister Wolfgang Schaeuble said Friday.
“No one should expect that Europe will deliver high growth rates for years,” he said.
Apparently the new strategy is to keep expectations low. One has to
imagine that given the current path of activity and the lack of fiscal
support from European nations, the European Central Bank will find
itself not only cutting rates but implementing its own version of
quantitative easing by year end. The only other option would be to sit back and watch Europe slide from recession to depression And that does
not seem like a credible policy path.
Jared Bernstein calls for "direct, public job creation":
Getting Back to Full Employment: Getting back to full employment—not
debt, deficits, sequester, debt ceilings—is what we ought to be talking
about... I’m happy to say, in fact, that in my travels outside this
benighted town (DC), it’s the question I get asked most often (“why isn’t
Washington doing anything about jobs!!??”). ....
So how do we get there from here?
Of course, the first thing is to get the macro policy right, and I go on
about that enough about that ... already. Dean Baker
emphasizes dollar policy here as well: the trade deficit is a drag on growth
and factory jobs, so that too is a target in the quest for full employment.
But for this post, I’d like to focus on something else, motivated by the
chart below, one I’ve posted before. It simply plots private sector
job growth against productivity growth. Up until about 15 years ago,
you could have nicely employed this picture against your Luddite friends who
complain about productivity killing jobs.
Until then, the two lines largely grew together. Yes, we were more
productive, but growth resulted in higher demand that fed back into the
economy’s job-creation function in ways that boosted job growth. The
income and wage benefits of growing productivity certainly haven’t reached very
far down the income scale since the late 1970s—that’s the inequality story.
But even as inequality grew in the 1980s and 1990s, job creation largely kept
pace with output per hour.
That hasn’t been the case since, and it is a matter of grave concern.
The reasons go beyond my scope here, but a prime suspect observed at the crime
scene is an acceleration of labor-saving capital investment, like robotics (see Brynjolfsson
and McAfee for incisive work on this question).
Here, I want to introduce a different solution, one that isn’t better fiscal
and monetary policy to maximize growth. It’s direct, public job creation.
That is, if the private sector can’t be counted upon to generate the needed job
opportunities to absorb our labor supply, then there is a role for government to
correct this important market shortcoming. ...
What, specifically, am I talking about? Not so much a bunch of guys
setting up camp in the woods and building stuff circa the 1930s, though that
worked well at
But those days have passed, I think, and contemporary direct job creation
programs are not limited to public sector jobs. A more common model today
is subsidized work, often in the private or NGO sectors. The TANF subsidized
jobs program during the Recovery Act is a good recent example of an effective,
though small, program that placed over 250,000 low-income workers in 2009-10.
As Pavetti et al report,
the program worked with private and government employers to create “new
temporary jobs that would otherwise have not existed.” ...
There’s obviously a ton to be done, both in terms of infrastructure
(upgrading and repairing public goods) and services, and while displacement must
be prohibited and monitored (and punished, when it’s exposed), research suggests
that a lot of what happens here is you pull forward a hire that might have
happened later or nudge an employer at the margin of a hiring decision to go
ahead and pull the trigger.
I’ll have a lot more to say about this in coming weeks and yes, I know it’s
way outside the current political box. But this relatively new gap between
employment and productivity will only exacerbate the old gap between income and
productivity unless we begin to think and act outside that box on ways to
achieve full employment. Direct job creation is part of the answer.
Will the "Reinhart-Rogoff fiasco" change "the obviously intense desire of
policy makers, politicians and pundits across the Western world to turn their
backs on the unemployed and instead use the economic crisis as an excuse to
slash social programs"?:
The Excel Depression, by Paul Krugman, Commentary, NY Times: ... At the
beginning of 2010, two Harvard economists, Carmen Reinhart and Kenneth
Rogoff, circulated a paper ... that purported to identify a critical
“threshold,” a tipping point, for government indebtedness. Once debt exceeds
90 percent of gross domestic product, they claimed, economic growth drops
Ms. Reinhart and Mr. Rogoff had credibility thanks to a widely admired
earlier book on the history of financial crises, and their timing was
impeccable. The paper came out just after Greece went into crisis and played
right into the desire of many officials to “pivot” from stimulus to
austerity. As a result, the paper ... was, and is, surely the most
influential economic analysis of recent years.
In fact,... Reinhart-Rogoff faced substantial criticism from the start... As
soon as the paper was released, many economists pointed out that a negative
correlation between debt and economic performance need not mean that high
debt causes low growth. It could just as easily be the other way around,
with poor economic performance leading to high debt. ...
Over time, another problem emerged: Other researchers ... couldn’t replicate
the Reinhart-Rogoff results. ... Finally,... the mystery of the
irreproducible results was solved. First, they omitted some data; second,
they used unusual and highly questionable statistical procedures; and
finally, yes, they made an Excel coding error. Correct these oddities and
errors, and you get what other researchers have found: some correlation
between high debt and slow growth, with no indication of which is causing
which, but no sign at all of that 90 percent “threshold.” ...
The ... Reinhart-Rogoff fiasco needs to be seen in the broader context of
austerity mania: the obviously intense desire of policy makers, politicians
and pundits across the Western world to turn their backs on the unemployed
and instead use the economic crisis as an excuse to slash social programs.
... For three years,... austerity advocates insisted ... that terrible
things happen once debt exceeds 90 percent of G.D.P. But “economic research”
showed no such thing; a couple of economists made that assertion, while many
others disagreed. Policy makers abandoned the unemployed and turned to
austerity because they wanted to, not because they had to.
So will toppling Reinhart-Rogoff from its pedestal change anything? I’d like
to think so. But I predict that the usual suspects will just find another
dubious piece of economic analysis to canonize, and the depression will go
on and on.