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

Dean Baker (my comments are at the end):

Scary Thought on Labor Day Weekend: Obama's Economic Team Think They Are Doing a Good Job: Ezra Klein gives us some terrifying news in a Bloomberg column today. President Obama's economic team think they are doing a great job, hence the desire to bring back former teammate Larry Summers as Fed chair. This is terrifying because the economy this Labor Day is described by a set of statistics that can only be described as horrible.

We are almost 9 million jobs below the trend level of employment. The number of people involuntarily working part-time is still up by almost 4 million from its pre-recession level. Wages have been stagnant for a decade and show no signs of increasing any time soon. And, according to the Congressional Budget Office, the economy is still operating more than $1 trillion (6 percent) below its potential. Oh, and by the way, the financial sector is more concentrated than ever, with top honchos drawing the same sort of paychecks they did before the crisis.

I could go on but what's the point? This is an economy that under other circumstances we would all say is awful. ...

The best that can be said is that the crew has been ineffectual in the face of Republican opposition in building any sort of political support for a stronger economic agenda. But ineffectual is not a much better recommendation than incompetent.

And it's hard to blame items like the "pivot to deficit reduction" on the Republicans. If the Obama team has an aggressive plan for turning the economy around that is being stifled by the nasty Republicans they have not done a very good job of even making it known, must less rallying support.

I suppose if they think everything in the economy is just great that would explain why they want Larry Summers back. That's pretty bad news on Labor Day. ...

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

Bankers, Workers, Obama and Summers: Brad DeLong has an excellent piece distinguishing between two views of central banking. There’s the “banking camp,” which sees the central bank’s job as being to secure the stability of the financial system – full stop. OK, maybe also price stability. And then there’s the “macroeconomics camp,” which sees the central bank’s job as being to achieve full employment; banking stability and even price stability are basically means towards that end.

Brad complains that the Fed has ended up being much more in the banking camp than many macroeconomists would have wanted. See, for example, the harsh criticisms leveled at the Bank of Japan by one Ben Bernanke in 2000, criticisms that apply almost perfectly to the Bernanke Fed of today.

But I think Brad casts his net too narrowly: it’s not just central bankers who fall into these two camps. And one important consequence of this division is an utterly different read on recent history.

Ask yourself: How well did we respond to the crisis of 2008?

If you’re in the banking camp, here’s what you see [graph]... The financial system was in great danger – but catastrophe was averted. We’re heroes!

On the other hand, if you’re in the macroeconomics camp, here’s what you see [graph]... A catastrophic collapse in employment, with only a modest recovery even after all these years. ... We blew it!

Which brings us to what looks more and more like Obama’s decision to choose Larry Summers as Fed chair, passing over Janet Yellen.

As of right now, Summers is clearly not in the banking camp; the stuff he has been writing about fiscal policy makes it clear that he very much believes that the job of economic recovery is not done. On that basis, you would expect him to prod the Fed into doing much more than it is. On the other hand, given Bernanke’s pre-Fed record you would have expected the same thing — maybe even more so... Once at the Fed, however, Bernanke appears to have been assimilated by the Borg, moving much closer to the banking camp.

Would the same thing happen to Summers? I worry. And one of the strong (though probably futile at this point) arguments for Yellen is that she spent years at the Fed without being assimilated, never losing sight of the crucial importance of employment.

While Summers isn’t in the banking camp, however, Obama is. ...

Obviously I’m in the macroeconomics camp, not the banking camp, so this is all depressing, in several senses. It means, among other things, that even if Summers is the right choice — which we’ll never really know — it’s a choice that Obama is making for all the wrong reasons.

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

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

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

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

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