The Republicans Just won’t Trade in their Fairy Tales
Posted: November 11, 2012 Filed under: Economy, just because | Tags: fiscal cliff, joseph stiglitz, Mark Thoma, Paul Krugman, Trickle Down Economics, voodoo economics 23 CommentsThere’s a notable absence of economists on panels in the mainstream media that discuss the fiscal “ramp”. I’m refusing to call it a fiscal cliff because that’s a misnomer. I’m not sure why they won’t put research economists on these panels. Perhaps they think we’re not photogenic or–despite the fact that a lot of us teach–we can’t explain ourselves. There’s an extremely strong consensus in the economics community on the s0-called budget crisis. Dragging out mainstream economists like Paul Krugman and Joseph Stiglitz and labeling them lefties because of their political leanings is rather disingenuous. It stops them from getting on panels where they could actually explain to people what’s what.
The corporate press would rather haul out a few journalists with real background in the field. There’s a difference between asking a journalist, a lawyer, or some self-anointed policy expert a question on economic theory. First, asking an economist to answer a question as an economist means they’ll stick to the theory and the empirical findings. Second, you can actually pull in almost any economist either trained after about 1980 or who has kept up with the dynamic business cycle models, the empirical findings, and theories and you won’t get much disagreement. You wouldn’t know that if you listen to the press, which seems to be made up a few folks with MBAs who have very little understanding of theory, models, or findings.
Deficit hawks tend be either Wall Street types, lawyers, or partisan right wing politicians. The folks that are screaming worst about dropping the tax cuts for the uber rich tend to have the most to lose personally and the least to lose professionally. Study-after-study-after-study shows that tax cuts to the middle, working, and lower classes and to young people tend to create completely different circumstances than they do for older people and the rich. First, there’s more folks in the first group. Second, they tend to spend a lot more of their current income. Third, their savings and investment opportunities are limited, so the assets they use stay in the country. None of this applies to the uber rich who tend to create jobs and wealth overseas these days and work hard to avoid taxes anyway. We’d do well to just simply let go of the idea that increasing the tax rates on the rich will either lead to unemployment, won’t pay down the deficit, or will suppress growth. These are tales of sound and fury signifying nothing but personal greed.
It is true that we are not on a sustainable spending path. This is because of the direct actions of the Bush administration. They lowered tax rates. Ran two huge wars with no tax increases. They oversaw and created two recessions. They created an asset bubble and then popped it. Growth, employment, and the value of taxable assets all decreased because of their actions. We simply have to reverse their trajectory. We have to do some work on Medicare and we need to walk away from the decaying, rotting corpse of Zombie Economics. The Republicans still won’t let that rotting corpse go.
Krugman talks about some of this on his blog in a post called “Squirming Hawks”. Paul Krugman may be a liberal but he’s certainly not going to risk his reputation in the economics community to spout crackpot hypothesis. Look at what happened to Arthur Laffer whose basically been expunged from any serious text, publishing deal, or institution. When you push crackpot hypotheses that do not stand up to empirical testing and you do not give them up and move on, the community of those who base their research on the scientific method will write you off. Those that follow Hayek and Von Mises have been similarly written off. Their ideological hypotheses do not stand up to any empirical testing.
Now, there’s a straightforward argument for why the fiscal cliff is bad but long-term deficit reduction is good — namely, that you really don’t want to cut deficits when the economy is depressed and you’re in a liquidity trap, so that monetary expansion can’t offset fiscal contraction. As Keynes said, the boom, not the slump, is the time for austerity. But the deficit hawks can’t make that argument, because they have in fact been arguing for austerity now now now.
So they’re left making a mostly incoherent case: it’s too abrupt (why?), it’s the wrong kind of deficit reduction (???), and then this:
a better approach would be to focus spending cuts on low-priority spending and on changes which can help to encourage growth and generate new revenue through comprehensive tax reform which broadens the base – ideally by enough to also lower tax rates.
Low-priority spending? I think that means spending on poor people and the middle class. And isn’t it amazing how people who claim to be horrified, horrified about deficits can’t stop talking about cutting tax rates?
Meanwhile, the CRFB features on its home page an op-ed by Jim Jones declaring that
We are perilously close to trillion-dollar yearly interest payments, 7 percent yields on 10-year U.S. Treasury bonds, 10 percent home mortgage rates and 13 percent rates on car loans. For the good of the country, the parties must come together and not let this happen.
How does he know that we are “perilously close” to this outcome? Not from the markets; not from any kind of economic model. My guess is that Peggy Noonan told him.
Scaring people with large numbers that are not grounded to other large numbers is a mean and terrible thing to do. We have a huge tax base. We have more than enough ability to continue to borrow at low interest rates. We have the ability to print money. We have all kinds of options. We have a huge economy that is showing signs of coming out of a lot of trauma. We should get a double peace dividend shortly. These things point to a very good reason not to be crazy-go-nuts like the Europeans and fall on the austerity sword.
I think that Mark Thoma has some interesting things to add to this conversation. He asks rhetorically and then answers: Hasn’t Paul Krugman Heard about the Magic of Tax Cuts and Supply-Side Economics? No, and for Good Reason…
I guess Paul Krugman hasn’t heard about the magic of tax cuts and supply-side economics. Well, Cato-at-Liberty has, and it’s ticked at the CBO because “it assumes higher tax rates generate more money” when making budget projections. That’s right, despite all the evidence against the claim that tax cuts actually increased revenue — it’s a myth that won’t die because people who know better, or ought to, still promote it — we should discredit the CBO for making the claim that higher tax rates would help with the budget problem.
And that’s not all. The CBO should be further discredited because it says the stimulus package helped to ease the recession:
The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.
I’ll pass over the “record levels of unemployment’ claim (but note that unemployment peaked at 10.0% in October 2009, but was 10.8% at the end of 1982, at best this is playing games with the word “levels” and ignoring population growth — and if duration is the argument, as Reinhart and Rogoff recently noted, conditional on the type of recession this recovery is actually a bit better than most).
On the main claim about fiscal policy, there’s plenty of emerging evidence supporting the contention that fiscal policy helped to ease the recession (and remember how much of the stimulus package was tax cuts — it’s amusing to listen to conservatives tell us how useless the tax cuts they fought for as part of the stimulus package turned out to be, especially when in the next breath they argue for more tax cuts). The CBO is dealing in actual evidence, the claims made by Cato-at-Liberty are backed by nothing more than the Republican noise machine that is so good at misleading followers.
Republicans just can’t help themselves from attacking anyone and anything that is inconvenient to their goals, and actual evidence has little to do with it. Apparently, they learned nothing from the election. This is part of a larger effort to discredit the CBO because it doesn’t agree with Republican views on the magic of tax cuts, and for other results the non-partisan agency has come up with that Republicans don’t want to hear (so they basically cover their ears and ignore them).
The Republicans aren’t the only ones doing this. I watch about 5 minutes of an Ali Velshi panel that really horrified me. No one there directly took on Stephen Moore of the WSJ on that same damn fairy tale about job creators and tax rates on the rich. Why doesn’t any one mention that his assertions have no basis in reality, theory, or empirical evidence and have been thoroughly trounced? Better yet, why is some one who spouts propaganda even on a news program that supposedly informs people about economics, finance, and policy? There was one truly knowledgeable person on the panel. The rest of them should have asked questions then listened to Mohamed A. El-Erian. Again, Stephen Moore should only be placed on panels where fairy tales are involved. His degrees in economics are obviously stale. Plus, he works with Laffer whose been laughed out of any organization that contains serious economists. He’s basically a tool of the plutocracy.
Fortunately, it looks like the Senate Democrats are having none of this.
Sen. Patty Murray (D-Wash.) on Sunday said Democrats were prepared to allow the expiration of all George W. Bush-era tax rates if Republican lawmakers objected to raising taxes on the wealthiest.
“We can’t accept an unfair deal that piles on the middle class and tell them they have to support it. We have to make sure that the wealthiest Americans pay their fair share,” said Murray on ABC”s “This Week.”
Murray said one option would be to let the lower rates expire across-the-board and then return to the table next year with new talks on a tax-cut package.
“So if the Republicans will not agree with that, we will reach a point at the end of this year where all the tax cuts expire and we’ll start over next year. And whatever we do will be a tax cut for whatever package we put together. That may be the way to get past this,” said Murray.
The Washington senator is likely to become chairwoman of the Senate Budget Committee and previously served on the congressional “supercommitee,” which failed to finalize a deficit-reduction plan, which may trigger sequestration cuts in January 2013.
The evidence points to the recessionary impact of tax cuts on the middle class. There is nothing that shows allowing the Bush Tax cuts to expire will do the same. Republicans keep suppressing the evidence.
In particular, the CBO gave its most detailed look at how the expiration of the Bush-era tax cuts would affect the economy. Apparently, it would do little harm, the numbers show.
Just like the damn things did little good for the economy and most of us, letting them die would do little harm. I hope the Dems just hold to the facts and that the election has given them some resolve to do the people’s business.
It’s still the jobs, stupid
Posted: August 29, 2011 Filed under: Economy, jobs, unemployment, voodoo economics | Tags: Alan Krueger, Dean Baker, Economists, jobs policy, labor market, Mark Thoma, unemployment 17 CommentsIn what I hope is not some symbolic hype, Alan Krueger–an actual economist and a labor one at that–was nominated by President Obama today to head the Council of Economic Advisors. He will replace Austin Goolsbee.
As the Wall Street Journal noted, Krueger’s scholarship suggests he will “likely provide a voice inside the administration for more-aggressive government action to bring down unemployment and, particularly, to address long-term joblessness.”
If his name sounds familiar, it’s because Krueger’s academic work has frequently played a valuable role in the political discourse. When congressional Republicans blatantly lied about the costs of a cap-and-trade plan, it was Krueger who set the record straight. When conservatives said in 2009 that slashing the minimum wage would boost the economy, Krueger explained why the opposite is true.
The economist also brings relevant experience to the table.
I’m hoping this finally brings the correct policy priorities and prescriptions to the table. We’ve had nearly three years of confused messages and results and the economy is clearly the worse for it. There’s an article up at The Guardian by economist Dean Baker that pretty much sums up all of my economic posts for the past few years. Obama never seemed to understand that high unemployment is a problem and never instituted any kind of policy to target the problem directly. He says he gets it now, but I’d just like to remind every one that he said he got it after the election that delivered the House of Representatives to the Tea Party terrorists and still has shown no sign that he understands that people expect bold fiscal policy in the face of low economic growth. All we keep getting is tax breaks for rich people and opposites day fiscal policy.
President Obama has discovered how serious the recession is. That’s what he told an audience in Chicago last week. To be fair, he was referring to revised data from the commerce department showing that the falloff in GDP was larger than originally reported.
But ridicule is appropriate. He and we knew all along how many people were out of work. The employment numbers told us the size of the hole and the desperate need for government action.
This sort of ridiculous comment, and President Obama’s weak response to the recession over the first two and a half years of his presidency, explains the tidal wave of scepticism facing his widely hyped upcoming speech on jobs after the Labor Day weekend. The list of remedies leaked ahead of time does little to inspire hope.
At the top of the list of job-creating measures is extending the 2 percentage-point reduction in the social security payroll tax. This provides no boost to the economy, since it just keeps in place a tax cut that was already there, but if the cut is allowed to end at the start of 2012, it will be a drag on growth.
As it stands, the social security programme is being fully reimbursed for the lost tax revenue, but there is always the possibility that Republicans will use this as a basis for attacking the programme. Given President Obama’s willingness to support cuts to social security, it is understandable that this part of his jobs agenda doesn’t generate much enthusiasm.
Baker goes on to call for a new CCC and explains why trade agreements, tax cuts to business yet again that undermine social security, and all the rest of the “jobs” agenda touted by the President aren’t going to do much of anything. Economist Nancy Folbre has a great piece of analysis up at the NYT explaining why letting this high level of unemployment go on for a period of time has an increasingly negative impact on the entire economy because things multiply over time. However, a new study covered by Folber shows that the unemployed just don’t sit around and act like they are on vacation. They create value by doing unpaid work. The same folks that think that the unemployed just lie around are the same ones that push the meme that homemakers spend their days eating bon bons and watching soap operas.
The overall increase in non-market work implies that household consumption among the unemployed fell less than market income, but it’s hard to put a dollar value on the unpaid work. When people make a voluntary decision to substitute time for money, we can infer something about the relative value they place on it.
But most unemployment is involuntary, and some unpaid work probably represents an effort to stay busy more than a significant contribution to household living standards.
The authors emphasize the relatively large impact of unemployment on unpaid work, in part because this is a new finding, and in part because it counters the wrong impression that, as Professor Hurst put it, the Great Recession was a Great Vacation.
But it is also important to note that most of the unemployed can’t allocate more of the free time they gain to productive uses, even if they want to. They lack the capital, land, tools and skills needed to flexibly shift from wage employment to production for their own use. Even when they can make a partial shift, their productivity is likely to be lower in unpaid work than paid work.
That’s why involuntary unemployment represents such a waste of human capabilities and loss of productive output for the economy as a whole.
So, what can Alan Krueger bring to the White House if the President will listen to this economist? This is economist Mark Thoma’s take on the appointee.
His most well known research is on the minimum wage and immigration, The work is somewhat controversial in that the results show small negative effects from raising the minimum wage and from increasing immigration. In my view that is a sign of an economist who is willing to let the evidence do the talking, and that is a good trait to have in this job.
He has also worked in many other areas, including occupational licensing, the economics of terrorism, and more recently on job search in periods when unemployment is high, including how job search is affected by things such as unemployment insurance. But that is just a small taste of the large amount of research he has done.
Krueger’s been working at the Treasury so maybe that will give him access that many of the other Obama economic advisers seemed without. Time is running out for policy to help the unemployed in any meaningful way. I say this because as we get closer to the election, it will make the Republicans more surly and less likely to do anything to help a Democratic administration. They’ve already been rewarded for hostage-taking behavior. Then, there’s the policy lags. Things like infrastructure banks take a lot of time to set up. Ideas like patent reform are laughable as job creation tools. I have no idea why the Obama administration won’t embrace things that worked in the past, but that doesn’t appear to be their MO. They seemed to get their jobs mojo from reheating failed Republican canards and presenting them as the higher, middle ground. I continue to be discouraged.
Monday Reads
Posted: May 16, 2011 Filed under: 2012 presidential campaign, Economy, Federal Budget and Budget deficit, fundamentalist Christians, Global Financial Crisis, income inequality, Medicare, religion, religious extremists, Republican politics, Republican presidential politics, Team Obama, The Bonus Class, The Great Recession, U.S. Economy, U.S. Politics | Tags: Debt Ceiling, End Times, evangelical Christians, Harold Campaign, Mark Thoma, Newt Gingrich, Rapture, the plutocracy, Timothy Giethner 52 Comments
Good Morning!
Are you reading for the end of the world next Saturday? Nope, it’s not 2012 yet and we’re not talking about the Mayan Prophecy. Harold Campaign has convinced a group of evangelicals that the date is May 21, 2011. I wonder if any of them would like me to take care of their left behind pets for all their money? You can read more about the man and his end of days wishes at Salon.
The self-appointed harbingers are not tied to any particular church — they claim organized religion has been corrupted by the devil — but rather to Internet- and radio-based ministries. And their lone mission is to tell anyone and everyone that the end of days is May 21. That’s when, they insist, God’s true believers will be lifted into heaven and saved, during a biblical event widely referred to as the Rapture.
The finer points of Christian eschatology have long been the subject of dispute (not to mention the inspiration for movies and books, like the blockbuster “Left Behind” series). Though mainstream churches reject the the notion that doomsday can be predicted by any man, fringe scholars continue to work feverishly pinpointing the moment of the final, divine revelation. And one such man — 89-year-old radio host Harold Camping — has been at the game for decades.
In the early ’90s, Camping published a book titled “1994?,” which claimed judgment day would arrive in September of that year. When confronted with such a staggering anticlimax — the world, after all, kept on spinning — Camping chose not to be discouraged, but to learn from his mistakes. (He hadn’t considered the Book of Jeremiah, he says.) A civil engineer by trade, Camping went back to the drawing board and continued to crunch the numbers, before arriving at the adamant determination that Rapture would come on May 21, 2011. He began to spread the word through his broadcasting network, Family Radio, in 2009, and quickly built up a fervid following.
I guess it takes all kinds. That’s what my mother used to tell me when she was alive, anyway. Speaking of that, MoJo has a great list of Newtisms that will take you a trip back in time with Gingrich’s greatest tongue trips. Here’s some of his earliest hits.
1978 In an address to College Republicans before he was elected to the House, Gingrich says: “I think one of the great problems we have in the Republican party is that we don’t encourage you to be nasty. We encourage you to be neat, obedient, and loyal and faithful and all those Boy Scout words.” He added, “Richard Nixon…Gerald Ford…They have done a terrible job, a pathetic job. In my lifetime, in my lifetime—I was born in 1943—we have not had a competent national Republican leader. Not ever.”
1980 On the House floor, Gingrich states, “The reality is that this country is in greater danger than at any time since 1939.”
1980 Gingrich says: “We need a military four times the size of our present defense system.” (See 1984.)
1983 A major milestone: Gingrich cites former British Prime Minister Neville Chamberlain on the House floor: “If in fact we are to follow the Chamberlain liberal Democratic line of withdrawal from the planet,” he explains, “we would truly have tyranny everywhere, and we in America could experience the joys of Soviet-style brutality and murdering of women and children.”
What is it that Republicans put in their formula that turns out people like this? Newt was on Meet the Press yesterday where he mouthed off on a number of subject’s including Paul Ryan’s Medicare pogrome. This is the National Review’s take so read with caution.
Newt Gingrich’s appearance on “Meet the Press” today could leave some wondering which party’s nomination he is running for. The former speaker had some harsh words for Paul Ryan’s (and by extension, nearly every House Republican’s) plan to reform Medicare, calling it “radical.”
“I don’t think right-wing social engineering is any more desirable than left-wing social engineering,” he said when asked about Ryan’s plan to transition to a “premium support” model for Medicare. “I don’t think imposing radical change from the right or the left is a very good way for a free society to operate.”
As far as an alternative, Gingrich trotted out the same appeal employed by Obama/Reid/Pelosi — for a “national conversation” on how to “improve” Medicare, and promised to eliminate ‘waste, fraud and abuse,’ etc.
“I think what you want to have is a system where people voluntarily migrate to better outcomes, better solutions, better options,” Gingrich said. Ryan’s plan was simply “too big a jump.”
He even went so far as to compare it the Obama health-care plan.”I’m against Obamacare, which is imposing radical change, and I would be against a conservative imposing radical change.”
I have to say that having Trump, Gingrich, Santorum and Paul all debating each other on one stage would probably be highly entertaining. They could have a contest for who would make the craziest old uncle.
The White House is out on the road trying to head off problems with the national debt ceiling. Timothy Geithner says that the economy will double-dip if the Republicans don’t raise the ceiling.
In a heavily-anticipated response to Sen. Michael Bennet, D-Colo., who asked Geithner to document the economic and fiscal impacts of failing to lift the statutory debt limit, the Treasury secretary detailed a chain reaction that would cripple the economy, costing jobs and income.
“A default would inflict catastrophic far-reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment,” said Geithner in the letter to Bennet which was dated May 13. “Even a short-term default could cause irrevocable damage to the economy.”
Geithner has imposed an August deadline for Congress to lift the $14.3 trillion debt ceiling, but lawmakers are still negotiating over Republican demands to tie the move to spending cuts. And a portion of the GOP still remains skeptical about the need to act by the deadline at all, arguing that the consequences have been overstates.
Economist Mark Thoma has a better explanation of how the refusal to increase the debt ceiling would impact the economy on CBS Money Watch. This explanation is much more precise.
If politicians fail to reach a deal to increase the debt ceiling, there would be a large fall in federal spending. The decline in federal purchases of private sector goods and services would reduce aggregate demand, and this could slow or even reverse the recovery (it could also threaten the delivery of critical services that some people depend upon). In addition, the failure to pay wages to federal workers would disrupt household finances and cause a further decline in demand, as would the failure of the government to pay its bills for the goods and services it has already purchased from the private sector (and it could even threaten some households and businesses with bankruptcy should the problem persist). There may be some room for the Treasury to use accounting tricks to avoid the worst problems, at least for a time, but it is not at all clear how well this would work to insulate the economy from problems and eventually this strategy will come to an end.
That’s potentially bad enough, but it’s far from the end of the problems that could occur. Failure to raise the debt ceiling could also undermine faith in the safety of US Treasury bills. If we default on bond payments, or appear willing to do so even if it doesn’t actually occur and investors lose faith in US Treasury Bills, they will begin demanding higher interest rates to cover the increased perception of risk. This could be very costly. We depend upon the rest of the world to finance our debt at extremely low interest rates. If the willingness of other countries to do this diminishes, then the cost of financing our debt would rise substantially. And that’s not all. In addition to increased debt servicing costs, an increase in interest rates would also choke off business investment potentially lowering economic growth, and the consumption of durable goods by households would fall as well. Rising interest rates would also be bad for the housing recovery (such as it is). Thus, failure to reach an agreement could be very costly.
The Economist‘s Blog on American Politics: Democracy in America has an interesting post right now on ‘The Road to Plutocracy’. It’s an interesting read with a lot of quotes from other pundits.
THE word “plutocracy” is in the air these days. Some say the era of the de facto rule of the mighty top 10%, or top 1%, or whatever insidious sliver of the income distribution is thought to constitute the moneyed power elite, is upon us, or nearly so. I’m not so sure. I am sold on the proposition that there’s something deeply whacked about the American financial system, and that whatever that’s whacked about it is significantly responsible for the top 1% pulling so far away from the rest of the income distribution. This needs to be fixed, whatever its other consequences. It’s not clear to me, however, what exactly is whacked. I don’t know whether to sign up for Tyler Cowen’s “going short on volatility” story, Daron Acemoglu’s “financial-sector lobbying and campaign contributions ‘bought’ an enriching (and destabilising) regulatory structure” story, or some other story. No doubt the truth is in some subtle combination of stories. In any case, accounts such as Mr Acemoglu’s, according to which big players in certain sectors over time manage to rig the regulatory climate to their advantage, are quite compelling for reasons both theoretical and empirical
Newsweek has an interesting article up on why the megarich manage to have such a sweet tax deal. Even if we raise their income taxes, it really doesn’t hit them where it counts. Here’s why.
It drives economist Bruce Bartlett crazy every time he hears another bazillionaire announce he’s in favor of paying higher taxes. Most recently it was Mark Zuckerberg who got Bartlett’s blood boiling when the Facebook founder declared himself “cool” with paying more in federal taxes, joining such tycoons as Bill Gates, Warren Buffett, Ted Turner, and even a stray hedge-fund manager or two.
Bartlett, a former member of the Reagan White House, isn’t against the wealthy paying higher taxes. He’s that rare conservative who thinks higher taxes need to be part of the deficit debate. His beef? It’s a hollow gesture to say the federal government should raise the tax rate on the country’s top wage earners when the likes of Zuckerberg have most of their wealth tied up in stock. Many of the super-rich see virtually all their income as capital gains, and capital gains are taxed at a much lower rate—15 percent—than ordinary income. When Warren Buffett talks about paying a lower tax rate than his secretary, that’s because she sees most of her pay through a paycheck, while the bulk of his compensation comes in the form of capital gains and dividends. In 2006, for instance, Buffett paid 17.7 percent in taxes on the $46 million he booked that year, while his secretary lost 30 percent of her $60,000 salary to the government.
“It’s easy to say ‘Raise taxes’ when you know you’re not going to have to pay those taxes,” Bartlett says. “What I don’t hear is ‘Let’s raise the capital-gains tax.’” Instead the focus has been on the federal tax rate paid by those with an annual income of $250,000 or more—the top 3 percent of earners. Bartlett argues that while raising taxes on the country’s richest individuals would go a long way in easing the debt crisis, it makes no sense to treat the professional making a few hundred thousand dollars a year the same as the Richie Rich set. Maybe it’s hard to muster sympathy for an executive pulling down $1 million a year. But ours is a tax system where a person in the top tax bracket (those earning more than $374,000 in 2010) pays a tax rate of 35 percent on the upper portions of his or her income (37.9 percent if you include Medicare), whereas a hedge-fund manager or mogul earning 10 or 100 times that amount pays less than half that tax rate.
Well, now I’m thinking we’re all just so f’ked that I might as well stop while I’m ahead. What’s on your reading and blogging list today?
Wonky Fed Post (hip waders advised)
Posted: April 29, 2011 Filed under: Economy | Tags: Ben Beranke, Brad Delong, Fedderal Reserve Bank, Mark Thoma, monetary policy, Monetary policy at the Zero Bound, Paul Krugman, quantitative easing 23 CommentsThe Fed’s been doing some pretty nontraditional things recently under Ben Bernanke. A lot of this was not unexpected given his record of academic research on the subject of the Fed trying to be more public about its actions and the role of Quantitative Easing in Japan’s lost decade recovery. I thought I’d put a few things up about both. I’m going to have to use some monetarist jibber jabber so please ask questions if the jargon is overwhelming! It’s easier to explain the jargon downthread than write a long run on post with explanations included.
The Roosevelt Institute held a Future of the Federal Reserve Event. Here’s video via RortyBomb of Joseph Stiglitz discussing QE2 among other Fed issues. I mentioned something yesterday down thread about the effectiveness of transmission of monetary policy through the traditional interest rate channel into the real economy and Stiglitz has a fairly succinct comment on that. There is some debate on how much the Fed can actually do much at this point–with zero bound interest rates–to get at unemployment and even the inflation coming from higher oil and food prices. We know it can happen, it’s just we don’t have empirical evidence under similar situations–other than from Japan–to know the degree to which stuff can happen right now. So it could be an infinitesimally positive effect even thought it’s a positive effect.
There’s been some discussion of this on economists’ blogs since the Bernanke Presser a few days ago. Mark Thoma tweeted this critique of both him and Brad Delong on the Bernanke Presser from a monetarist’s site from blogger economist Stephen Williamson. My first masters was in Monetary Economics so I’m well-steeped in monetarist theory.
In standard form, Mark Thoma’s heartgoes out to the unemployed, as mine does. However, Mark is much more certain than I am that the Fed can actually help these people out. Here is what Mark would have asked Ben about, if he could:
The main question I wanted to hear Bernanke answer is, given that inflation is expected to remain low, why isn’t the Fed doing more to help with the employment problem? Why not a third round of quantitative easing?
And:
In retrospect, more aggressive action by the Fed was warranted in every instance. Perhaps this time is different — I sure hope so — but the recovery has been far too slow to be tolerable. Green shoots require more than hope, they require the nourishment, and with fiscal policy out of the picture it’s up to the Fed to provide it.
Well, the answer to the question: “Why not a third round of quantitative easing?” should be: “Because it does not do anything.” (see here). In retrospect, the Fed could not have done any more than it did, even if you think that sticky wages and prices matter in a big way. Mark may think that the level of employment is intolerable, but the Fed has to tolerate it in the same way I have to tolerate the soggy weather outside.
I wanted to put this up before I linked to Krugman’s Op-Ed today which argues that Bernanke may be unduly influenced by inflationistas and Ron Paul, of all people called “The Intimidated Fed” and that he can do more. Because, I’m not so sure the FED can do much more or if it’s Ron Paul that’s the dragon needing slaying. First, I think it more like that Bernanke is being influenced by two Fed Presidents sitting on the Board of Governors right now than by Ron Paul. But, I’m not a DC or FED insider so it’s pure speculation on my part.
Some background: The Fed normally takes primary responsibility for short-term economic management, using its influence over interest rates to cool the economy when it’s running too hot, which raises the threat of inflation, and to heat it up when it’s running too cold, leading to high unemployment. And the Fed has more or less explicitly indicated what it considers a Goldilocks outcome, neither too hot nor too cold: inflation at 2 percent or a bit lower, unemployment at 5 percent or a bit higher.
But Goldilocks has left the building, and shows no sign of returning soon. The Fed’s latest forecasts, unveiled at that press conference, show low inflation and high unemployment for the foreseeable future.
True, the Fed expects inflation this year to run a bit above target, but Mr. Bernanke declared (and I agree) that we’re looking at a temporary bulge from higher raw material prices; measures of underlying inflation remain well below target, and the forecast sees inflation falling sharply next year and remaining low at least through 2013.
Meanwhile, as I’ve already pointed out, unemployment — although down from its 2009 peak — remains devastatingly high. And the Fed expects only slow improvement, with unemployment at the end of 2013 expected to still be around 7 percent.
It all adds up to a clear case for more action. Yet Mr. Bernanke indicated that he has done all he’s likely to do. Why?
Second, I’m not sure Bernanke (i.e. The FED) is in a very strong position to do much that can influence the real economy right now. The QE stuff really only shifts the FED portfolio around between long and short term debt which can influence yield curves, but, at the zero bound, there’s still a limited impact on real interest rates. You really can’t go lower than zero in nominal terms. Also, the FED’s bought all this crap from every one from Belgian cities to AIG to give them more liquidity and for the most part, that money’s not channeling back into the US economy in the forms of loans. Monetary policy is never very effective when an economy is in a liquidity trap (extremely low interest rates) and its transmission channel–the way the policy gets to the real economy where GDP lurks–morphs during various economic conditions. We’re not seeing anything resembling 20th century economic conditions.
The Economic Troika Seems Confused
Posted: November 28, 2010 Filed under: U.S. Economy | Tags: joseph stiglitz, Mark Thoma, Obama and Unemployment, Paul Krugman 42 CommentsThere are three economists that I read almost every day because I share a lot in common with their value system and their approach to the subject area. That would be Brad DeLong, Paul Krugman, and Mark Thoma. The three are probably the most visible group of liberal economists on the web with the exception of Joseph Stiglitz. All three of them just don’t seem to get why President Obama does what he does given that he said what he said during the election.
Now I admit to being a relative newcomer to academia compared to these three. I’m old and will never garner the prestige they’ve achieved. I spent most of my career in financial institutions and the FED so maybe that’s where the difference comes. I don’t know. But all three of them were on the same track today and the centralized blog theme began on Thoma’s Economist’s View where the topic germinated.
Is giving some one an overly generous portion of the benefit of the doubt something that liberals academics do? I’m beginning to wonder. All this year, the troika appeared to be baffled by the continuing not democratic, not progressive/liberal, and not wise economic policy coming out of the District. Did they listen to the same presidential primary debates that I listened to? Did they watch the appointments of folks like Austin Goolsbee and just miss something? Is it just me?
From the keyboard and fingers of Mark Thoma comes a series of not so rhetorical questions and a thought. The title of the thread is The Administration’s “Communication Problem”.
I find it incredible and disturbing that on the eve of the recent election in which Democrats got trounced, the administration was still trying to figure out if the unemployment problem is structural or cyclical.
Chiming in with a reply–even quoted by Thoma–is Delong. (They all obviously read each other too.) He titled his thread ‘Mark Thoma Watches Barack Obama and His Political Advisors Go Off Message Yet Again…Can we please get the White House back on message?’
Okay, so now we come full circle as Paul Krugman also responds to Thoma with his NYT blog and this title: Lacking All Conviction.
“Now”, I thought as I braced for the read, “we might be getting a little closer to the true source of this ‘communication’ or ‘message’ problem.” But, Krugman’s take on the meeting was concern that POTUS is just getting bad advice. I’m going to bold Krugman’s relevant assertion.
What I want to know is, who was arguing for structural? I find it hard to think of anyone I know in the administration’s economic team who would make that case, who would deny that the bulk of the rise in unemployment since 2007 is cyclical. And as I and others have been trying to point out, none of the signatures of structural unemployment are visible: there are no large groups of workers with rising wages, there are no large parts of the labor force at full employment, there are no full-employment states aside from Nebraska and the Dakotas, inflation is falling, not rising.
More generally, I can’t think of any Democratic-leaning economists who think the problem is largely structural.
Yet someone who has Obama’s ear must think otherwise.
No wonder we’re in such trouble. Obama must gravitate instinctively to people who give him bad economic advice, and who almost surely don’t share the values he was elected to promote. That’s what I’d call a structural problem.
Okay, there are two prominent Noble Prize winners that I’ve mentioned in this thread. Krugman is one and Stiglitz the other. Any truly Democratic President seeking a Roosevelt/Kennedy Style economic program would call on Stiglitz in a minute’s notice. Krugman’s the obvious choice for trade and international economics under similar policy goals. There is a rich legacy of Paul Samuelson acolytes out there. Heck, Samuelson only died a year ago, so he was even available for some time; especially during the historic ‘transition’ presidency when we even got that new fangled seal. Samuelson even went to the University of Chicago and Harvard. Samuelson was the consummate neoKeynesian. He was the yang to the Milton Friedman yin. He was friggin’ brilliant.
Now, I’m feeling a bit like Inigo Montoya here except that it’s not the word inconceivable that’s confusing me. What’s confusing me is that I keep reading these guys. These guys work with models and data. They also–of course–make assumptions. I think the models are okay, but they keep using the wrong assumptions. After two years, you have to question the assumptions when the data results keep confusing you, guys!!
Let’s start with some fresh assumptions that don’t start with he said this, yet he’s doing this, it must be the message, the adviser, or the communication style. Let’s try, he said what it took to get elected. Now, he’s doing what he believes in. If he was all that interested in being the next FDR, at least one of you and Joseph Stiglitz would be on the CEA right now. He’s just not that into you, Keynes, or unemployment unless he thinks it’s going to help in 2012.
M’kay?
Susie at Suburban Guerilla had a slightly different take but with a somewhat similar line of thought.
Obama would rather preside over a graduate seminar than make hardnosed political decisions, and that continues to be a major flaw.
I think it runs even deeper than that. I think the ‘graduate seminar’ was a public relations exercise.
Digby at Hullabaloo has a little stronger sentiment than that.
If anyone’s wondering why the administration hasn’t been able to get on message about jobs and unemployment, it might be because they just don’t know what the hell they are doing.
Well, that too.
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