Positive Outlook

With the economic outlook turning gloomy and Q2 growth at 1.5 percent, Baker points out some positive data points:

Commerce Department Issues Secret Report Showing Plunge in Housing Vacancy Rates

Good News on Weekly Unemployment Claims and No One Notices

Washington Pundits Are So Cute When They Try To Figure Out the Obvious by Dean Baker

Robert Samuelson's column lays out the factors that caused the huge surplus predicted for the last decade by the Congressional Budget Office to turn into a huge deficit. Samuelson cites analysis of the $12 trillion shift from the Congressional Budget Office (CBO) and two "non-partisan" groups, the Committee for a Responsible Federal Budget and the Pew Fiscal Initiative. 

Samuelson and these groups are careful to say that blame for this shift is widely shared, but that the largest chunk stems from weaker than projected economic growth and changes in technical assumptions. If we look more closely at the weaker than expected economic growth and some of those technical assumptions, the picture gets a bit more interesting. 

The economy grew much more slowly than expected in 2001 and 2002 because of the collapse of a stock bubble. It grew much less rapidly than expected in 2008 and 2009 because of a collapse of the housing bubble. Some of the "technical changes" were the result of much lower capital gains income than had been projected. That is what happens when a bubble bursts. (The official data probably understates the falloff, since it is likely that much capital gains income shows up as normal income.) 

In short, the main reason that the CBO projections understated the deficits over the last decade was that it twice failed to recognize asset bubbles. In fact, the impact of this failure on projections is even larger since some items on the Samuelson deficit list would not have been there absent the slower growth, like the Obama stimulus. 

So there is a clear villain in this story, economic analysts who were too incompetent to recognize two huge bubbles and the impact that their collapse would have on the economy. Unfortunately, in Washington policy circles, such failures are a badge of honor ("who could have known?" is the official motto in these parts), so these folks continue to hold their jobs and get regular promotions and increased authority. 

While we might prefer to see people with better knowledge of the economy in positions of responsibility, there is a bright side. These jobs keep people without marketable skills employed.

Doug Henwood on Cockburn

audio of interview from August 2011

In Tribute to Alexander Cockburn, 1941–2012, in The Nation

We know the how, but not the where by Ryan Avent

Yield Stories by Krugman

Maybe there’s some truth to some of these stories. But surely the dominant story is very simple: it reflects market perceptions that the economy is going to be depressed for a long time. As I’ve argued before, you really want to look at Japan, which exhibited this syndrome at a time when there was clearly no shortage of safe assets and few were talking about disaster...

SF Fed's John Williams Gets It on Monetary Policy by Yglesias

But since the Federal Reserve isn't an investor trying to make money, but rather a policy-making institution trying to achieve some policy goals, it needs to articulate those goals.

That's why it's exciting to read San Francisco Federal Reserve President John Williams calling for what's being termed "open-ended QE."

We should probably just retire the term "QE" at this point. What he's talking about is going back to doing asset purchases, but doing them in potentially unlimited quantities in order to meet a goal. You say, for example, "we're going to spend BLAH BLAH a week to try to get inflation expectations up to YADDA YADDA and if after five weeks we're not there yet we're going to start spending DOUBLE BLAH BLAH." This is not my idea of what an asbolutely optimal policy agenda looks like, but it would work much better than trying to decide how much to buy in advance....

True Blood gets high and does Vampire Karaoke, but with naked ladies and blood by Meredith Woerner

Dean Baker Reduces Uncertainty

Spanish Debt, the European Central Bank, and the Maginot Line by Dean Baker

Problems arise due to the distribution of the debt. If every third household borrowed $600,000, which was lent by the other two households, then this third household is getting deep in debt, with the other two are appearing to build up large amounts of assets.

This is what happened to Spain, the United States and other countries with serious housing bubbles. The other two households were willing to lend money to the third household because they thought it held an asset (a house) of great value. When this turned out not to be true, the third household found itself with an unsustainable debt burden and the other two households found themselves with assets of questionable value. If the third household can't repay its debt, then the loans are no longer worth their face value.

Central banks should be paying attention to the buildup of such unsustainable debt burdens. Unfortunately, the European Central Bank (ECB) was focused on building up its Maginot Line, being vigilant in its fight against inflation.

The problem now is to try to correct the imbalances created by growth of the housing bubble. Spain and the rest of Europe is getting little help from ECB which is still focused on reinforcing the Maginot Line rather than promoting growth in the euro zone. 

Something the followers of Steve Keen don't understand?

Sticky Wages and the Macro Story by Krugman

In any case, however, we are in a liquidity trap, and balance sheet effects are very important. So there is no reason to believe that cutting wages would be helpful; on the contrary, falling wages would worsen the balance-sheet problem, a point some of us have been making for quite a while. 

So when I emphasize nominal wage rigidity, I am defending an analysis of how the economy works, which is not at all the same thing as saying that this rigidity is the problem. On the contrary, for the US (though not for countries like Spain), wage stickiness is if anything good for us right now, helping stave off destructive deflation.

Michal Kalecki on the Great Moderation by Steve Randy Waldman