Looks like we're going to war again
Looks like we're going to war
Looks like we're going to war again
Syria here come the bombs
You don't think that we do this just for fun, do you?
Something has to be done
Now look at Miley Cyrus' tongue
Sometimes — usually, though not always, in a belligerent tone — people ask me, well, how big do you think the stimulus should have been? How much debt should we have run up? Regardless of the tone, that is actually a question worth answering. With the benefit of hindsight, we do know roughly how depressed the economy has been; we have reasonably good estimates of the effects of government spending; so we can put together an estimate of what would have happened if we had, in fact, pursued a policy of government spending sufficient to keep output at potential.
Start with the CBO estimates of potential GDP, which can be subtracted from actual GDP to estimate the output gap. Start the clock at the beginning of 2009, and the output gap — measured quarterly, but at an annual rate — looks like this:
The output gap.
If you add it up, the cumulative output gap since start-2009 comes to $2.29 trillion — that is, $2.29 trillion worth of goods and services we could and should have produced, but didn’t.
How much government spending would have been required to close that gap? The evidence is now overwhelming that when you’re at the zero lower bound the multiplier is greater than one; see,e.g., Blanchard and Leigh. Suppose we take a multiplier of 1.3, which is fairly conservative. Then it would have taken $1.76 trillion in spending over the past 4 1/2 years to close the output gap. Yes, I know, it would have been politically impossible — but we’re just doing the economics here.
So is that an extra $1.76 trillion in debt? No — the economy would have been stronger, leading both to higher revenue and to lower spending on means-tested programs. A fairly conservative estimate is that each dollar of extra GDP would have saved 1/3 of a dollar in the form of higher revenue and lower spending, which means 2.29/3 = $0.76 trillion.
So the net extra debt we would have run up with my fantasy stimulus turns out to be a round $1 trillion. OMG: ONE TRILLION DOLLARS!
But how bad is that? It’s about 6 percent of GDP. And remember, also, that GDP would have been higher — it would have been at potential, not well below. So at this point, instead of where we are — with federal debt at 72 percent of GDP — we would have had federal debt at 76 percent of GDP. Does anyone seriously claim that this difference would have caused a fiscal crisis?
And in return for those 4 points on the debt ratio, millions of American families would have been spared the hardship and humiliation of mass unemployment, lost houses and savings, and more. We can further argue that by avoiding the corrosive effects of long-term unemployment, we would surely have avoided substantial damage to America’s longer-run economic prospects, which in turn means that future revenue would be higher — and my fantasy fiscal program would probably have improved, not worsened, our fundamental fiscal position.
Again, I understand that none of this was going to happen. But you should understand that this reflects bad judgment by bad politicians and bad economists, not the logic of the case.
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, because Bernanke had strongly emphasized the central bank’s responsibility for economic growth. 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. As Ezra Klein explains, his choice of Summers clearly reflects his view that policy in 2009-2010 was a great success, not a big disappointment, and he wants to keep the winning team together.
Of course, it’s a lot easier for Obama to consider his policies a success given that he was reelected.
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.
...More delusional is the agreed-upon conclusion that the band wouldn’t succeed if it was missing even a single one of its largely interchangeable members. Who do these kids think they are, The Beatles? Actually, Spurlock makes that connection more than once—first by noting that One Direction has conquered the world even faster than its Liverpool predecessors, second by casting the new British invaders in a loose A Hard Day’s Night homage. Will earworm-catchy ditties like “What Makes You Beautiful” eventually give way to psychedelic greatness? Only time will tell, though the boys may have to stop living nice—and start partying with Bob Dylan—before they can get in touch with their own rubber souls.*Menudo
The group became very popular throughout Latin America, from Mexico to Argentina, including Brazil. During that time, Diaz was able to afford a Lockheed JetStar that had belonged to American President Richard Nixon and the Shah of Iran. The plane carried Menudo's name on both sides of the fuselage and made it the first boy band ever with its own private jet. The group also had a fan base in Spain and the rest of Europe.
The Security Council should have quickly formulated a robust response, including tough sanctions, to the chemical weapons attack, near Damascus on Aug. 21. Instead, Russia and China, which have long protected Mr. Assad, have thwarted any Council action. They seemed to care little that chemical weapons use is a war crime, that the weapons are banned under international treaties and that as veto-wielding Council members, they, along with the United States, France and Britain, have a responsibility to ensure these legal commitments are upheld.
...People can't work hard and get ahead on fair terms without lots of government support, and plenty of people who do work hard won't get ahead anyway for one reason or another and they need government support too.My impression is that Obama and his team know all this and agree with it all, just like they know this is a total parenting strawman. It's just the faint echoes of Sister Souljah rattling around American racial politics. But it rankles.
So what are they really up to? Are [SEIU] using workers as pawns in some undisclosed game, to be discarded after some deals are made? Workers themselves are showing enormous courage in participating in the one-day strikes that have marked this campaign. People who are barely getting by are putting their jobs at risk, and one can feel nothing but admiration for their nerve. What does SEIU plan to do with them?
At this point, the deficit hawks are jumping up and down screaming that the boost to Japan’s economy is just a sugar high and that it will soon face a horrible collapse as payback. Of course, anything can happen in the future, but we just don’t see any real evidence of the deficit hawks’ bad story as of yet.The sugar high was the housing bubble which Greenspan ignored and the shadow banking system which was allowed to arise unregulated and susceptible to a bank-run.
But we didn't avoid the biggest mistake, which is to try to pop a bubble by causing a recession.
In fact the conduct of monetary policy on the eve of the Great Depression and the Great Recession are eerily similar. Monetary policy was tightened to such an extent that the yield curve became persistently inverted in January 1928, 19 months before the Great Depression started:
http://research.stlouisfed.org/fred2/graph/?graph_id=108333&category_id=0
Similarly monetary policy was tightened to such an extent that the yield curve became persistently inverted in August 2006, 16 months before the Great Recession started:
http://research.stlouisfed.org/fred2/graph/?graph_id=75581&category_id=0
So far from being very different, it's "deja vu all over again".
The bank panics in the Great Depression started in small rural banks, so it was far easier to totally ignore it and to allow things to fester for a couple of years in those days. It wasn't until big urban banks started to fail, like the Bank of the United States in New York City in 1931, that the powers that be started to notice that there was financial crisis going on in their midst.
This time the banks are far larger, and thus harder to miss, especially since with the help of Bernanke and Paulson, they informed the Congress that they were holding the nation's economy hostage unless a TARP ransom was paid. So I'm not sure this is a sign of improved economic policy as much as it is a sign of more deeply entrenched and powerful interests demanding and getting first and best servings near the beginning of our depression, while the rest of us have to wait interminably for poor seconds.
From 1933-37 the US pulled off the greatest economic recovery in history. Real GDP growth averaged 9.5% and unemployment dropped from 20.9% to 9.2%. And we know based on analysis by E. Cary Brown, Christina Romer, Barry Eichengreen etc. that the contribution of fiscal policy to the recovery was minor. Thus this was primarily a monetary policy led recovery.
Why did monetary policy work so well back then despite the incredible odds against it? Because by taking the country off the gold standard in April 1933, and allowing the price of gold to rise from $20.67 an ounce to $35.00 an ounce by January 1934, FDR effectively set a Price Level Target (PLT). This PLT was high enough to attract a large gold inflow from abroad which the Treasury monetized by issuing gold certificates to the Federal Reserve. The monetary base skyrocketed upward, reaching a maximum year-on-year rate of increase of 23.0% in February 1935, which essentially was the QE of its day. The economic recovery only came to an end when the decision to start sterilizing gold inflows in December 1936 meant prematurely removing the punch bowl, leading to the 1937 Recession.
That was very much unlike our recent experience, where no new target has been set (it's just the same old 1-2% inflation rate target, yawn) and, until QE3, monetary base expansion has come in fits and starts.
It seems to me, rather than evolving over time, monetary policy has devolved back into the "lunged" fish-like gold standard era ancestors from which it evolved, and seems utterly content to wallow in the miasmic swamp from which it came.
Over the past 5 years, the economy has been growing but not enough to make up for lost ground and close the output gap. Demand management (fiscal, monetary and trade policy) has been such that the economy has achieved slow growth and a sort of deflation in hysterisis - an increase in long term unemployment and a degradation of the economy's productive capacity. Downward nominal wage rigidity has prevent outright deflation and a return to full employment by that painful route.Chapter four--"Alternative Aims in Monetary Policy"--sees Keynes shift from analyst to advocate: he comes down, in the context of Western Europe in the 1920s, on the side of devaluation to bring official currency values in line with relative national price levels rather than of deflation to force national price levels into consistency with pre-WWI exchange rate parities. He argues that when you are forced to choose between maintaining a stable exchange rate and maintaining a stable internal price level, choose the second. For avoiding fluctuations in your internal price level avoids a host of evils:We see, therefore, that rising prices and falling prices each have their characteristic disadvantage.... Inflation is unjust and Deflation is inexpedient.... [I]t is not necessary that we should weigh one evil against the other. It is easier to agree that both are evisl to be shunned. The Individualistic Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient--perhaps cannot survive--without one...He argues against return to the gold standard, on the grounds that modern central banks can do a better job of maintaining price stability if they are not tied to gold. Keynes's arguments in chapter four look very good: current opinion among economic historians, exemplified by Barry Eichengreen's Golden Fetters: The Gold Standard and the Great Depression, is that attachment to gold did a large part of the work in preventing central banks from stemming the Great Depression of the 1930s.
Suppose, for example, that banks lend primarily to cash-starved agents, and that cash-starved agents spend primarily to cash-rich agents. (I am including bank deposits as in my definition of “cash” here.) Should the banking system “exogenously” increase lending, the effect would be first a transfer of cash and an increase in debt to the cash-poor, and then a transfer of cash to the cash-rich as borrowers spent their loans. Suppose that the cash-rich then find themselves holding more bank deposits then they prefer to hold. Mechanically, they have absolutely no ability to redeem the deposits for other assets. The only way that deposits in aggregate are reduced is when loans are repaid to the banking system. But the cash-rich have very few loans to repay! Unless they pay off the loans of the cash-poor, taking losses to uphold the collective preferences of a putative nonbank private sector, bank deposits are as inescapable to cash-rich as base money is to the private sector as a whole.
If the real world looks anything like this, then commercial banks do indeed have something quite analogous to a central bank’s printing press. Net-expansions of the banking system’s balance sheet provoke an inescapable injection of deposits into the aggregate portfolio of the cash-rich. The price of bank deposits, like base money, is pegged to unity. If deposit balances come to exceed the desired allocation in portfolios of the cash-rich, the imbalance cannot be resolved by falling prices. Instead, a “hot potato” effect must take hold: prices of other assets might be bid higher until deposits are restored to their desired small share of the aggregate portfolio. Credit expansion would lead to asset price inflation (much more than to ordinary price inflation, as the consumption plans of the cash-rich need not change in real terms, so there is no impetus to bid up the prices of goods, services, or labor). As a stylized fact about the world, bank-credit-expansion-leads-to-asset-price inflation seems pretty solid.
Last autumn, after months of quiet campaigning, Mr. Bernanke won support for two experiments that made job creation the clear focus of Fed policy. The Fed announced in September that it would buy $40 billion a month in mortgage bonds until the labor market outlook improved “substantially.” In December, it said it would hold short-term rates near zero at least so long as the jobless rate remained above 6.5 percent.
Mr. Bernanke spoke of the Fed’s “grave concern” about unemployment, a problem that he said should concern every American.
But many of the officials who supported the program did so tentatively, and their growing unease drove the decision for Mr. Bernanke to announce in June that the Fed intended to reduce its bond-buying before the end of the year.
