Catherine Rampell

David Leonhardt: "The wheel keeps spinning in the econo-journo-world: Congrats to my friend @crampell, now an op-ed columnist at WaPo. She'll be great."

Standard of Living Is in the Shadows as an Election Issue by Leonhardt

Better Ways to Deal With China by Eduardo Porter

China and Protectionism: It Ain't Quite as Simple as They Tell Us by Dean Baker

Housing Was a Huge Headwind; Now It’s a Small Tailwind by Jared Bernstein

Obamanomics: A Counterhistory by David Leonhardt

The Problem is a Collapsed Housing Bubble, Not a Financial Crisis #4306 by Dean Baker

However, contrary to what is widely asserted, for example by David Leonhardt in hiscolumn today, consumption remains high, not low. The saving rate averaged more than 8.0 percent of disposable income in the years prior to the rise of the stock bubble in the 90s. Currently, it is between 4 and 5 percent of disposable income. If anything, we should be asking why consumption is so high, not why it is low. 

It would be to absurd to expect bubble levels of consumption in the absence of the bubble. However this is what proponents of the financial crisis theory seem to be arguing. In short, the collapse of the bubble led to a gap of more than $1 trillion in lost demand due to the plunge in construction and the falloff in consumption. What if any part of this requires a story about the financial crisis?

This is a bit tricky for me. One way to think of the issue is to imagine an alternate timeline where there had not been a housing bubble.

Could there have been a bubble without the shenanigans in the financial industry?

NGDP (or short run versus long run)

The Short Run Is Short by Eli Duardo

The bottleneck by Ryan Avent

Oh NGDP, is there anything you can't do? by Angus

NGDP in the Long Run and Economic Plasticity by Karl Smith

The NGDP Dilemma Is a Good Dilemma by Yglesias

Economy, Heal Thyself by David Glasner

generational warfare fail by David Leonhardt by Dean Baker

Recovery Winter?

Why Job Growth Is Likely to Slow by David Leonhardt

Why do economists expect growth to slow? The warm winter has probably pulled some spending forward into the last few months and will reduce spending in coming months, says Joshua Shapiro, an economist at MFR Inc. in New York. Rising oil prices also play a role. So does the continuing debt overhang, which makes a sustained recovery difficult.

None of these forecasts should be taken as gospel, of course. Maybe the gross domestic product numbers are wrong and will be revised upward in coming months, as government economists receive more data about the economy’s condition. Maybe the recent job gains will lead to a surge in confidence that lifts spending above expected levels.

But the most likely path includes a slowdown in job growth. It’s easy to forget that on a day with a jobs report as positive as this one.

My colleagues Binyamin Appelbaum and Annie Lowrey have each written recent articles with more details on the predicted slowdown.

And:

On Friday, Macroeconomic Advisers, one of the most closely watched forecasting firms, reduced its estimate of economic growth in the current quarter to an annual rate of 1.8 percent, from 2 percent. And 1.8 percent growth does not generally lead to very strong job growth. In the fourth quarter of last year, by comparison, the economy grew 3 percent.
...

Sure enough, most forecasters do expect job growth to slow. Barclays Capital expects 200,000 jobs a month for the rest of the year. IHS Global Insight forecasts a slowdown to 180,000 jobs a month. Macroeconomic Advisers says it will slow to 140,000 jobs a month in the final three quarters of this year.

“We don’t get anything like the booming labor market with 300,000 jobs,” said Laurence H. Meyer, senior managing director of Macroeconomic Advisers and former Federal Reserve governor. “It would take much stronger growth than we have to do that.”

As a benchmark, the economy needs to create roughly 125,000 jobs a month to keep up with population growth.

Calculated Risk is more upbeat:

There are reasons to expect better job growth overall this year compared to 2011. Last year was negatively impacted by the tsunami, bad weather, high oil prices and the debt ceiling debate. We can't predict the weather, and oil prices are high again - but hopefully there will be no natural disasters this year, and also no threats of defaulting on the debt.

Plus residential investment (new home sales and housing starts) has made the bottom turn, and even with a sluggish housing recovery, residential investment will add to economic growth in 2012. Also, the employment losses from state and local governments will probably end mid-year. As the BLS noted:  

Government employment was essentially unchanged in January and February. In 2011, government lost an average of 22,000 jobs per month. 

Employment growth in manufacturing will probably slow in 2012, but the overall picture is improving. Unfortunately the labor market is still very weak with 12.8 million Americans unemployed and 5.4 million unemployed for more than 6 months.

Another positive report was the ISM services survey that indicated faster expansion in February. Negatives included a larger trade deficit, an increase in initial weekly unemployment claims, and - of course - falling house prices in January.

The February job market: not bad by recent standards by Doug Henwood
 

DeLong has spoken highly of Macroeconomic Advisors, but Calculated Risk's outlook is persuasive. Although those betting on the downside have usually been right these past few years.

Grading the Obama Economic Record by David Leonhardt

The Role of Austerity by David Leonhardt

Over the last two years, the private sector grew at an average annual rate of 3.2 percent, while the government shrank at an annual rate of 1.4 percent.

The combined result has been economic growth of 2.3 percent.

The Austerity Debacle by Krugman

Cyclical and Secular Trends

After saying Ezra Klein's narrative and tour d'horizon of Obama's economic policy is ultimately a white wash, I feel compelled to quote the parts which I thought were excellent. Afterwards I'll coment on David Leonhardt's essay "The Depression: If Only Things Were That Good." Leonhardt is writing for the New York Times and Klein is writing for the Washington Post so perhaps both felt the necessity to add some "balanced" comments so that their worthwhile insights don't appear too controversial or partisan. This is probably why Klein's piece ends up feeling like a white wash. Leonhardt's piece starts off shaky but gets better at the end. I'd cut the two some slack given the state of newspapers these days, but that's just me.

Let me first say I'm sympathetic to Obama and I admire the advisers he picked like Romer, Bernstein, and Goolsbee and I'm less down on Orszag, Summers, Geithner, and Bernanke than others have been.

First off, Klein is right to report that other respected forecasters were in agreement with the administration's analysis of the downturn.

But Romer wasn’t trying to be alarmist. Her numbers were based, at least in part, on everybody else’s numbers: There were models from forecasting firms such as Macroeconomic Advisers and Moody’s Analytics. There were preliminary data pouring in from the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Federal Reserve. Romer’s predictions were more pessimistic than the consensus, but not by much.

Granted the "consensus" was all wrong about the housing bubble, but still. Klein could have pointed this out, but it would have called into question the authority of the Washington Post. 

By that point, the shape of the crisis was clear: The housing bubble had burst, and it was taking the banks that held the loans, and the households that did the borrowing, down with it. Romer estimated that the damage would be about $2 trillion over the next two years and recommended a $1.2 trillion stimulus plan. The political team balked at that price tag, but with the support of Larry Summers, the former Treasury secretary who would soon lead the National Economic Council, she persuaded the administration to support an $800 billion plan.

So the damage was $2 trillion and they were going with 800 billion which was whittled down by the Senate to 700 billion with a large part being ineffective tax cuts? What if it was an "L-shaped" recovery as in the early 1990s and early 2000s, the last two recessions? What if recovery took longer because it followed a financial crisis as shown in Rogoff and Reinhart's book "This Time It's Different"? Klein writes that everyone underestimated the amount the economy shrank:

To understand how the administration got it so wrong, we need to look at the data it was looking at.

The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn’t until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; t hey didn’t know that it had been run over by a truck.

So was Romer's $2 trillion estimate off the mark? What makes Klein's story better than most is the following:

There were certainly economists who argued that the recession was going to be worse than the forecasts. Nobel laureates Krugman and Joe Stiglitz were among the most vocal, but they were by no means alone. In December 2008, Bernstein, who had been named Biden’s chief economist, told the Times, “We’ll be lucky if the unemployment rate is below double digits by the end of next year.”

The Cassandras who look, in retrospect, the most prophetic are Carmen Reinhart and Ken Rogoff. In 2008, the two economists were about to publish “This Time Is Different,” their fantastically well-timed study of nine centuries of financial crises. In their view, the administration wasn’t being just a bit optimistic. It was being wildly, tragically optimistic.

He'll acknowledge the existence of "Cassandras" even if he doesn't highlight how the consensus - whose figures he's citing - had been wrong about the housing bubble and deregulation, etc. Klein quotes Orszag's mea culpa:

I don’t think it’s too much of an exaggeration to say that everything follows from missing the call on Reinhart-Rogoff, and I include myself in that category,” says Peter Orszag, who led the Office of Management and Budget before leaving the administration to work at Citigroup. "I didn’t realize we were in a Reinhart-Rogoff situation until 2010.

I like that Klein quotes critics who have been right about a lot like Stiglitz and Baker. Here they comment on Reinhart-Rogoff:

Yet even among economists who admire Reinhart and Rogoff’s work, there is skepticism.

One source comes in how Reinhart and Rogoff find the economic phenomena they’re trying to study. “There’s an identification problem,” Stiglitz says. “When you have underlying problems that are deep, they will cause a financial crisis, and the crisis itself is a symptom of underlying problems.”

Another is in their fatalism. “I don’t buy their critique in the sense that this was an inevitability,” says Dean Baker, director of the Center for Economic and Policy Research and one of the economists who spotted the housing crisis early.

Klein gets a gold star for that third paragraph. I remember very well when Bernanke was asked about Reinhart-Rogoff and he deadpanned in response "yes policy makers usually don't respond well to financial crises and their aftermath" which is why it takes a while for the economy to recover after they occur. He was probably thinking of Japan. I could be wrong but I don't believe Reinhart and Rogoff emphasized the failure of policy makers in their publicity for the book. They seemed fatalistic as Baker points out.

Klein reports that the stimulus was too small:

Critics and defenders on the left make the same point: The stimulus was too small. The administration underestimated the size of the recession, so it follows that any policy to combat it would be too small. On top of that, it had to get that policy through Congress. So it went with $800 billion — what Romer thought the economy could get away with — rather than $1.2 trillion — what she thought it needed. Then the Senate watered the policy down to about $700 billion. Compare that with the $2.5 trillion hole we now know we needed to fill.

Klein doesn't really emphasize the point, but the administration should have gone back for more or done more unilaterally or at least refrain from talking of green shoots and cutting government spending.

Some more good info Klein highlights is the Federal Reserve and inflation.

There was, however, one institution that some think could have reduced the debt overhang crushing the economy and that didn’t face such political obstacles: the Federal Reserve.

The central bank manages the nation’s money supply and credit and sits at the center of its financial system. Usually, it spends its time guarding against the threat of inflation. But in December 2008, Rogoff argued that the moment called for the reverse strategy.

“It is time for the world’s major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today’s epic debt morass,” he wrote.

...
Rogoff scoffs at this. “Creating inflation is not rocket science,” he wrote. “All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20 or 30 percent instead of 5 or 6 percent. Indeed, fear of overshooting paralyzed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.”

Klein could have mentioned Volcker's success. In fact we need Bernanke to get some Volckerian resolve. But at least he discusses the Federal Reserve. Usually liberals and progressives neglect to mention it.

Another good idea Klein raises is Germany's work-sharing:

Germany’s response to the recession included a work-sharing program that subsidized salaries when employers trimmed the hours of individual workers to keep more people on the job. If workers attended job training, the government gave a more generous subsidy.

The program worked. Even though Germany’s economy was devastated by the recession — declining by almost 7 percent — the jobless rate fell slightly, from 7.9 percent at the start of the recession to 7 percent in May 2010.

There are reasons to question whether work-sharing programs would have been as effective here as they were in Germany. For one thing, they work best in sectors where jobs are bound to return after a recession — such as Germany’s export sector — rather than sectors that need to be downsized after being inflated by a credit boom.

Germany also has a different labor market. Employers, unions and the government work together with an unusual level of cooperation. The culture is much more hostile toward layoffs than the United States’ is, which has caused Germany problems in the past but has been a boon throughout this recession.

But paying the private sector to save jobs was not the administration’s only option. There was also the possibility of simply paying workers to work.

For one thing, the government could have refused to fire anyone. Says Baker, of the Center for Economic and Policy Research: “We’ve lost 500,000 state and local jobs, and before that, we were creating 160,000 a year. If we hadn’t had those losses and had done more to keep creation at that pace, we would have almost another million jobs.”

It also could have started hiring. Romer, for instance, proposed to add 100,000 teacher’s aides. Imagine similar proposals: Every park ranger could have had an assistant park ranger. Every firefighter station could have added three trainees. Every city could have expanded its police force by 5 percent. Everyone between ages 18 and 26 could have signed up for two years of paid national service.

Another idea Klein could have touched on is FDR's mistaken turn towards deficit cutting in 1937. Klein could have been clearer on the numbers, too. First Romer says a $2 trillion dollar hole. How does that relate to the shrinking economy in the last quarter of 2008? Then Klein says $2.5 trillion and finally he mentions the loss of $8 trillion in housing wealth.

However, if you read between the lines, it's quite a good article all in all, not perfect, but thorough.

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Leonhardt's piece comparing the Great Depression with today is shorter but good also. Leonhardt starts off comparing the 1930s with today.

Economists often distinguish between cyclical trends and secular trends — which is to say, between short-term fluctuations and long-term changes in the basic structure of the economy. No decade points to the difference quite like the 1930s: cyclically, the worst decade of the 20th century, and yet, secularly, one of the best.

It would clearly be nice if we could take some comfort from this bit of history. If anything, though, the lesson of the 1930s may be the opposite one. The most worrisome aspect about our current slump is that it combines obvious short-term problems — from the financial crisis — with less obvious long-term problems. Those long-term problems include a decade-long slowdown in new-business formation, the stagnation of educational gains and the rapid growth of industries with mixed blessings, including finance and health care.

Together, these problems raise the possibility that the United States is not merely suffering through a normal, if severe, downturn. Instead, it may have entered a phase in which high unemployment is the norm.

I just don't agree with this. Christina Romer doesn't and I don't believe Leonhardt himself does either.

On Friday, the Labor Department reported that job growth was mediocre in September and that unemployment remained at 9.1 percent. In a recent survey by the Federal Reserve Bank of Philadelphia, forecasters said the rate was not likely to fall below 7 percent until at least 2015. After that, they predicted, it would rarely fall below 6 percent, even in good times.

Well they've been wrong before. Leonhardt discusses education:

Despite the media’s focus on those college graduates who are struggling, it’s not much of an exaggeration to say that people with a four-year degree — who have an unemployment rate of just 4.3 percent — are barely experiencing an economic downturn.

Maybe Obama is less concerned about unemployment than he ought to be because all of the states that voted for Obama in 2008 had high levels of college graduates, especially the new purple states like Virginia. (This is why they took out no insurance after passing the stimulus.) They are counting on these states to win in 2012. (Granted Obama is more concerned than Republicans. Plus median incomes have fallen 10 percent or so since the beginning of the recession. That should hurt Obama's prospects. The one downside in an Obama victory will be the analyses of those who argue high unemployement doesn't matter.)

Economic downturns do often send people streaming back to school, and this one is no exception. So there is a chance that it will lead to a surge in skill formation. Yet it seems unlikely to do nearly as much on that score as the Great Depression, which helped make high school universal. High school, of course, is free. Today’s educational frontier, college, is not. In fact, it has become more expensive lately, as state cutbacks have led to tuition increases.

Beyond education, the American economy seems to be suffering from a misallocation of resources. Some of this is beyond our control. China’s artificially low currency has nudged us toward consuming too much and producing too little. But much of the misallocation is homegrown.

In particular, three giant industries — finance, health care and housing — now include large amounts of unproductive capacity. Housing may have shrunk, but it is still a bigger, more subsidized sector in this country than in many others.

This is the Leonhardt I've grown to admire. These are the long-term "structural" problems with the U.S. economy.

Health care is far larger, with the United States spending at least 50 percent more per person on medical care than any other country, without getting vastly better results. (Some aspects of our care, like certain cancer treatments, are better, while others, like medical error rates, are worse.) The contrast suggests that a significant portion of medical spending is wasted, be it on approaches that do not make people healthier or on insurance-company bureaucracy.

In finance, trading volumes have boomed in recent decades, yet it is unclear how much all the activity has lifted living standards. Paul A. Volcker, the former Fed chairman, has mischievously said that the only useful recent financial innovation was the automated teller machine. Critics like Mr. Volcker argue that much of modern finance amounts to arbitrage, in which technology and globalization have allowed traders to profit from being the first to notice small price differences.

IN the process, Wall Street has captured a growing share of the world’s economic pie — thereby increasing inequality — without doing much to expand the pie. It may even have shrunk the pie, given that a new International Monetary Fund analysis found that higher inequality leads to slower economic growth.

The common question with these industries is whether they are using resources that could do more economic good elsewhere. “The health care problem is very similar to the finance problem,” says Lawrence F. Katz, a Harvard economist, “in that incredibly talented people are wasting their talent on something that is essentially a zero-sum game.”

In the short term, finance, health care and housing provide jobs, as their lobbyists are quick to point out. But it is hard to see how the jobs of the future will spring from unnecessary back surgery and garden-variety arbitrage. They differ from the growth engines of the past, which delivered fundamental value — faster transportation or new knowledge — and let other industries then build off those advances.

Obamacare and Frand-Dodd are good steps in the right direction but not enough. The housing bubble was deflating on its own and jobs were moving to other sectors until the financial crisis hit.

The rate at which new companies are created has been falling for most of the last decade. So has the pace at which existing companies add positions. “The current problem is not that we have tons of layoffs,” Mr. Katz says. “It’s that we don’t have much hiring.”

If history repeats itself, this situation will eventually turn around. Maybe some American scientist in a laboratory somewhere is about to make a breakthrough. Maybe an entrepreneur is on the verge of creating a great new product. Maybe the recent health care and financial-regulation laws will squeeze the bloat.

For now, the evidence for such optimism remains scant. And the economy remains millions of jobs away from being even moderately healthy.

What is needed is more government spending to help with aggregate demand and for Bernanke to get some Volckerian resolve. Inflation will help with deleveraging and inflation will get those sitting on money to invest and spend. It will boost the velocity of money.

Ideally, we would have a 21st century WPA program which could be modeled on the way the National Science Foundation doles out grants.

Housing Boom / Housing Bubble

Be Warned: Mr. Bubble is Worried Again by David Leonhardt (August 21, 2005)

Robert Shiller's graph of housing prices ending in 2005 or so.

This post is sort of free-floating working-out of my ideas on the issues. The context of this is series of back and forth blog posts between Matt Yglesias and Doug Henwood. Yglesias's first post is a reaction to a piece by Jeffrey Sachs published in the Huffington Post. Right off the bat, I'm distrustful of Sachs and more trusting that Yglesias will be correct. They're both liberals so they both want the same things or ends, but Sachs can be all over the place and became famous after putting the Russian people through the wringer via "Shock Therapy." My view is that he had sort of a crisis of conscience over the experience and became more liberal if not really that rigorous in his thinking. I could be wrong. Also, Huffington Post will publish good stuff, but also will run hokey stuff. So my BS detector is on high alert. Anyway Sachs writes:

The housing boom between 1998 and 2008 was an indirect reaction to the loss of manufacturing. As the US shed manufacturing jobs in the 1980s and 1990s, the Federal Government and Federal Reserve tried to compensate by boosting jobs in construction and other sectors shielded from international competition (so-called non-traded sectors). The Fed cut interest rates and the White House and Congress promoted housing finance, including through reckless deregulation and irresponsible behavior by government-backed entities like Fannie Mae. These efforts produced a temporary boom in housing, followed by the bust in 2008.

Obama and his advisors have believed, in effect, that they can reignite the housing boom. Rather than reacting to the underlying problem -- the loss of manufacturing competitiveness -- they have acted as if a bit of pump priming and the passage of time will recreate consumer-led growth in housing, autos, and other sectors.

Yet this approach has been doomed to fail, and continues to do so. Consumers will not return quickly to buying houses, cars, and other big-ticket items in large numbers. They are exhausted and in debt, and in no mood to repeat the earlier disasters of over-borrowing.

Ygelsias argues there wasn't a boom in housing, but a boom in prices or a bubble. Doug Henwood responds to this. He's usually pretty good, but can bitchy towards others like Yglesias. Henwood's response is that there was a boom, along with a bubble. A bubble starts with a boom and then takes on a life of its own. And then as far a I can tell Yglesias responds and agrees there was a boom but that it wasn't that big. Henwood says it was pretty big:

To reprise a couple of points from yesterday’s post: 1) As a share of GDP, residential investment—that is, the building of new houses and work done on older ones—hit a peak of almost 60% above its long-term trend in the mid-00s. And, 2) between 2001 and 2006, residential investment accounted for 12% of GDP growth, twice its share of the economy. If “60%” and “twice” don’t sound like big numbers, then I don’t know what does.

See where I'm confused is where inflated prices work into the equation of residential investment. Is the bubble reflected in the numbers? And when working with fractions and percentages it gets kind of tricky. My guess is that Yglesias doesn't want to admit there was a boom of any sort in the Bush years, but maybe that's not fair or true.

Calculated Risk* has had some interesting posts on the housing market. The construction industry builds a certain number of houses a year to keep up with new housing formation. Because of the crisis and bust, there's a big overhang of available housing. Once that is worked through, which will be slower than the past because of a slowdown in household formation, the construction industry will start building again to meet demand and create jobs and more demand. New construction won't be at the boom level of the past though because there won't be the boom level of demand in new housing formation. Dean Baker repeatedly points out at his blog that housing prices need to come down to their trend before the market can turnaround. I admittedly don't have a handle on it.

But back to Sach's long history. It interesting that Sachs says the boom is from 1998-2008 whereas Henwood says 2001-2006. There was an Interent bubble in the late Nineties and then a mild crash. Sachs says the US shed manufacturing jobs in the 1980s and 1990s and I guess it's true, although the 1990s had a period of growing wages and full employment during the Clinton years right before the Internet bubble burst. Sachs asserts that the government created the housing boom through design and I don't know if that's quite true. There was the Global Savings Glut which lowered mortgage rates and the Bush tax cuts and the weakening of loan restrictions so that more people could pile on debt. Was this a housing boom policy or more accidental? Growth would have been worse with out these things. I agree that Clinton and Bush both pushed "the American Dream" with more access to housing with the Bush administration probably inflicting more unintended consecquenses.

Sachs says this "artificial" housing boom demand won't be replaced so the Obama administration's "pump-priming" is futile. He argues they need to address the long-term structural problems of "competitiveness" and the loss of demand caused by the loss of manufacturing jobs. Dean Baker has pointed to the trade deficit.

Maybe after priming the economy won't pick back up to its previous boom levels, but after financial crises economies do usually come back (except Japan of course). The world economies came back after the Great Depression but only because of the pump-priming of war time spending and moentary policies.

In sum, I agree that there's a lack of demand because consumers were relying on credit during the boom years and they are not now. Plus the loss of demand cause by job losses and government budget cuts. But it's also the case that the fear caused by the crisis and recession is making credit and spending less than they need be. The Fed and White House pump-priming are trying to get people to be less cautious and help them deleverage. There's no reason why corporations and people with money are sitting on it, demanding safe places to park it and low returns, other than the fact that they are anxious and see years of slow growth ahead.
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*This might be wrong. It's not that there's an overhang, it's that prices are too high and demand is too low. Anyway I'm confused.

Dissecting the Mind of the Fed by David Leonhardt

But you would also find a sizable group of economists who thought the Fed could and should do far more than it was doing. This group, known as doves, tilts liberal, though it includes conservatives as well. If anything, it can probably claim a larger number of big-name economists -- J. Bradford DeLong, Paul Krugman (an Op-Ed columnist for The New York Times), Christina D. Romer, Scott Sumner and Mark Thoma, among others -- than the camp that believes the Fed has done too much.

...

David Levey, a former managing director at Moody’s and another critic of Fed inaction, points out that banks often have more to lose from inflation than from unemployment. Inflation reduces the future value of the money that their debtors — homeowners, car buyers, small businesses and the like — will repay them.

...

"The Fed regional banks represent, in essence, the banking community, which tends to be very conservative and hawkish," Mr. Levey says. "Creditors don’t like inflation -- it’s good for debtors." Indeed, the three recent dissents all came from regional bank presidents: Richard W. Fisher of Dallas, Narayana R. Kocherlakota of Minneapolis and Charles I. Plosser of Philadelphia.

David Leonhardt's time machine

David Leonhardt: This time machine would start its magic by taking us back almost a decade, to the days when everyone from senior Washington officials to ordinary Americans believed that house prices could never drop. We'd then have a chance to persuade Alan Greenspan and Ben Bernanke, the last two Federal Reserve chairmen, to stop saying that nationwide housing bubbles could not happen and to start cracking down on the wishful-thinking mortgages that were making that bubble possible.

We would also stop by the Treasury Department and Congress and ask them to give some more attention to the fact that incomes were stagnating and many Americans were using their credit cards to pay for higher living standards. Finally, we'd pay a visit Wall Street. We'd go to Lehman Brothers and explain to the bigwigs there why they might not want to be borrowing $33 for every $1 in assets they held. If they didn't listen to us, we'd go see a gentleman named Timothy Geithner, then overseeing the regulators at the New York Fed.

In every case, we would issue an urgent message: The United States economy is in the midst of creating the worst economic excesses since the 1920s. If allowed to continue, those excesses will do enormous damage -- damage that you won't be able to stop once it starts.

This damage, of course, is what we are living through right now. And as much as we all may wish they were an easy fix, there isn't. Financial crises cause spending to be depressed and unemployment to be high -- for years.

Are there steps we can take to mitigate the damage? Absolutely. An aggressive policy response in 2008 and 2009 helped prevent another depression. And a more timid response in 2011 has aggravated the problems.

But the economy was never going to recover quickly from the bubbles. That's why sales -- not just of houses, but of appliances, vehicles and even services like entertainment, are all still far below their pre-crisis levels. They will be for a long to come.

It's too late to prevent the last great financial bubble. It's not too late to ask whether we are taking substantial steps to keep the next bubble from being nearly so bad. Remember: there's always a next bubble.

David Leonhardt will be Washington bureau chief

David Leonhardt on Germany's economic successes

"Holding Bernanke Accountable" by David Leonhardt

Congratulations to David Leonhardt for winning the Pulitzer in the commentary catergory for "his graceful penetration of America’s complicated economic questions".

Calculated Risk: ADP: Private Employment increased by 201,000 in March

Private-sector employment increased by 201,000 from February to March on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from January 2011 to February 2011 was revised down to 208,000 from the previously reported increase of 217,000.
...
The average monthly increase in employment over the last four months --December through March -- has been 211,000, consistent with a gradual if uneven decline in the unemployment rate...

(via DeLong)

Still the Fed has failed, as writes David Leonhardt.

One group of Fed officials and watchers worries constantly about the prospect of rising inflation, no matter what the economy is doing. Some of them are haunted by the inflation of the 1970s and worry it may return at any time. Others spend much of their time with bank executives or big investors, who generally have more to lose from high inflation than from high unemployment.

There is no equivalent group -- at least not one as influential -- that obsesses over unemployment. Instead, the other side of the debate tends to be dominated by moderates, like Ben Bernanke, the Fed chairman, and Mr. Meyer, who sometimes worry about inflation and sometimes about unemployment.

The result is a bias that can distort the Fed’s decision-making. Just look at the last 18 months. Again and again, the inflation worriers, who are known as hawks, warned of an overheated economy. In one speech, a regional Fed president even raised the specter of Weimar Germany.

Flirting With a Repeat of a Stunted Recovery by Leonhardt

On the positive side, exports and consumer spending are up, and the job market finally seems to be improving. If anything, last week’s jobs report probably undercounted recent gains. That often happens early in an economic recovery because the Labor Department has a hard time keeping track of newly started businesses.

On the negative side, oil prices have risen more than 40 percent since September, and every level of government is considering spending cuts and layoffs.

All in all, the situation is uncomfortably reminiscent of last spring. Back then, companies were just starting to hire again, before a combination of events -- including Europe’s debt crisis and the fading of the stimulus program here -- spooked them and cut short the recovery. It’s easy to imagine how energy costs and government cuts could do the same this year.

Why Budget Cuts Don't Bring Prosperity by Leonhardt

"It’s really quite striking how well the U.S. is performing relative to the U.K., which is tightening aggressively," says Ian Shepherdson, a Britain-based economist for the research firm High Frequency Economics, "and relative to Germany, which is tightening more modestly." Mr. Shepherdson adds that he generally opposes stimulus programs for a normal recession but that they are crucial after a crisis.

The trick is finding the political will to end the stimulus when the time comes. That is not easy, especially for Democrats, given that stimulus programs tend to include policies they favor. But the wave of recently elected Republicans, in Congress and the states, will no doubt be happy to help summon that political will.

For the sake of the economy, the best compromise in coming weeks would be one that trades short-term spending for medium- and long-term cuts. Beef up the cost-control measures in the health care overhaul and add new ones, like malpractice reform. Cut more wasteful military programs, like the F-35 jet engine. Force more social programs to prove they work -- and cut their funding in future years if they don’t.

By all means, though, don’t follow the path of the Germans and the British just because it feels morally satisfying.

In Wreckage of Lost Jobs, Lost Power by David Leonhardt

The column of the year so far. It hits on the issue. What he doesn't mention is that Bernanke and the Federal Reserve Bank are failing miserably at their mission.  They have gone above and beyond, but it hasn't been enough.

The unemployment rate is higher in this country than in Britain or Russia and much higher than in Germany or Japan, according to a study of worldwide job markets that Gallup will release on Wednesday. The American jobless rate is also higher than China’s, Gallup found. The European countries with worse unemployment than the United States tend to be those still mired in crisis, like Greece, Ireland and Spain.

Economists are now engaged in a spirited debate, much of it conducted on popular blogs like Marginal Revolution, about the causes of the American jobs slump. Lawrence Katz, a Harvard labor economist, calls the full picture "genuinely puzzling."

Tyler Cowen at Marginal Revolution and libertarians of his type leach politics out of their discussion. What would he think of Leonhardt's pitch-perfect column?

Why? One obvious possibility is the balance of power between employers and employees.

Relative to the situation in most other countries -- or in this country for most of the last century -- American employers operate with few restraints. Unions have withered, at least in the private sector, and courts have grown friendlier to business. Many companies can now come much closer to setting the terms of their relationship with employees, letting them go when they become a drag on profits and relying on remaining workers or temporary ones when business picks up.  

Just consider the main measure of corporate health: profits. In Canada, Japan and most of Europe, corporate profits have still not recovered to precrisis levels. In the United States, profits have more than recovered, rising 12 percent since late 2007.

For corporate America, the Great Recession is over. For the American work force, it’s not.

Yglesias had a post on this subject yesterday, where he linked to Krugman's speculations on "postmodern" recessions, that is ones not caused by the Fed hiking interest rates.

Leonhardt:

Germany’s job-sharing program -- known as "Kurzarbeit," or short work -- has won praise from both conservative and liberal economists. Senator Jack Reed, Democrat of Rhode Island, has offered a bill that would encourage similar programs. So far, though, the White House has not pursued it aggressively. Perhaps Gene Sperling, the new director of the National Economic Council, can put it back on the agenda.

Restoring some balance to the relationship between employers and employees will be more difficult. One problem is that too many labor unions, like the auto industry’s, have been poorly run, hurting companies and, ultimately, workers. Of course, many other companies -- AT&T, General Electric, Southwest Airlines -- have thrived with unionized workers, and study after study has shown that unions usually do benefit workers. As one bumper sticker says, "Unions: The folks who brought you the weekend."

Today, unions are clearly playing on an uneven field. Companies pay minimal penalties for illegally trying to bar unions and have become expert at doing so, legally and otherwise. For all their shortcomings, unions remain many workers’ best hope for some bargaining power.

Dean Baker gives the column a thumbs-up.

Leonhardt on legal opposition to health care law

"We are against forcing all citizens, regardless of need, into a compulsory government program," said one prominent critic of the new health care law. It is socialized medicine, he argued. If it stands, he said, "one of these days, you and I are going to spend our sunset years telling our children, and our children’s children, what it once was like in America when men were free."

The health care law in question was Medicare, and the critic was Ronald Reagan. He made the leap from actor to political activist, almost 50 years ago, in part by opposing government-run health insurance for the elderly.

Today, the supposed threat to free enterprise is a law that’s broader, if less radical, than Medicare: the bill Congress passed this year to create a system of privately run health insurance for everyone. On Monday, a federal judge ruled part of the law to be unconstitutional, and the Supreme Court will probably need to settle the matter in the end.