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May 9, 2012

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Posted: 09 May 2012 12:06 AM PDT
Posted: 08 May 2012 05:03 PM PDT
This is from chapter 1 of Paul Krugman's new book "End This Depression Now" (the full chapter 1 is here):
...How severe is the problem of unemployment? That question calls for a bit of discussion.
Clearly, what we're interested in is involuntary unemployment. People who aren't working because they have chosen not to work, or at least not to work in the market economy--retirees who are glad to be retired, or those who have decided to be full-time housewives or househusbands--don't count. Neither do the disabled, whose inability to work is unfortunate, but not driven by economic issues.
Now, there have always been people claiming that there's no such thing as involuntary unemployment, that anyone can find a job if he or she is really willing to work and isn't too finicky about wages or working conditions. There's Sharron Angle, the Republican candidate for the Senate, who declared in 2010 that the unemployed were "spoiled," choosing to live off unemployment benefits instead of taking jobs. There are the people at the Chicago Board of Trade who, in October 2011, mocked anti-inequality demonstrators by showering them with copies of McDonald's job application forms. And there are economists like the University of Chicago's Casey Mulligan, who has written multiple articles for the New York Times website insisting that the sharp drop in employment after the 2008 financial crisis reflected not a lack of employment opportunities but diminished willingness to work.
The classic answer to such people comes from a passage near the beginning of the novel The Treasure of the Sierra Madre (best known for the 1948 film adaptation starring Humphrey Bogart and Walter Huston): "Anyone who is willing to work and is serious about it will certainly find a job. Only you must not go to the man who tells you this, for he has no job to offer and doesn't know anyone who knows of a vacancy. This is exactly the reason why he gives you such generous advice, out of brotherly love, and to demonstrate how little he knows the world."
Quite. Also, about those McDonald's applications: in April 2011, as it happens, McDonald's did announce 50,000 new job openings. Roughly a million people applied.
If you have any familiarity with the world, in short, you know that involuntary unemployment is very real. And it's currently a very big deal...: for millions, the damage from the bad economy runs very deep. ...
And we aren't doing nearly enough to try to fix the unemployment problem, in part because of those who say unemployment is the fault of the unemployed -- they aren't trying hard enough, they're lazy, they're addicted to the benefits, and other such nonsense. They tell us that it's all structural and hence there's little we can do, that we can afford wars and tax cuts, but not this. In short, what we hear is any excuse Republicans can think of to forestall government action. And they're winning the ideological battle. Government is shrinking -- the Republicans are making good on the adage to "never let a crisis go to waste" -- all the while accusing Democrats of out of control spending and stoking fears of impending budget doom in the hopes of getting even more reductions in the size of government. Under those circumstances, we aren't going to get much help for the unemployed, especially if Democrats continue to roll over rather than making a strong, winning case for an alternative path.
Posted: 08 May 2012 01:42 PM PDT
Tim Duy:
Greece, Again, by Tim Duy: It is shaping up to be another long, hot summer, and not just because of global warning. As has been widely noted, the austerity backlash in Europe began in earnest this past weekend. And Greece is once again the epicenter, at least for now. The Greek political system appears rudderless, which is calling into question the nation's resolve to complete the conditions of the last bailout package. Moreover, there are open calls for Greece to renege on the deal:
Greece's Syriza party leader Alexis Tsipras, charged with forming a government, told his pro-bailout counterparts they must renounce support for the European Union- led rescue if there is to be any chance of forging a coalition.
Tsipras said he expected Antonis Samaras of New Democracy and Evangelos Venizelos, the former finance minister who leads the Pasok party, to send a letter to the EU revoking their pledges to implement austerity measures by the time he meets with them tomorrow to discuss forming a coalition. Samaras said he would not do so, and would support a minority government if necessary.
The Troika can't be particularly optimistic about Greek resolve whatever government finally holds together. Also note that in the coming days, Greece is faced with some real debt management decisions. From Bloomberg:
The government taking office after this weekend's election has 30 days to decide whether to make today's interest payment on 20 billion yen ($250 million) of 4.5 percent notes maturing in 2016, or default. Then, by May 15, officials must decide if they're going to repay the 436 million euros ($555 million) due on a floating-rate note issued a decade ago.
These are among about 7 billion euros of bonds whose holders took advantage of being governed by foreign rather than Greek law to sidestep losses suffered under the private-sector involvement rescheduling, or PSI. Paying the holdouts in full would arouse the ire of Greek taxpayers, as well as investors who cooperated with PSI. A failure to pay would signal Europe's debt crisis is worsening.
A lot of moving pieces here, but any way you organize the pieces, the odds of a Greek exit from the Eurozone are heading up with each passing day, and market participants are increasingly leaning in that direction. From Bloomberg:
"This summer I think is very likely," Taylor, founder and chief executive officer of FX Concepts in New York, said today in an interview on Bloomberg Television's "Inside Track" with Erik Schatzker and Sara Eisen. "The Europeans aren't going to give them the money, the International Monetary Fund's not going to give them an OK. They will be out of money in June."
June is coming up fast. And, for the moment, the rest of Europe is drawing a line in the sand. As expected, the Germans are at the forefront. From Reuters:
The European Central Bank will not renegotiate Greece's bailout package and there are no alternatives to sticking with it if Greece wants to stay in the euro zone, ECB Executive Board member Joerg Asmussen was quoted as saying on Tuesday.
"Greece needs to be aware that there are no alternatives to the agreed bailout program, if it wants to stay in the euro zone," Asmussen told German financial daily Handelsblatt.
See also Athens News. Of course, the sustainability of the last bailout might have been a moot point anyway, given that the Greek economy will likely deteriorate more than expected anyway. From Athens news:
The economy will contract by a steeper-than-expected 5 percent this year, the central bank chief said in a speech to the bank's shareholders on Tuesday.
Last month, the bank in March had forecast a 4.5 percent contraction in the economy this year.
I don't know if this includes expectations of a decline of the Greek tourism industry. From ekathimerini:
Online tourism bookings from abroad are pointing to a 12.5 percent decline for this year, according to the Airfasttickets travel agency.
Nikos Koklonis, head of the company that owns the agency, says that the biggest drop in bookings for Greek destinations this year is from the German market, which last year accounted for 15 percent of all bookings. Its share has now shrunk to just 3 percent.
In my opinion, what makes a Greek exit more likely is the apparently growing belief that the external costs will be minimal. Back to Bloomberg:
"I think that people are feeling the implications of a Greek exit aren't so bad," Taylor said. If Greece leaves the euro, Europeans will "turn around and huddle together and say, 'how do I help Portugal and Spain?'"
And Athens News:
Voters' rejection of pro-bailout political parties in Sunday's election has raised the chances of Greece leaving the euro, but this unprecedented step is seen as manageable rather than catastrophic for the currency bloc.
Some banks have raised estimates of the likelihood of Greece quitting the euro. But after a year of investors shedding bonds issued by highly indebted euro zone countries and big injections of central bank cash, they said the damage could be contained.
And from CNNMoney:
The results of the latest elections in Greece may make it more likely that the country will eventually leave the eurozone. But such an exit would probably be more orderly than Greece's default, experts said....
..."[Greece] is not going to get pushed, but they might walk out," Citi chief economist Willem Buiter said at last week's Milken Institute Global Conference...
...Economist Nouriel Roubini thinks Portugal and Ireland may also find themselves restructuring their debt and could even wind up following Greece out the door, but none of that should prove disruptive to world markets.
"If a small country -- like Greece or Portugal -- exit, you can have an orderly divorce, but if that restructuring and/or exit hits Italy or Spain, effectively you could get a breakup of the eurozone," Roubini said. But he added that's an unlikely scenario....
The proximate cause for such optimism, I believe, is that the much feared Greek debt default failed to trigger a financial collapse. Apparently, European policymakers kicked that can far enough down the road that financial market participants had time to adjust to that ultimate outcome. That, in addition to the two LTRO's and more firepower in other emergency funding facilities have perhaps created a sense of complacency about a Greek exist from the Eurozone. And that complacency suggests that there will be no third bailout for Greece, especially if that means reserving resources for other ailing Euro members. No bailout renegotiations will likely tip the balance such that staying in the Eurozone will be more costly than exit.
Whether or not Europe should become so sanguine about a Greek exit is another question entirely. But perhaps at this point such concerns are irrelevant anyway. Unless economic conditions dramatically shift in a positive fashion in Greece, it is increasingly difficult to see how this ends with anything but a Greek exit from the Eurozone.
Posted: 08 May 2012 08:01 AM PDT
Via the WSJ's Real Time Economics, a calculation of how costly the "sharp cuts in state and local government spending" have been:
Unemployment Rate Without Government Cuts: 7.1%, by Justin Lahart: One reason the unemployment rate may have remained persistently high: The sharp cuts in state and local government spending in the wake of the 2008 financial crisis, and the layoffs those cuts wrought.

The Labor Department's establishment survey of employers — the jobs count that it bases its payroll figures on — shows that the government has been steadily shedding workers since the crisis struck, with 586,000 fewer jobs than in December 2008. ... But the survey of households that the unemployment rate is based on suggests the government job cuts have been much, much worse.
In April the household survey showed that that there were 442,000 fewer people working in government than in March. The household survey has a much smaller sample size than the establishment survey, and so is prone to volatility, but the magnitude of the drop is striking: It marks the largest decline on both an absolute and a percentage basis on record going back to 1948. Moreover, the household survey has consistently showed bigger drops in government employment than the establishment survey has.
The unemployment rate would be far lower if it hadn't been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.
Ceteris is rarely paribus, of course: If there were more government jobs now, for example, it's likely that not as many people would have left the labor force, and so the actual unemployment rate would be north of 7.1%. ...
It's possible to quarrel with the exact figure given above, but not the general message. One of the biggest policy mistakes that has been made during this recession is allowing government employment to fall by this magnitude. Stabilization policy calls for the opposite, a temporary increase in employment to provide employment for people who cannot find private sector jobs, and at the very least we should have kept government employment stable.

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Posted: 08 May 2012 01:11 AM PDT
If inflation begins to increase before the economy has fully recovered, the Fed shouldn't panic:
Federal Reserve Policy: Exceptions Improve the Rule: At some point during the recovery, the Fed may face an important decision. If the inflation rate begins to rise above the Fed's 2% target and the unemployment rate is still relatively high, will the Fed be willing to leave interest rates low and tolerate a temporary increase in the inflation rate?
Probably not. Even though higher inflation can help to stimulate a depressed economy, Ben Bernanke, Chairman of the Federal Reserve, is not in favor of allowing higher inflation because it could undermine the Fed's "hard-won inflation credibility." And recent Fed communications seem to be setting the stage for the Fed to abandon its commitment to keep interest rates low through the end of 2014. This adds to the likelihood that the Fed will raise interest rates quickly if inflation begins increasing above the 2% target even if the economy has not yet fully recovered.
As I'll explain in a moment, that's the wrong thing to do. But first, why does the Fed put so much value on its credibility? ...[continue reading]...
Posted: 08 May 2012 12:06 AM PDT
Posted: 07 May 2012 11:43 AM PDT
Chris Blattman makes the case for more research on industrial policy:
The case for industrial policy (a paper and a rant), by Chris Blattman: A new paper, where some very good economists look at data from Chinese medium and large firms:
…sectoral policy aimed at targeting production activities to one particular sector, can enhance growth and efficiency if it made competition-friendly.
…if subsidies are allocated to competitive sectors… and allocated in such a way as to preserve or increase competition, then the net impacts of subsidies, tax holidays, and tariffs on total factor productivity levels or growth become positive and significant.
"You can't pick winners" is the knee-jerk retort to the mention of anything that even rhymes with industrial policy. I would call it the triumph of ideology over evidence, except that even "ideology" feels like a generous term. Lazy thinking might be a more accurate description. Some have given the question a great deal of thought, but most have not.
I'm not suggesting that ... governments can pick winners (probably they can't). Nor am I forgetting that industrial policy is easily politicized and distorted (as surely it is). So what am I talking about?
I'll make two claims. The first: industrialization is the most important and essential process of development. ... The problem? We have little to no idea how to do that. And many of the tools in the current policy tool box are deeply flawed.
Some take this as evidence economists and researchers should focus on other things. This brings us to the second part of my argument, where I make the opposite claim: there is no more important or promising frontier of knowledge. The fact that we know so little, and the tools are so poor, suggests (to me) that the marginal gains from more research are huge. there is no more important place for scholars to spend their time. ...
When my students run rushing in the direction of micro-poverty programs, or randomized trials, I steer them away. Yesterday's research and policy frontier is tomorrow's old news. What is the next frontier? I would put money on industrial development and, with it, a new breed of industrial policy.
Some of the most interesting development research is coming from people swimming ahead of this wave: Eric Verhoogen, Nick Bloom, David Atkin, David McKenzie, Dani Rodrik, Ricardo Hausman, the authors of this post's paper, and a slew of others. I haven't seen the same swell in political science, but surely it will come.
Posted: 07 May 2012 09:13 AM PDT
Here's an example of what Joe Stiglitz is talking about in the post below this one. The IMF embraces the confidence fairy:
How to Get the Balance Right: Fiscal Policy At a Time of Crisis, by Anders Borg and Christine Lagarde: Last autumn was a turbulent time for Europe. The debt crisis deepened and financial markets became embroiled in turmoil, driven by fears of widespread restructuring of public debt. The crisis has harmed growth, increased unemployment, and left a large number of people less protected.
We are now seeing some signs of stabilization. Most countries are reducing their deficits and even if debt ratios are still rising, the return back to fiscal health has begun. ...
How, exactly, do rising debt to GDP ratios signal a return to fiscal health? Anyway:
... Sweden provides an interesting case study for countries' current predicament. In the early 1990s, Sweden was rocked by an economic crisis with escalating unemployment, double digit deficits, and a sudden loss of market confidence that raised the cost of sovereign borrowing.
In response, Sweden initiated a comprehensive set of reforms. Favorable external conditions helped, but domestic policies played a critical role in the adjustment. Strong fiscal tightening was implemented to regain fiscal sustainability and market confidence. ...
Never mind the evidence that austerity doesn't work -- it goes on to explain how other countries can use austerity to summon the confidence fairy for themselves.
Posted: 07 May 2012 08:42 AM PDT
Joe Stiglitz on Europe:
After Austerity, by Joseph Stiglitz, Commentary, Project Syndicate: This year's annual meeting of the International Monetary Fund made clear that Europe and the international community remain rudderless when it comes to economic policy. Financial leaders, from finance ministers to leaders of private financial institutions, reiterated the current mantra: the crisis countries have to ... bring down their national debts, undertake structural reforms, and promote growth. Confidence, it was repeatedly said, needs to be restored.
It is a little precious to hear such pontifications from those who, at the helm of central banks, finance ministries, and private banks,... created the ongoing mess. Worse, seldom is it explained how to square the circle. How can confidence be restored ... when austerity will almost surely mean a further decrease in aggregate demand, sending output and employment even lower? ...
There are alternative strategies. Some countries, like Germany, have room for fiscal maneuver. Using it for investment would enhance long-term growth, with positive spillovers to the rest of Europe. ...
Europe as a whole is not in bad fiscal shape... If Europe – particularly the European Central Bank – were to borrow, and re-lend the proceeds, the costs of servicing Europe's debt would fall, creating room for the kinds of expenditure that would promote growth and employment.
There are already institutions within Europe, such as the European Investment Bank, that could help finance needed investments in the cash-starved economies. ...
The consequences of Europe's rush to austerity will be long-lasting and possibly severe. If the euro survives, it will come at the price of high unemployment and enormous suffering, especially in the crisis countries. And the crisis itself almost surely will spread. ...
The pain that Europe, especially its poor and young, is suffering is unnecessary. Fortunately, there is an alternative. But delay in grasping it will be very costly, and Europe is running out of time.

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Posted: 07 May 2012 12:24 AM PDT
Can the euro be saved?
Those Revolting Europeans, by Paul Krugman, Commentary, NY Times: The French are revolting. The Greeks, too. And it's about time.
Both countries held elections Sunday that were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It's far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity — and that's a good thing. ...
So what are the alternatives? One answer ... would be to break up the euro... Greece and Spain would have ... a quick way to restore cost-competitiveness and boost exports, namely devaluation. ...
Yet breaking up the euro would be highly disruptive, and would also represent a huge defeat for the "European project," the long-run effort to promote peace and democracy through closer integration. Is there another way? Yes, there is — and the Germans have shown how that way can work. Unfortunately, they don't understand the lessons of their own experience. ...
German opinion leaders ... like to point out that their own economy was in the doldrums in the early years of the last decade but managed to recover. What they don't like to acknowledge is that this recovery was driven by the emergence of a huge German trade surplus vis-à-vis other European countries — in particular, vis-à-vis the nations now in crisis — which were booming, and experiencing above-normal inflation, thanks to low interest rates. Europe's crisis countries might be able to emulate Germany's success if they faced a comparably favorable environment — that is, if this time it was the rest of Europe, especially Germany, that was experiencing a bit of an inflationary boom.
So Germany's experience isn't, as the Germans imagine, an argument for unilateral austerity in Southern Europe; it's an argument for much more expansionary policies elsewhere, and in particular for the European Central Bank to drop its obsession with inflation and focus on growth.
The Germans, needless to say, don't like this conclusion, nor does the leadership of the central bank. They will cling to their fantasies of prosperity through pain, and will insist that continuing with their failed strategy is the only responsible thing to do. But it seems that they will no longer have unquestioning support from the Élysée Palace. And that, believe it or not, means that both the euro and the European project now have a better chance of surviving than they did a few days ago.
Posted: 07 May 2012 12:06 AM PDT
Posted: 06 May 2012 12:00 PM PDT
I'm guessing most of you know about this by now, but in case you want to discuss it:
Hollande Beats Sarkozy in French Election, NY Times: François Hollande swept to victory on Sunday, becoming the first Socialist to become president of France since François Mitterrand left office in 1995.
Mr. Hollande campaigned on a kinder, gentler, more inclusive France, but his victory over Nicolas Sarkozy will also be seen as a challenge to the German-dominated policy of economic austerity in the euro zone, which is suffering from recession and record unemployment. ...
Here are Paul Krugman's comments: Ex-President Bling-Bling. Maybe the message that austerity is not only bad economics, but also bad politics will begin to resonate more here? Let's hope so.
Posted: 06 May 2012 11:35 AM PDT
Here's the second part of the interview of Jamie Galbraith (German version) conducted by Roger Strassburg and Jens Berger of the German blog NachDenkSeiten (the first part is here). This is on US politics:
RS: What's your take on the shift of the political spectrum in the U.S.? When I was growing up, liberals and conservatives made the same accusations at each other that they do now, but if you look at, for example, what Nixon proposed as a health care plan and what Obama actually enacted and what's being called socialist now, I mean, you'd almost think that Nixon was a socialist by today's standards.
JG: Julie Nixon-Eisenhower and her husband David came to the LBJ Library a few weeks ago, and I went, and I sat, well, I didn't sit in the front row, but I came in afterwards and I greeted them. It was Julie Nixon who said that her father was the last liberal president.
RS: I would agree.
JG: What happened in American politics? I think one thing to bear in mind is that during the entire period of the Cold War, it was necessary for the United States and it's allies in western Europe to meet certain performance criteria,...
RS: ...socially...
JG: ...socially, because otherwise they were going to lose in a game of comparisons against the East, and that, of course, ceased to be a serious threat in the 1970's, but it went away entirely in the 80's, and, as a result, you had a kind of disempowerment of what was a strong strand of Cold War liberalism.
RS: The liberal shift started actually before that. The Cold War didn't really get going until after World War II, and Roosevelt started the liberal shift with the New Deal, didn't he?
JG: The competition between capitalism and the alternatives was extremely intense in the 1930's, and that's what got Roosevelt going. What we've seen in the last twenty years is the sense that, to coin a phrase, is that there is no alternative, and that has created a great deal of destructive running room for the right, and none whatever on the left, with the result that the old generation of liberals has largely disappeared..
RS: …died off...
JG: By and large, with a few legacies hanging around, like yours truly. What were historically left parties both in the United States and Europe, equally true of the Democrats and the SPD and the PS in France have adopted what would have been in earlier times considered to be right-wing orthodoxies, particularly with respect to budget deficits, public debt. So they can pretend to be in favor of solidaristic social policies, but unfortunately unable to do anything in the face of the realities they allegedly face.
RS: Did you really think that the neoliberals would bounce back, neoliberal thinking in economics and in government would actually bounce back after the crisis hit?
JG: Yes. In fact I think I wrote that it would. As soon as the first wave of inadequate Keynesian interventions had passed, it was very foreseeable that what would happen is that you would open up the spectrum of discourse in a completely undisciplined way, and essentially everybody with an agenda would come in and say, "do what I've always been pressing to do and the world will be better". The American presidential campaign is entirely of this type, both President Obama and Governor Romney.
RS: That's the sad part about it, that Obama...
JG: The crisis imposed a momentary intellectual discipline and a resurgence, a reassertion of Keynesian principles. But that discipline did not extend into decision-making circles, at least not deeply enough, and it was overridden by, let's say, existing protocols, existing habits of thought and action that had developed in policymaking circles. And those protocols and habits precluded taking adequate action. What I mean by that specifically is that you had ways of making forecasts which were intrinsically too optimistic, intrinsically assumed that you were going to return to a baseline over a five-year time frame. And that meant that you were not going to get even presented to the president the possibility that the crisis was on the scale of the 1930's.
RS: Well there were some people who did run the numbers and came up with at least twice the size of what Obama eventually ended up doing.
JG: That's true, and it turned out that Christina Romer's number was very much like mine.
RS: Which was about what, 1.2 ...?
JG: I think her number was at 1.8 trillion over two years, and that was roughly where I was. I wasn't running numbers, I was just trying to get a number big enough to make an impression on people. My view was that this was a situation where you had to have an essentially unlimited intervention, and the idea was – and I mean that in a very specific way – my idea was that you would intervene until you saw the consequences, and then you'd scale back rather than setting a target number as the limit of what you would do and hoping it was enough.
RS: Well, that was the whole mistake, that Obama was assuming he could go back and get more. And with the political situation he had then, he maybe could have actually...
JG: No, there was no chance of that. How one could think you could go back and get a second bite of that apple is surreal.
RS: That's exactly what Krugman predicted, that it wouldn't happen, and prove that stimulus doesn't work is essentially what...
JG: That was not hard to foresee, and Paul foresaw it, I foresaw it. And once you open up yourself to that line of criticism, then any argument, "repeal Obamacare", "reduce government regulation", "balance the budget", "reduce uncertainty", whatever that means, becomes as good as any other as far as what a presidential candidate can say on television.
RS: Actually, there's quite a bit of certainty, the certainty that it's not going to get better any time soon.
Posted: 06 May 2012 09:36 AM PDT
I talked a bit yesterday about the political hurdles standing in the way of more help for job creation, something that is desperately needed if we want to avoid the permanent scars of high unemployment. Robin Wells has more on the hurdles, in this case "learned helplessness" (though I might have called it something like "convenient claims of helplessness"):
In weakened economy, policymakers give in to learned helplessness, by Robin Wells, Commentary, guardian.co.uk: Yet another disappointing statistic today from the US labor market – only 115,000 jobs added in April, barely enough to keep the unemployment rate from rising given the growth in population... While not necessarily a sign that the economy is headed for another turn downward, April's job numbers signal a repeat of the pattern seen in 2011 – a recovery that is halting, unpredictable, and agonizingly slow. ...
And it's not surprising given the continued heavy drag on the economy from high levels of household debt, high oil prices, and significant budget cutbacks by state and local governments. Moreover, the longer the economy limps along, the harder it appears to be for policymakers to accept that another outcome is possible. ... Learned helplessness sets in.
One could not have asked for a clearer example of learned helplessness than Ben Bernanke's recent press conference, where he labeled calls for further Fed stimulus "reckless" and appeals for a higher inflation target "irresponsible" because it would, in his view, sacrifice its commitment to a 2% inflation target. Higher inflation helps stimulate a depressed economy... But that is just one example of the implicit deference given by policymakers to views that ignore the plight of the unemployed.
Another variant of this mindset is the appeals to "structural unemployment" as the problem. ... [W]e are not in normal times, and appeals to structural unemployment is a red herring that only serves to distract from what focusing on pushing for we can do. It's a travesty given the state of public education in the US that we've laid off hundreds of thousands of schoolteachers; rehiring them would not only help the economy but it would also improve our long-run growth potential. Ditto for hiring laid-off construction workers to repair falling-down bridges and schools and repairing broken roads.
Perhaps the most maddening area of willful policy blindness is failure to address the foreclosure crisis. Obama's own inspector general has roundly criticized the treasury department for its glacial approach in helping underwater homeowners and its unwillingness to pressure the big banks – recipients of Tarp bailouts, mind you – to help. ...
So where does this leave us? First, we need to understand that a "slow bleed" of the economy – chronically high but not catastrophic rates of unemployment, low levels of private investment, and deteriorating public infrastructure – are nonetheless devastating. Many workers will lead permanently diminished careers, and the economy's long-run productive capacity may be permanently lowered. Second, recognize that it is all too likely that policymakers will fail to advocate for policies to get this economy going. Learned helpless is, unfortunately, a comfortable state of affairs.
Finally, that leaves us with the distinct possibility that without a political sea-change in favor of more progressive policies, we have reached the limits of what is possible. It's up to US voters to overcome their habit of learned helplessness as well.
Posted: 28 Apr 2012 02:55 PM PDT
A quick one from the side of the road:
Hey, Not So Fast on European Austerity, by Christina Romer, Commentary, NY Times: European policy makers just don't get it. To hear them talk, you'd think that Europe was on the right path. Troubled countries just need more of the same, they say — more fiscal austerity, more labor market flexibility, more price stability — and the European crisis will be licked.
Have they looked at their own numbers? It has been two years since moves to austerity started, but the crisis is still with us. Growth in European gross domestic product was negative in the last quarter of 2011. Unemployment in the entire euro zone in February was 10.8 percent; in Spain it was an astounding 23.6 percent. And judging from the renewed turbulence in bond markets, investors don't believe that prosperity is just around the corner.
Fiscal austerity is normally a sensible response to a loss in confidence in a country's solvency, as has occurred in parts of Europe. But the current situation is exceptional. ...[continue reading]...
Posted: 28 Apr 2012 10:08 AM PDT
Travel day, so I had this set aside to highlight, and in the interim Paul Krugman beat me to it. But it's still worth noting (and it supports my contention that there has been a "mal-distribution" of income in recent decades):
Understanding the wedge between productivity and median compensation growth, by Larry Mishel: One of the key dynamics of our economy for more than 30 years has been the divergence between productivity growth and compensation (or wage) increases for the typical worker. This divergence between pay and productivity has been increasingly recognized as being at the heart of the growth of income inequality. ...
Understanding the driving forces behind the productivity-median hourly compensation gap is the subject of a new paper, The wedges between productivity and median compensation growth, that previews a portion of the analysis in the forthcoming State of Working America. This research reflects the results in a more technical paper, Why Aren't Workers Benefiting from Labour Productivity Growth in the United States, that I co-authored with Kar-Fai Gee...
During the 1973 to 2011 period, labor productivity rose 80.4 percent but real median hourly wage increased 4.0 percent, and the real median hourly compensation (including all wages and benefits) increased just 10.7 percent. ... If the real median hourly compensation had grown at the same rate as labor productivity over the period, it would have been $32.61 in 2011 (2011 dollars), considerably more than the actual $20.01 (2011 dollars). Consequently, the conventional notion that increased productivity is the mechanism by which living standards increases are produced must be revised to this: Productivity growth establishes the potential for living standards improvements and economic policy must work to reconnect pay and productivity.
The objective of our new paper is to provide a comprehensive and consistent decomposition of the factors explaining the divergence between growth in real median compensation ... and labor productivity since 1973 in the United States, with particular attention to the post-2000 period. In particular, the paper identifies the relative importance of three wedges driving the median compensation-productivity gap: 1) rising compensation inequality, 2) declining share of labor compensation in the economy (the shift from labor to capital income), and 3) divergence of consumer and output prices....
Growing inequality of compensation and the erosion of labor's income share are the key overall drivers of the wedge between productivity and median compensation, accounting for two-thirds of the wedge since 1973 and about 85 percent of the wedge since 2000. These factors, in turn, reflect the various ways that the typical worker has lost bargaining power in the economy over the last three decades: excessive unemployment, eroded labor market institutions such as the minimum wage and unions, globalization, deregulation of industries, privatization, and the rising power of finance. The third factor, the fact that output prices (covering investment, exports, imports, government as well as consumption)  grew more slowly than the prices of consumer purchases—sometimes labeled a deterioration in "labor's terms of trade"—was evident throughout most of the last three decades and was most important in the 1970s and least important in the 2000s.
Maintaining rapid overall productivity growth—through innovation, restoring manufacturing, improved education and skills—is obviously an important policy goal. But if we want to improve the living standards of the vast majority—and we definitely can do so given the expected productivity growth—then we must also place the challenge of reconnecting growth in overall productivity and median compensation at the center of economic policy.
My view on whether this problem will correct itself:
I've never favored redistributive policies, except to correct distortions in the distribution of income resulting from market failure, political power, bequests and other impediments to fair competition and equal opportunity. I've always believed that the best approach is to level the playing field so that everyone has an equal chance. If we can do that – an ideal we are far from presently – then we should accept the outcome as fair. Furthermore, under this approach, people are rewarded according to their contributions, and economic growth is likely to be highest.
But increasingly I am of the view that even if we could level the domestic playing field, it still won't solve our wage stagnation and inequality problems. ..
We've given self-correction mechanisms 40 years to solve the problem of growing inequality, and the result has been even more inequality. ... Some people say education is the answer, but we have been trying to reform education for decades, yet the problems remain. The idea that a fix for education is just around the corner is wishful thinking.
If we want to preserve a growing and socially healthy economy, and avoid moving to lower growth points on the inequality curve, then we will need to do much more redistribution of income than we have done over the last several decades. We must ensure that the rising economic tide lifts all boats, not just the yachts. That means the wealthy will no longer get it all, they will be asked to share economic growth with the workers who helped to bring it about, workers who ought to be rewarded for their growing productivity.
We can expect considerable protest when the wealthy are asked to give up a portion of the growth that has been flowing exclusively to them for so long, and we'll hear every reason you can think of and a few more as to why redistributive polices are bad for America. But sharing economic gains among all those who had a hand in creating them is the right thing to do. For the foreseeable future, redistributive polices appear to be the only way to ensure that workers receive their share of the growing economic pie.
And, something I wrote just before the Occupy Wall Street movement broke out:
Many of the policies enacted during and after the Great Depression not only addressed economic problems but also directly or indirectly reduced the ability of special interests to capture the political process. Some of the change was due to the effects of the Depression itself, but polices that imposed regulations on the financial sector, broke up monopolies, reduced inequality through highly progressive taxes, and accorded new powers to unions were important factors in shifting the balance of power toward the typical household.
But since the 1970s many of these changes have been reversed. Inequality has reverted to levels unseen since the Gilded Age, financial regulation has waned, monopoly power has increased, union power has been lost, and much of the disgust with the political process revolves around the feeling that politicians are out of touch with the interests of the working class.

We need a serious discussion of this issue, followed by changes that shift political power toward the working class. But who will start the conversation? Congress has no interest in doing so; things are quite lucrative as they are. Unions used to have a voice, but they have been all but eliminated as a political force. The press could serve as the gatekeeper, but too many news outlets are controlled by the very interests that the press needs to confront. Presidential leadership could make a difference, but this president does not seem inclined to take a strong stand on behalf of the working class...

Another option is that the working class will say enough is enough and demand change. There was a time when I would have scoffed at the idea of a mass revolt against entrenched political interests and the incivility that comes with it. We aren't there yet – there's still time for change – but the signs of unrest are growing, and if we continue along a two-tiered path that ignores the needs of such a large proportion of society, it can no longer be ruled out.
Posted: 28 Apr 2012 09:36 AM PDT
People often object to the idea of a multiplier because it comes from the old Keynesian model. Real macroeconomists, we are told, use DSGE models. But using a DSGE model doesn't matter, the result is essentially the same:
A case for balanced-budget stimulus, by Pontus Rendahl, Vox EU: ...there is little, if any, support in the current macroeconomic literature for the view that expansionary fiscal policy must come at the price of ramping up debt. In fact,... a 'balanced-budget stimulus' can set the economy on a steeper recovery path...
[W]hile Ricardian equivalence might have put a nail in the coffin of the Keynesian multiplier, it has certainly not pre-empted the underlying idea: that an increase in government spending may provoke a kickback in output many times the amount initially spent. Indeed, a body of recent research suggests that the fiscal multiplier may be very large, independently of the foresightedness of consumers (Christiano et al 2011, Eggertson 2010). And in a recent study of mine (Rendahl 2012), I identify three crucial conditions under which the fiscal multiplier can easily exceed 1 irrespective of the mode of financing. These conditions, I argue, are met in the current economic situation.
Condition 1. The economy is in a liquidity trap … When interest rates are near, or at, zero, cash and bonds are considered perfect substitutes. ...
Under these peculiar circumstances the laws of macroeconomics change. A dollar spent by the government is no longer a dollar less spent elsewhere. Instead, it's a dollar less kept in the mattress. And the logic underpinning Say's law – the idea that the supply of one commodity must add to the immediate demand for another – is broken. ...
Condition 2. … with high unemployment …
So while a dollar spent by the government is not a dollar less spent elsewhere, it is not immediate, nor obvious, whether this implies that government spending will raise output. The second criterion therefore concerns the degree of slack in the economy.
If unemployment is close to, or at, its natural rate, an increase in spending is unlikely to translate to a substantial rise in output. Labor is costly and firms may find it difficult to recruit the workforce needed to expand production. An increase in public demand may just raise prices and therefore offset any spending plans by the private sector.
But at a high rate of unemployment, the story is likely to be different. The large pool of idle workers facilitates recruitment, and firms may cheaply expand business. An increase in public demand may plausibly give rise to an immediate increase in production, with negligible effects on prices. Crowding-out is, under these circumstances, not an imminent threat.
Combining the ideas emerging from Conditions 1 and 2 implies that the fiscal multiplier – irrespective of the source of financing – may be close to 1 (cf Haavelmo 1945).
Condition 3. … which is persistent
But if unemployment is persistent, these ideas take yet another turn. A tax-financed rise in government spending raises output, and lowers the unemployment rate both in the present and in the future. As a consequence, the increase in public demand steepens the entire path of recovery, and the future appears less disconcerting. With Ricardian or forward-looking consumers, a brighter outlook provokes a rise in contemporaneous private demand, and output takes yet another leap. Thus, with persistent unemployment, a tax-financed increase in government purchases sets off a snowballing motion in which spending begets spending.
Where does this process stop? In a stylised framework in which there are no capacity constraints and unemployment displays (pure) hysteresis, I show that the fiscal multiplier is equal to the inverse of the elasticity of intertemporal substitution, a parameter commonly estimated to be around 0.5 or lower. Under such conditions, the fiscal multiplier is therefore likely to lie around 2 or thereabout.
Collecting arguments
To provide more solid grounds to these arguments, I construct a simple DSGE model with a frictional labour market.1 A crisis is triggered by an unanticipated (and pessimistic) news shock regarding future labour productivity. As forward-looking agents desire to smooth consumption over time, such a shock encourages agents to save rather than to spend, and the economy falls into a liquidity trap. In similarity to the aforementioned virtuous cycle, a vicious cycle emerges in which thrift reinforces thrift, and unemployment rates are sent soaring. ...
There are three important messages [from the work]:
  • First, for positive or small negative values of the news shock, the multiplier is zero. The reason is straightforward: With only moderately pessimistic news, the nominal interest rate aptly adjusts to avert a possible liquidity trap, and a dollar spent by the government is simply a dollar less spent by someone else.
  • Second, however, once the news is ominous enough, the economy falls into a liquidity trap. The multiplier takes a discrete jump up, and public spending unambiguously raises output. Yet, in a moderate crisis with an unemployment rate of 7% or less, private consumption is at least partly crowded-out.
  • Lastly, however, in a more severe recession with an unemployment rate of around 8% or more, the multiplier rises to, and plateaus at, around 1.5. Government spending now raises both output and private consumption, and unambiguously improves welfare...
As evidence that theoretical models -- the DSGE models used in modern macroeconomics -- support fiscal policy, and that the implied multipliers are relatively high in severe recessions, it becomes increasingly clear that much of the opposition to fiscal policy is ideological.
Posted: 28 Apr 2012 09:25 AM PDT
Evidence that our social insurance system needs to be shored up:
More Americans find aging is a gateway to poverty, by Ellen Freilich: Over the last several years, more Americans have found that aging has left them in the clutch of poverty. Between 2005 and 2009, the rate of poverty among American seniors rose as they aged, as did the number of people entering poverty, according to a new report from the nonpartisan Employee Benefit Research Institute (EBRI).
Poverty rates fell in the first half of the last decade for almost all age groups of older Americans (defined as age 50 or older) but increased since 2005 for every age group. ...
Poverty rates, as defined by U.S. Census poverty thresholds, were highest for the oldest of the elderly. Almost 15 percent of Americans older than age 85 were in poverty in 2009... Additionally, in 2009, 6 percent of those age 85 or older were new entrants in poverty. ...
Poverty rates for women were nearly double that of men... The EBRI report found that in 2009, the poverty rate for Hispanics was 21 percentage points higher than for whites. For blacks it was 17 percentage points higher than for whites. ...

Latest Posts from Economist's View


Latest Posts from Economist's View



Posted: 06 May 2012 12:06 AM PDT
Posted: 05 May 2012 01:51 PM PDT
Tyler Cowen:
Never Mind Europe. Worry About India., by Tyler Cowen, Commentary, NY Times: The economic slowdown in India is one of the world's biggest economic stories, but it is commanding only a modicum of attention in the United States.
It may not even look like a slowdown because by developed standards, India's growth — estimated by the International Monetary Fund at 6.9 percent for 2012 — is still strong. But a slowdown it is: the economy has decelerated from projected rates of more than 8 percent, and negative momentum may bring a further decline. ...
What is disturbing is that much of the decline in the growth rate is distributed unevenly, with the greatest burden falling on the poor. If the slower rate continues or worsens, many millions of Indians, for another generation, will fail to rise above extreme penury and want. The problems of the euro zone are a pittance by comparison. ...
India also is a potential force for energizing the economies of Bangladesh, Nepal and, perhaps someday, Pakistan and Myanmar. The losses from a poorer India go far beyond the country's borders; furthermore, the wealthier India becomes, the stronger the allure of democracy in the region. ...
India may not be alone in this slowdown. There is a more general worry that the grouping of disparate giants known as the BRIC nations — Brazil, Russia, India and China — has, for some reason, lost much of its previous momentum. ... Chinese and Russian G.D.P. growth are slowing too, to an unknown extent and duration....
We ignore India's troubling trends at our peril.
Posted: 05 May 2012 09:39 AM PDT
I have to fight the feeling that it's too late to do much more about the unemployment problem. It's not. Unemployment is still several percentage points above the full employment level and falling slowly -- far too slow to provide any comfort -- and there is every reason to believe that it could be years yet before we reach acceptable employment levels (barring further troubles along the way). We know that unemployment is costly, and that the longer the problem persists the more permanent and damaging it becomes. We also know that we could help to overcome this problem by using idle labor and idle resources to build needed infrastructure. The price of doing so -- the cost of labor, materials, and interest on the borrowing needed to build infrastructure -- is as low as it is likely to get. The cost is low, the need is great, yet we do nothing. Why?
Politics. That's what makes me want to throw up my hands and give up. As I've noted in the past, it seems useless to even try since politicians aren't going to act. Political gridlock will not allow it. But I've also been careful to say that "I'll still complain -- there's no reason to let policymakers off the hook."
And there's good reason for that. One of the frustrating things about the Obama administration is its inability to put Republicans on the spot -- to back them into a corner with an unpopular vote on proposed legislation. Republicans do this all the time. They give legislation a name like "The Revitalization of the American Dream Act," or something better -- they are much better at this than me -- throw in something Democrats can't stomach so they vote against it, and then never let voters forget the vote against America.
Democrats did very little of this when they controlled the agenda in Congress, and the opportunity to bring legislation to an actual vote is now diminished. But that shouldn't stop the Democrats from using policy proposals to point out the stark difference between the parties on issues such as job creation.
Importantly, doing so may be provide benefits beyond political gains. Paul Krugman believes there's still hope for additional policy measures devoted to job creation if Democrats play their policy cards correctly:
...It's not at all clear what the political landscape will look like after the election. But there do seem to be three main possibilities: President Obama is reelected and Democrats also regain control of Congress; Mitt Romney wins the presidential election and Republicans add a Senate majority to their control of the House; the president is reelected but faces at least one hostile house of Congress. What can be done in each of these cases?
The first case—Obama triumphant—obviously makes it easiest to imagine America doing what it takes to restore full employment. In effect, the Obama administration would get an opportunity at a do-over, taking the strong steps it failed to take in 2009. Since Obama is unlikely to have a filibuster-proof majority in the Senate, taking these strong steps would require making use of reconciliation, the procedure that the Democrats used to pass health care reform and that Bush used to pass both of his tax cuts. So be it. If nervous advisers warn about the political fallout, Obama should remember the hard-learned lesson of his first term: the best economic strategy from a political point of view is the one that delivers tangible progress.
A Romney victory would naturally create a very different situation; if Romney adhered to Republican orthodoxy, he would of course reject any government action... It's not clear, however, whether Romney believes any of the things he is currently saying. His two chief economic advisers, Harvard's N. Gregory Mankiw and Columbia's Glenn Hubbard, are committed Republicans but also quite Keynesian..., we can at least hope that Romney's inner circle holds views that are much more realistic than anything the candidate says in his speeches, and that once in office he would rip off his mask, revealing his true pragmatic, Keynesian nature.
Of course, a great nation should not have to depend on the hope that a politician is in fact a complete fraud who doesn't believe any of the things he claims to believe. And such a hope is certainly not a reason to vote for that politician. Still, making the case for job creation may not be a wasted effort, even if Republicans take it all this November.
Finally, what about the fairly likely case in which Obama is returned to office but a Democratic Congress is not? What should Obama do, and what are the prospects for action? My answer is that the president, other Democrats, and every Keynesian-minded economist with a public profile should make the case for job creation forcefully and often, and keep pressure on those in Congress who are blocking job-creation efforts.
This is not the way the Obama administration operated for its first two and a half years. ... The result ... was ... that as ... the president bought into deficit obsession and calls for austerity, the whole national discourse shifted away from job creation. ...
In September 2011 the White House finally changed tack, offering a job-creation proposal that fell far short of what was needed, but was nonetheless much bigger than expected. There was no chance that the plan would actually pass the Republican-led House of Representatives, and Noam Scheiber of The New Republic tells us that White House political operatives "began to worry that the size of the package would be a liability and urged the wonks to scale it back." This time, however, Obama sided with the economists... Public reaction was generally favorable, while Republicans were put on the spot for their obstruction.
And early this year, with the debate having shifted perceptibly toward a renewed focus on jobs, Republicans were on the defensive. As a result, the Obama administration was able to get a significant fraction of what it wanted—an extension of the payroll tax credit, not an ideal stimulus but nonetheless a measure that puts cash in workers' pockets, and maintenance for a shorter period of extended unemployment benefits—without making any major concessions.
In short, the experience of Obama's first term suggests that not talking about jobs simply because you don't think you can pass job-creation legislation doesn't work even as a political strategy. On the other hand, hammering on the need for job creation can be good politics, and it can put enough pressure on the other side to bring about better policy too.
Or to put it more simply, there is no reason not to tell the truth about this depression.