10/24/10 2:20 PMWe Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 7080467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchJuly 06, 2010

We Are Live at the Week: "A (Keynesian) Voice Crying in the

Wilderness, Saying..."

Keynes & Co. have lost the stimulus argument - The Week: My friends Kevin O'Rourkeand Barry Eichengreen in the office next door were chief among those economistswarning at the start of 2009 that the shock to the world economy inflicted by thefinancial crisis was greater than the shock that had caused the Great Depression. Theywere right.

The good news is we have avoided another Great Depression. But it seems ill-advisedfor Barack Obama to stand up on a Friday morning in early July and say that theeconomy is "headed in the right direction" (even if, as he said, "we are not headedthere fast enough") and to highlight "the sixth straight month of job growth in theprivate sector." The employment-to-population ratio has been flat since November.Over the past six months--since the downturn ended--the U.S. economy has not beenrecovering from its near-depression, and not been putting a greater and greaterportion of its potential labor force to work. Rather, it has been bumping along thebottom. There is a big difference between the economy getting "better" and theeconomy "no longer getting worse rapidly."

The president’s calm rhetorical pose is not helpful to policymaking. As Ezra Kleinwrites, "the White House's broad approach... is to emphasize how much improvementthere is, rather than how much needs to be done. That makes political sense." But italso "makes it difficult for the White House to run around with its hair on fire abouthow bad things are and how necessary it is that Congress doesn't abandon the labormarket in order to pretend to care about the deficit."

Premature declarations of victory are especially worrisome because the Congress isonly one of the many centers of power in the global economy that have decided too

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much has already been done to boost global demand, and that the next policy movesmust serve the opposite goals of austerity, retrenchment, and contraction. From theGerman and British governments to the U.S. Federal Reserve, and from all 50 U.S.states to the European Central Bank, economists seeking additional stimulus have lostthe argument. Those of us who believe that double-digit unemployment, accompaniedby less-than-single-digit inflation and record lows for nominal long-term governmentbond rates, signals a crisis of confidence not in the government but in the bankingsystem and the private sector find that we have no policy traction.

Our arguments lack even rhetorical effect—filtered, as they are, through a journalisticprism that cannot distinguish the financial travails of Greece from those of the UnitedStates. Similarly, in the Academy, a good many economists don't seem to be up tospeed on the analytical advances made by Jean-Baptiste Say and John Stuart Mill intheir 1829 analyses of the 1825-1826 recession in Britain, let alone the advances madeby economists like Walter Bagehot, Knut Wicksell, Irving Fisher, Richard Kahn, MiltonFriedman, John Hicks, Hyman Minsky, James Tobin, Charles Kindleberger, and JohnMaynard Keynes.

Intellectually disarmed, we face U.S. payroll employment declining by 125,000 in June,forecasts predicting no decline in the unemployment rate for the rest of the year, andbond-market government yields and stock market equity prices that predict a moredire future than they appeared to presage last fall when the bleeding stopped.

The situation is grim. So why isn't everybody running around with their hair on fire?

Why aren't there irresistible political demands for more government action to steer ustoward a better economic recovery --or at least to hedge against a double-dip in whatseems likely to be called not a “recession” but a “depression” when historians getaround to writing about it?

I have my theories:

1. widening wealth inequality and an upgrading of the class position of reporters andpundits, who are no longer ink-stained wretches immersed in mainstreamAmerica;

2. the collapse of union power, which ensures that nobody who sees real workers ona daily basis sits at the table when the deals are made;

3. increasing job security for the powerful in Washington, aided by the growth of thelobbying apparatus that envelops the mixed-economy government;

4. the collapse of professional integrity among the Washington press corps, which nolonger dares to call balls and strikes as it sees them, preferring to say only that theDemocrats say it was a strike and the Republicans say it was a ball, and thatopinions on the shape of the earth differ.

I don't know which theories are right. But the situation does leave me feeling like onecrying in the wilderness. (Say not "we are children of the market!”) I cry out to boostaggregate demand -- by banking policy, by monetary policy, by fiscal policy, byspending increases, by tax cuts, by anything -- I don't care what! (Well, I do, but not bymuch)

More constructive, however, might be to go back to late 2008, when the incipientObama Administration thought that it had put in place policies that would, by today,have reduced the unemployment rate safely below 7.5 percent. It’s time to review someof the ideas then being batted around about what to do if recovery reversed or stalled.

Go back to December 16, 2008, when Ryan Lizza reported in The New Yorker on the

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Obama Administration’s thinking. Council of Economic Advisors Chair-DesignateChristina Romer believed the following: that the appropriate total value for theAmerican Recovery and Reinvestment Act fiscal stimulus was something more than$1.2 trillion, but that to ask for a stimulus that large would risk gridlock in the Senate.(The result was an ARRA of about $600 billion of real stimulus tax cuts and spendingincreases alongside ineffective ornaments dear to the hearts of legislators.)

Or go back earlier--to August of 2008, before the Lehman Brothers and the AIGbankruptcies, when Obama adviser Lawrence Summers was writing that "theremaining scope for monetary policy to stimulate the U.S. economy is surely verylimited" and that "output and employment are likely to remain below their potentiallevels for several years in the best of circumstances.”

The output gap even then was some $300 billion per year. To address it, some calledfor a stimulus program of roughly $500 billion. Yet the problem ultimately turned outto be four to five times larger than what economists were forecasting at the timeSummers wrote.

When Congress passed an ARRA on a scale that struck many of us who had done thenumbers as worrisomely small, we told ourselves six things to reassure ourselves:

1. If unemployment rises faster and further than in the forecast--or even as fast as inthe forecast--there will always be scope for another ARRA-like tranche of tax cutsand spending increases.

2. If high unemployment persists longer than in the forecast--or even as long as inthe forecast--there will always be scope to extend ARRA for additional years andadd additional fiscal stimulus.

3. The Federal Reserve has already increased the monetary base to a previouslyunimaginable extent and has doubled its balance sheet to $2 trillion. Even thoughthere is good reason to think that further increases in the money stock alone willhave little effect on the economy--that conventional monetary policy is tapped out--the Federal Reserve could always further increase its balance sheet to $3 trillionor $4 trillion. Such quantitative easing would be highly likely to eliminate fears ofpossible deflation or other lower tail risks and act as a powerful spur toinvestment. Such an enormous expansion of the balance sheet would produce aqualitative improvement in the assets held by the private sector, which wouldgreatly reduce risk spreads and make funding available to American companies onmuch more attractive terms.

4. Even if the Federal Reserve does not engage in further quantitative easing, theTreasury could do so by leveraging its TARP authority to transform $2 trillion orso of risky assets that the private sector now holds into $2 trillion of assets backedby the faith and credit of the U.S. government. Such a transformation wouldproduce a qualitative change in private assets, greatly reducing risk spreads andmaking funding available to American companies on much more attractive terms.

5. If things get bad enough, the Treasury can always force banks to lend tocompanies--either via temporary nationalization, or through using its TARPauthority to capitalize new government-sponsored enterprises like the Depression-era Reconstruction Finance Corporation.

6. If all else fails, the Federal Reserve can always drop money out of helicopters.

The reassuring thought was that the ARRA was just one -- and not necessarily thebiggest -- of stimulative measures available beyond the standard Federal Reserve

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framework of using open market operations to reduce short-term Treasury rates. Infact, a Rooseveltian amplitude of acronyms -- TARP, PPIP, MMIFL, TALF, CPLF, TAC,HAMP – are at policy makers’ disposal.

But Congress is balking. Republican legislators from states with double-digitunemployment have put party above country. Blue Dog Democrats, who think thatthey can marginally improve their chance of gaining more terms in office if theypublicly worry about the deficit to the exclusion of all else, have put self above countryand party. And, significantly, the Obama Administration has never offered a grandbargain for tax increases and entitlement caps in the future in return for morespending now to restore full employment.

Additional stimulus – as conceived in (1) and (2) above appear no longer politicallyfeasible. (Dropping money out of helicopters (6), which would surely requireCongressional authorization at some level, is likewise politically difficult.)

But (3), (4), and (5) are all, in some form, still on the table. Under what circumstancesshould we break the glass and resort to them? And what political shots should we bemaking right now to set up the pool table in order to accomplish (1), (2), or (6) viaCongressional authorization if necessary in the coming lame-duck session.

So far, it seems the Obama administration has, at every stage, made honest forecastswithin the bounds of consensus opinion. But it has been making policies appropriate tothe 80th percentile outcome--to the situation in which we have quite good luck. Itshould have been making policies appropriate to the 20th percentile outcome—ineffect, buying insurance against the possibility of bad luck. And we have had bad luck.

So what is the administration’s Plan B? And who is drawing it up?

As I await answers, I’ll dine on a simple meal of locusts and wild honey, and wash myspare goatskin.

Brad DeLong on July 06, 2010 at 11:17 AM in Economics, Economics: Federal Reserve,Economics: Finance, Economics: Fiscal Policy, Economics: Macro, ObamaAdministration | Permalink

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Comments

Neal said...The alphabet soup of programs was mainly aimed at restoring the financial sector

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without effectively addressing the fact that the consumer is tapped out, living beyondtheir means and working in sectors that were entirely dependent upon unrealisticcredit.

Short term palliative measures are required, but these will be very different than thefundamental restructuring of the economy that is required. These are (1) and (2),palliative only--- unless some clear, rational line from bad economy to stable, goodeconomy can be plausibly drawn.

Buying more assets,(3)and (4), is just more money in the pockets of those who havealready received the most and who are the most equivocal about the need of vibrantsociety in the US.

Forced lending to businesses (5) is insanity with the current levels of under-utilization.

I personally want helicopters now, but I would then like to be on the first flight out,please.

Reply July 06, 2010 at 11:41 AMJohn Chandley said...You left out the "deficit commission." If the recession/depression continues on itspresent bottom dwelling into December, then decent policy would demand they do theopposite of what the commission is likely to propose for the medium term. I thoughtback in early 2009 that it was a mistake to limit spending only to "shovel ready"projects, because that assumed we'd be moving up now -- instead we're bottomdwelling or worse. So we should have been lining up and funding longer-terminvestments from the beginning, and those would be looking wise today, and will bemore so in December.

Reply July 06, 2010 at 11:45 AMMin said...Brad DeLong: "I cry out to boost aggregate demand -- by banking policy, by monetarypolicy, by fiscal policy, by spending increases, by tax cuts, by anything -- I don't carewhat!"

Keep on keeping on, bro! :)

As for what is politically possible, don't current polls indicate that people are moreconcerned with cutting the deficit than with more economic stimulus, but that they aremore concerned with doing something about unemployment than with cutting thedeficit? I. e., they would approve of legislation specifically aimed at unemployment,even if it increased the deficit? If so, then shouldn't the Dems push an unemploymentbill and, if the Reps filibuster, make the Reps own unemployment in the next election?

Reply July 06, 2010 at 12:34 PMdd said..."Moreover, the Demand Siders write as if everybody who disagrees with them isimmoral or a moron."

Reply July 06, 2010 at 01:38 PMRobert Waldmann said...Can I be more of an Obamabot that you ? Seems so. You start by criticizing Obama.This is an extreme case of considering the President responsible for everything,including, in this case, the fact that all other power centers resist his call for furtherstimulus. His views are much closer to yours than that of any head of state orgovernment of a major economic power and are much closer to yours than the medianmember of the House, the Senate or the FOMC. So why start by criticizing him ? I

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think that the reason is that a reference to a Presidential speach is assumed to berequired to demonstrate that the issue is important and topical. Uh come one, peopleout in real America know they are suffering. That is, and too alarm myself further, Iam accusing you of adopting the standard verbal ticks of the MSM.

I am not convinced by your quantitative statements about quantitative easing. You saythat an additional $ 2 trillion will greatly reduce risk premia. That sounds very odd tome. It doesn't sound like a lot of money. Uh let me rephrase that. Feared assetsoutstanding at current prices are worth a vastly vaster and hugely huger amount ofmoney.Cagnon says 5 trillion and he doesn't say "greatly."

Oh and you say people like you thought there could be a second or extended ARRA.People like you include Krugman who confidently predicted that this would beimpossible.

You left off a lot of culprits. The US public wants something done about the economy,but thinks it would be helped by a reduction of the deficit. Keynes convinced a tinyfraction of people. This is probably more true in other developed countries.

Reply July 06, 2010 at 06:57 PMTomInPortland said...How about a massive public works spending program? I am thinking about 750 billionfor projects already identified by the American Society of Civil Engineers as beingnecessary to prevent infrastructure collapse. How is it possible that doing such a thingwhen borrowing is so cheap is not politically tenable? Many of these projects would belabor intensive which would increase government tax revenues and spur consumerspending which is the only thing that will save private businesses.

Reply July 06, 2010 at 07:07 PMbeowulf said...Dropping money out of helicopters (6), which would surely require Congressionalauthorization at some level, is likewise politically difficult.The President and the Secretary have already been delegated all the power they need todeclare partial or total tax holidays and to fund deficit spending without adding adollar to the public debt. Its simply a failure of Administration will, not a lack of legalauthority. Anyway, here's your helicopter Brad--

One-- The President declares entire country a disaster area. Thanks for the assist BP!(i) “federally declared disaster” means any disaster subsequently determined by thePresident of the United States to warrant assistance by the Federal Government underthe Robert T. Stafford Disaster Relief and Emergency Assistance Act. (ii) “disasterarea” means the area so determined to warrant such assistance. 26 USC 1263(h)(3)(C)

Two - The Secretary of Treasury determines that every taxpayer is affected by thisfederally declared disaster. He then may disregard "any tax liability" he wishes for upto one year (e.g. administratively enact Warren Mosler's payroll tax holiday or AlanGrayson's $35,000 standard deduction, etc). He can rinse and repeat next year ifnecessary.In the case of a taxpayer determined by the Secretary to be affected by a federallydeclared disaster... the Secretary may specify a period of up to 1 year that may bedisregarded in determining, under the internal revenue laws, in respect of any taxliability of such taxpayer... 26 USC 7580A(a)

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Three - And how to pay for it (without tripping over the statutory debt limit)--Seigniorage. Consider this, all coins produced by the US Mint are legal tender and arepurchased by the Fed at face value. A $1 dollar coin costs only 12 cents to mint, the 88cents remaining after expenses is not debt. It goes to the US Mint Enterprise Fund,which the Secretary can sweep into miscellaneous receipts at any time. So in a daily actof sacrilege, the US Mint dares to make money without first selling bonds (was it Cainwho tried that, or Judas, I forget), a reminder that the government can createsovereign credit as easily as it can sovereign debt.

As it happens, Congress has already delegated its constitutional seigniorage powerrather generously. The Secretary can create money in any denomination, in anyquantity, at any time out of thin air (well actually out of platinum, but samedifference). My only advice to the Secretary would be to to remember that while asingle $1 trillion coin is easier to handle than a 1000 $1 billion pieces, it'll be a bitch tomake change for.(k) The Secretary may mint and issue platinum bullion coins and proof platinum coinsin accordance with such specifications, designs, varieties, quantities, denominations,and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from timeto time. 31 USC 5112(k)

Reply July 06, 2010 at 09:44 PMbeowulf said in reply to beowulf...I apologize for screwing up the html tags. First two lines are quoting Brad. The threelines before each USC citation are from the US Code.

Reply July 06, 2010 at 10:05 PMbeowulf said in reply to beowulf...To correct a cite, 26 USC § 7508A. "Authority to postpone certain deadlines by reasonof Presidentially declared disaster or terroristic or military actions".

The current year tax liability doesn't go away, it can simply be pushed out year to yeartill Congress fixes it (which means, per Medicare Part B fee reductions, never).

Reply July 07, 2010 at 12:27 AMlambert strether said...Permanently higher unemployment is not a bug. It's a feature. The elite want a singleworldwide wage, and the baseline is, say, India. And so what if a lot of peasants die?

Reply July 07, 2010 at 08:41 AMhomunq said...Helicopter drop FTW. Imagine Republican heads exploding as Obama provided amassive short-term stimulus through tax cuts. He could send a letter to all Americanworkers detailing how much extra they should be seeing in their paychecks due to thepayroll tax holiday. And government workers getting paid with actual $1000 platinum"new dimes" - what's not to like? (Same guy's picture as the "old dimes", natch.)

(The "dimes" would need a nanoscale diffraction-grating laser-verified hologram onsome concave anti-scratch surface. Even cooler!)

OK, it's a fantasy. But the Obama reality is too depressing, a little fantasy is healthy.

Reply July 07, 2010 at 01:46 PMbeowulf said in reply to homunq...You wouldn't actually have to be paid in coins of course. Geithner could just walk offinto any bank and drop off a shiny, new $1 trillion coin (if you put Reagan on the front,"a Gipper") and a deposit slip. If being Tsy's "fiscal agent" means anything, it means

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Me: Economists:

PaulKrugmanMark ThomaCowen andTabarrokChinn andHamiltonBrad Setser

Juicebox

Mafia:

Ezra KleinMatthewYglesiasSpencerAckermanDanaGoldsteinDanFroomkin

Moral

Philosophers:

Hilzoy andFriendsCrookedTimber ofHumanityMarkKleiman andFriendsEricRauchwayand FriendsJohn Holboand Friends

the Federal Reserve will accept for deposit any legal tender Tsy directs it to. Of course,direct Tsy issuance of "United States currency notes" (i.e. Greenbacks) would also workbut Congress would have to amend 31 USC 5115 to remove the current limitations.Besides, although exempt from the statutory debt limit (no debt ceiling votes then),Greenbacks are booked as public debt, which in our day and age appears to be aspraiseworthy as syphilis. In contrast, seigniorage revenue is booked to miscellaneousreceipts, so its (to use Henry CK Liu's wonderful phrase) sovereign credit, notsovereign debt. You could keep using seigniorage revenue even under a BalancedBudget Amendment.

Yes when we head towards full employment there'll be inflationary pressure, we'll haveto set up Bill Vickrey's gross markups market before then. But its like Thomas Edisonsaid (and every instinct tells me Tesla would agree), "If our nation can issue a dollarbond, it can issue a dollar bill. The element that makes the bond good makes the billgood".http://www.prosperityuk.com/prosperity/articles/edison.html

Reply July 08, 2010 at 05:43 AMComments on this post are closed.

First, Kill all the PensionsThe Atlantic (blog) - Oct 19, 2010She may or may not have been the first major economics blogger, depending onwhether we are allowed to throw outlying variables such as Brad Delong out of ...Related Articles » « Previous Next »

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