“The Timidity Trap”: The Best Lack All Conviction, While The Worst Are Full Of Passionate Intensity
There don’t seem to be any major economic crises underway right this moment, and policy makers in many places are patting themselves on the back. In Europe, for example, they’re crowing about Spain’s recovery: the country seems set to grow at least twice as fast this year as previously forecast.
Unfortunately, that means growth of 1 percent, versus 0.5 percent, in a deeply depressed economy with 55 percent youth unemployment. The fact that this can be considered good news just goes to show how accustomed we’ve grown to terrible economic conditions. We’re doing worse than anyone could have imagined a few years ago, yet people seem increasingly to be accepting this miserable situation as the new normal.
How did this happen? There were multiple reasons, of course. But I’ve been thinking about this question a lot lately, in part because I’ve been asked to discuss a new assessment of Japan’s efforts to break out of its deflation trap. And I’d argue that an important source of failure was what I’ve taken to calling the timidity trap — the consistent tendency of policy makers who have the right ideas in principle to go for half-measures in practice, and the way this timidity ends up backfiring, politically and even economically.
In other words, Yeats had it right: the best lack all conviction, while the worst are full of passionate intensity.
About the worst: If you’ve been following economic debates these past few years, you know that both America and Europe have powerful pain caucuses — influential groups fiercely opposed to any policy that might put the unemployed back to work. There are some important differences between the U.S. and European pain caucuses, but both now have truly impressive track records of being always wrong, never in doubt.
Thus, in America, we have a faction both on Wall Street and in Congress that has spent five years and more issuing lurid warnings about runaway inflation and soaring interest rates. You might think that the failure of any of these dire predictions to come true would inspire some second thoughts, but, after all these years, the same people are still being invited to testify, and are still saying the same things.
Meanwhile, in Europe, four years have passed since the Continent turned to harsh austerity programs. The architects of these programs told us not to worry about adverse impacts on jobs and growth — the economic effects would be positive, because austerity would inspire confidence. Needless to say, the confidence fairy never appeared, and the economic and social price has been immense. But no matter: all the serious people say that the beatings must continue until morale improves.
So what has been the response of the good guys?
For there are good guys out there, people who haven’t bought into the notion that nothing can or should be done about mass unemployment. The Obama administration’s heart — or, at any rate, its economic model — is in the right place. The Federal Reserve has pushed back against the springtime-for-Weimar, inflation-is-coming crowd. The International Monetary Fund has put out research debunking claims that austerity is painless. But these good guys never seem willing to go all-in on their beliefs.
The classic example is the Obama stimulus, which was obviously underpowered given the economy’s dire straits. That’s not 20/20 hindsight. Some of us warned right from the beginning that the plan would be inadequate — and that because it was being oversold, the persistence of high unemployment would end up discrediting the whole idea of stimulus in the public mind. And so it proved.
What’s not as well known is that the Fed has, in its own way, done the same thing. From the start, monetary officials ruled out the kinds of monetary policies most likely to work — in particular, anything that might signal a willingness to tolerate somewhat higher inflation, at least temporarily. As a result, the policies they have followed have fallen short of hopes, and ended up leaving the impression that nothing much can be done.
And the same may be true even in Japan — the case that motivated this article. Japan has made a radical break with past policies, finally adopting the kind of aggressive monetary stimulus Western economists have been urging for 15 years and more. Yet there’s still a diffidence about the whole business, a tendency to set things like inflation targets lower than the situation really demands. And this increases the risk that Japan will fail to achieve “liftoff” — that the boost it gets from the new policies won’t be enough to really break free from deflation.
You might ask why the good guys have been so timid, the bad guys so self-confident. I suspect that the answer has a lot to do with class interests. But that will have to be a subject for another column.
By: Paul Krugman, Op-Ed Columnist, The New York Times, March 20, 2014
“Fear Of Wages”: For Some People, It’s Always 1979
Four years ago, some of us watched with a mixture of incredulity and horror as elite discussion of economic policy went completely off the rails. Over the course of just a few months, influential people all over the Western world convinced themselves and each other that budget deficits were an existential threat, trumping any and all concern about mass unemployment. The result was a turn to fiscal austerity that deepened and prolonged the economic crisis, inflicting immense suffering.
And now it’s happening again. Suddenly, it seems as if all the serious people are telling each other that despite high unemployment there’s hardly any “slack” in labor markets — as evidenced by a supposed surge in wages — and that the Federal Reserve needs to start raising interest rates very soon to head off the danger of inflation.
To be fair, those making the case for monetary tightening are more thoughtful and less overtly political than the archons of austerity who drove the last wrong turn in policy. But the advice they’re giving could be just as destructive.
O.K., where is this coming from?
The starting point for this turn in elite opinion is the assertion that wages, after stagnating for years, have started to rise rapidly. And it’s true that one popular measure of wages has indeed picked up, with an especially large bump last month.
But that bump is probably a snow-related statistical illusion. As economists at Goldman Sachs have pointed out, average wages normally jump in bad weather — not because anyone’s wages actually rise, but because the workers idled by snow and storms tend to be less well-paid than those who aren’t affected.
Beyond that, we have multiple measures of wages, and only one of them is showing a notable uptick. It’s far from clear that the alleged wage acceleration is even happening.
And what’s wrong with rising wages, anyway? In the past, wage increases of around 4 percent a year — more than twice the current rate — have been consistent with low inflation. And there’s a very good case for raising the Fed’s inflation target, which would mean seeking faster wage growth, say 5 percent or 6 percent per year. Why? Because even the International Monetary Fund now warns against the dangers of “lowflation”: too low an inflation rate puts the economy at risk of Japanification, of getting caught in a trap of economic stagnation and intractable debt.
Over all, then, while it’s possible to argue that we’re running out of labor slack, it’s also possible to argue the opposite, and either way the prudent thing would surely be to wait: Wait until there’s solid evidence of rising wages, then wait some more until wage growth is at least back to precrisis levels and preferably higher.
Yet for some reason there’s a growing drumbeat of demands that we not wait, that we get ready to raise interest rates right away or at least very soon. What’s that about?
Part of the answer, I’d submit, is that for some people it’s always 1979. That is, they’re eternally vigilant against the danger of a runaway wage-price spiral, and somehow they haven’t noticed that nothing like that has happened for decades. Maybe it’s a generational thing. Maybe it’s because a 1970s-style crisis fits their ideological preconceptions, but the phantom menace of stagflation still has an outsized influence on economic debate.
Then there’s sado-monetarism: the sense, all too common in banking circles, that inflicting pain is ipso facto good. There are some people and institutions — for example, the Basel-based Bank for International Settlements — that always want to see interest rates go up. Their rationale is ever-changing — it’s commodity prices; no, it’s financial stability; no, it’s wages — but the recommended policy is always the same.
Finally, although the current monetary debate isn’t as openly political as the previous fiscal debate, it’s hard to escape the suspicion that class interests are playing a role. A fair number of commentators seem oddly upset by the notion of workers getting raises, especially while returns to bondholders remain low. It’s almost as if they identify with the investor class, and feel uncomfortable with anything that brings us close to full employment, and thereby gives workers more bargaining power.
Whatever the underlying motives, tightening the monetary screws anytime soon would be a very, very bad idea. We are slowly, painfully, emerging from the worst slump since the Great Depression. It wouldn’t take much to abort the recovery, and, if that were to happen, we would almost certainly be Japanified, stuck in a trap that might last decades.
Is wage growth actually taking off? That’s far from clear. But if it is, we should see rising wages as a development to cheer and promote, not a threat to be squashed with tight money.
By: Paul Krugman, Op-Ed Columnist, The New York Times, March 13, 2014
“Ignore The Prophets Of Economic Doom”: Why The Government Should Help The Unemployed Even If It Might Not Work
The United States is now starting its sixth year of mass unemployment, a grinding economic disaster that shows no sign of relenting. As Brad DeLong has written, very soon our current mess will result in something worse than the Great Depression: “Future economic historians will not regard the Great Depression as the worst business-cycle disaster of the industrial age. It is we who are living in their worst case.” (Though the Depression was deeper, the U.S. economy recovered much more quickly.)
That is the context in which we should look at a new spate of pessimistic economic arguments about the future. On Tuesday, the famed economist Robert Gordon released a new paper arguing that future economic growth will be awful.
Here’s a section from Gordon’s abstract:
This paper predicts that growth in the 25 to 40 years after 2007 will be much slower, particularly for the great majority of the population… The primary cause of this growth slowdown is a set of four headwinds, all of them widely recognized and uncontroversial. Demographic shifts will reduce hours worked per capita… Educational attainment, a central driver of growth over the past century, stagnates at a plateau… Inequality continues to increase, resulting in real income growth for the bottom 99 percent of the income distribution that is fully half a point per year below the average growth of all incomes. [NBER]
This may be right and it may not. (Personally, I’m not at all convinced — see Kevin Drum and Tyler Cowen for a good discussion.) But the great danger is that these predictions could be self-fulfilling, discouraging Congress from taking immediate action in the face of economic trends that will overwhelm its comparatively puny efforts.
What we must remember is that there is a strong case that additional effort could solve at least part of our mass unemployment problem at low cost. We owe it to ourselves and our fellow citizens to try to restore full employment, even if it might not work.
The case against the stagnationist position goes something like this: America is not primarily suffering economically because of the factors Gordon pointed out. Rather, as during the Great Depression, we’ve suffered a collapse of aggregate demand, and institutional arrangements and political gridlock prevent us from fully addressing the problem through monetary or fiscal stimulus. This dynamic is also quite similar to that of the Great Depression — it took World War II to break through the political gridlock and get enough deficit spending to restore full employment.
If the stagnationists are right, then government attempts to restore employment with monetary or fiscal stimulus will result in little more than inflation. But they might be wrong, and the relative downside risks to their positions aren’t even close to comparable. A bit of moderate inflation is no big deal — it came in at around 4 percent during most of Reagan’s term, and the Fed has the tools to easily rein inflation back in if it rises above the central bank’s target rate of 2 percent. In fact, a little inflation could even help matters, by eroding household debt burdens and reducing real interest rates.
On the other hand, mass unemployment is an ongoing economic and humanitarian catastrophe.
It’s like if your house is on fire, and you’re worried that spraying it with a firehose might break some windows. Maybe true! Also a terrible set of priorities!
So whether Gordon and others have a good theoretical case for their pessimism is not remotely enough to justify inaction on unemployment. Policymakers should keep that at the front of their mind.
By: Ryan Cooer, The Week, February 19, 2014
“Ignoring The Elephant In The Room”: No, President Obama’s Policies Are Not Holding Back The Economy
Wall Street Journal columnist Daniel Henninger had fun this week arguing that President Obama’s problems implementing health reform pale next to his problems getting the economy back to health. The attack on Obama’s economic stewardship, however, looks just like the standard conservative attack on health reform: it’s light on sound arguments and ignores the elephant in the room — Republican obstructionism.
First, health care. As the president says, it’s on him that the rollout of HealthCare.gov and the health insurance marketplaces — where individuals can purchase health insurance to avoid the fine for not having it — has been, to put it kindly, rocky. But Republicans have provided no clear alternative to expand access to good quality, affordable health care, and they have made the rollout more difficult.
Many Republican governors and state legislatures have left implementation of their health insurance marketplaces (also known as exchanges) to the federal government rather than do it themselves — hardly the usual position of a party that believes in devolving as much power as possible to the states. And, at the moment, 25 states are not moving forward to implement the Medicaid expansions — which are a very good deal for them — leaving a significant coverage gap among low-income adults and complicating the determination of eligibility for coverage on the exchanges.
Finally, Republican proposals to “fix” the problem would undermine, not improve, health reform. The president’s proposal, while not perfect, is the best on the table.
Like problems with the health care rollout, the problems in the economy are plain to see. Henninger plays fair when he notes that the president did not cause the Great Recession, which is the source of the problems with which we’re still grappling. But, he’s wrong to say it’s the president who “has the economy on lockdown.”
First, he ignores what many economists and policymakers see as the main problem we still face – inadequate demand for goods and services. Second, he cavalierly dismisses the benefits of economic stimulus in such an economy. Third, he insists the main thing holding back the recovery is excessive business regulation. With that mindset, he naturally doesn’t acknowledge the drag on economic activity and job creation from the premature austerity that Congress has imposed on the economy since Republicans regained control of the House in the 2010 mid-term elections and the barriers that Republicans have put in the way of a budget plan that could boost the recovery in the short run while still putting deficits and debt on a sustainable longer-run trajectory.
Just a reminder to all who, like Henninger, parrot the shibboleth that stimulus did not work: the Congressional Budget Office finds that gross domestic product has been higher each year since 2009 than it would have been without the 2009 American Recovery and Reinvestment Act and unemployment has been lower (see chart).
CBO includes a broad range of estimates about the recovery act’s impact to encompass the views of economists who continue to doubt the mounting evidence that stimulus is highly effective under the economic conditions prevailing in recent years. But, that evidence suggests that act’s impact is quite likely much nearer the high than the low estimate.
Here’s what the International Monetary Fund says about that research, the expansionary effects of fiscal policy (tax cuts and increases in government spending) and the “old Keynesian mulitplier” that Henninger mocks: “While debate continues, the evidence seems stronger than before the crisis that fiscal policy can, under today’s special circumstances, have powerful effects on the economy in the short run [and] that fiscal multipliers are larger.”
The powerful effects of fiscal policy in today’s special circumstances work both ways. The economic forecasting firm Macroeconomic Advisers estimates that the economic uncertainty and policy choices to raise taxes and cut spending that we’ve made since 2010 have cost the economy up to a percentage point per year of slower economic growth and up to 2 million jobs.
It’s Republicans whose policy preferences have pulled policy toward greater near-term fiscal austerity through spending cuts; Democratic plans look more like bipartisan proposals for less spending restraint in the short term and more deficit reduction that’s balanced between revenues and spending down the road when the economy is stronger.
It’s Republicans who have the U.S. economy on lockdown.
By: Chad Stone, Chief Economist, Center on Budget and Policy Priorities, U. S. News and World Report, November 22, 2013
“The Mutilated Economy”: Anyone Who Talks About How We’re Borrowing From Our Children Just Hasn’t Done The Math
Five years and eleven months have now passed since the U.S. economy entered recession. Officially, that recession ended in the middle of 2009, but nobody would argue that we’ve had anything like a full recovery. Official unemployment remains high, and it would be much higher if so many people hadn’t dropped out of the labor force. Long-term unemployment — the number of people who have been out of work for six months or more — is four times what it was before the recession.
These dry numbers translate into millions of human tragedies — homes lost, careers destroyed, young people who can’t get their lives started. And many people have pleaded all along for policies that put job creation front and center. Their pleas have, however, been drowned out by the voices of conventional prudence. We can’t spend more money on jobs, say these voices, because that would mean more debt. We can’t even hire unemployed workers and put idle savings to work building roads, tunnels, schools. Never mind the short run, we have to think about the future!
The bitter irony, then, is that it turns out that by failing to address unemployment, we have, in fact, been sacrificing the future, too. What passes these days for sound policy is in fact a form of economic self-mutilation, which will cripple America for many years to come. Or so say researchers from the Federal Reserve, and I’m sorry to say that I believe them.
I’m actually writing this from the big research conference held each year by the International Monetary Fund. The theme of this year’s shindig is the causes and consequences of economic crises, and the presentations range in subject from the good (Latin America’s surprising stability in recent years) to the bad (the ongoing crisis in Europe). It’s pretty clear, however, that the blockbuster paper of the conference will be one that focuses on the truly ugly: the evidence that by tolerating high unemployment we have inflicted huge damage on our long-run prospects.
How so? According to the paper (with the unassuming title “Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy”), our seemingly endless slump has done long-term damage through multiple channels. The long-term unemployed eventually come to be seen as unemployable; business investment lags thanks to weak sales; new businesses don’t get started; and existing businesses skimp on research and development.
What’s more, the authors — one of whom is the Federal Reserve Board’s director of research and statistics, so we’re not talking about obscure academics — put a number to these effects, and it’s terrifying. They suggest that economic weakness has already reduced America’s economic potential by around 7 percent, which means that it makes us poorer to the tune of more than $1 trillion a year. And we’re not talking about just one year’s losses, we’re talking about long-term damage: $1 trillion a year for multiple years.
That estimate is the end product of some complex data-crunching, and you can quibble with the details. Hey, maybe we’re only losing $800 billion a year. But the evidence is overwhelming that by failing to respond effectively to mass unemployment — by not even making unemployment a major policy priority — we’ve done ourselves immense long-term damage.
And it is, as I said, a bitter irony, because one main reason we’ve done so little about unemployment is the preaching of deficit scolds, who have wrapped themselves in the mantle of long-run responsibility — which they have managed to get identified in the public mind almost entirely with holding down government debt.
This never made sense even in its own terms. As some of us have tried to explain, debt, while it can pose problems, doesn’t make the nation poorer, because it’s money we owe to ourselves. Anyone who talks about how we’re borrowing from our children just hasn’t done the math.
True, debt can indirectly make us poorer if deficits drive up interest rates and thereby discourage productive investment. But that hasn’t been happening. Instead, investment is low because of the economy’s weakness. And one of the main things keeping the economy weak is the depressing effect of cutbacks in public spending — especially, by the way, cuts in public investment — all justified in the name of protecting the future from the wildly exaggerated threat of excessive debt.
Is there any chance of reversing this damage? The Fed researchers are pessimistic, and, once again, I fear that they’re probably right. America will probably spend decades paying for the mistaken priorities of the past few years.
It’s really a terrible story: a tale of self-inflicted harm, made all the worse because it was done in the name of responsibility. And the damage continues as we speak.
By: Paul Krugman, Op-Ed Columnist, The New York Times, November 7, 2013
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