“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
“Give Jobs A Chance”: To Err Is Human, But To Err On The Side Of Growth Is Wise
This week the Federal Reserve’s Open Market Committee — the group of men and women who set U.S. monetary policy — will be holding its sixth meeting of 2013. At the meeting’s end, the committee is widely expected to announce the so-called “taper” — a slowing of the pace at which it buys long-term assets.
Memo to the Fed: Please don’t do it. True, the arguments for a taper are neither crazy nor stupid, which makes them unusual for current U.S. policy debate. But if you think about the balance of risks, this is a bad time to be doing anything that looks like a tightening of monetary policy.
O.K., what are we talking about here? In normal times, the Fed tries to guide the economy by buying and selling short-term U.S. debt, which effectively lets it control short-term interest rates. Since 2008, however, short-term rates have been near zero, which means that they can’t go lower (since people would just hoard cash instead). Yet the economy has remained weak, so the Fed has tried to gain traction through unconventional measures — mainly by buying longer-term bonds, both U.S. government debt and bonds issued by federally sponsored home-lending agencies.
Now the Fed is talking about slowing the pace of these purchases, bringing them to a complete halt by sometime next year. Why?
One answer is the belief that these purchases — especially purchases of government debt — are, in the end, not very effective. There’s a fair bit of evidence in support of that belief, and for the view that the most effective thing the Fed can do is signal that it plans to keep short-term rates, which it really does control, low for a very long time.
Unfortunately, financial markets have clearly decided that the taper signals a general turn away from boosting the economy: expectations of future short-term rates have risen sharply since taper talk began, and so have crucial long-term rates, notably mortgage rates. In effect, by talking about tapering, the Fed has already tightened monetary policy quite a lot.
But is that such a bad thing? That’s where the second argument comes in: the suggestions that there really isn’t that much slack in the U.S. economy, that we aren’t that far from full employment. After all, the unemployment rate, which peaked at 10 percent in late 2009, is now down to 7.3 percent, and there are economists who believe that the U.S. economy might begin to “overheat,” to show signs of accelerating inflation, at an unemployment rate as high as 6.5 percent. Time for the Fed to take its foot off the gas pedal?
I’d say no, for a couple of reasons.
First, there’s less to that decline in unemployment than meets the eye. Unemployment hasn’t come down because a higher percentage of adults is employed; it’s come down almost entirely because a declining percentage of adults is participating in the labor force, either by working or by actively seeking work. And at least some of the Americans who dropped out of the labor force after 2007 will come back in as the economy improves, which means that we have more ground to make up than that unemployment number suggests.
How misleading is the unemployment number? That’s a hard one, on which reasonable people disagree. The question the Fed should be asking is, what is the balance of risks?
Suppose, on one side, that the Fed were to hold off on tightening, then learn that the economy was closer to full employment than it thought. What would happen? Well, inflation would rise, although probably only modestly. Would that be such a bad thing? Right now inflation is running below the Fed’s target of 2 percent, and many serious economists — including, for example, the chief economist of the International Monetary Fund — have argued for a higher target, say 4 percent. So the cost of tightening too late doesn’t look very high.
Suppose, on the other side, that the Fed were to tighten early, then learn that it had moved too soon. This could damage an already weak recovery, causing hundreds of billions if not trillions of dollars in economic damage, leaving hundreds of thousands if not millions of additional workers without jobs and inflicting long-term damage as more and more of the unemployed are perceived as unemployable.
The point is that while there is legitimate uncertainty about what the Fed should be doing, the costs of being too harsh vastly exceed the costs of being too lenient. To err is human; to err on the side of growth is wise.
I’d add that one of the prevailing economic policy sins of our time has been allowing hypothetical risks, like the fiscal crisis that never came, to trump concerns over economic damage happening in the here and now. I’d hate to see the Fed fall into that trap.
So my message is, don’t do it. Don’t taper, don’t tighten, until you can see the whites of inflation’s eyes. Give jobs a chance.
By: Paul Krugman, Op-Ed Columnist, The New York Times, September 15, 2013
“Defining Prosperity Down”: At This Point, It’s Clear That Monetary Hawkery Is Mainly A Form Of Puritanism
Friday’s employment report wasn’t bad. But given how depressed our economy remains, we really should be adding more than 300,000 jobs a month, not fewer than 200,000. As the Economic Policy Institute points out, we would need more than five years of job growth at this rate to get back to the level of unemployment that prevailed before the Great Recession. Full recovery still looks a very long way off. And I’m beginning to worry that it may never happen.
Ask yourself the hard question: What, exactly, will bring us back to full employment?
We certainly can’t count on fiscal policy. The austerity gang may have experienced a stunning defeat in the intellectual debate, but stimulus is still a dirty word, and no deliberate job-creation program is likely soon, or ever.
Aggressive monetary action by the Federal Reserve, something like what the Bank of Japan is now trying, might do the trick. But far from becoming more aggressive, the Fed is talking about “tapering” its efforts. This talk has already done real damage; more on that in a minute.
Still, even if we don’t and won’t have a job-creation policy, can’t we count on the natural recuperative powers of the private sector? Maybe not.
It’s true that after a protracted slump, the private sector usually does find reasons to start spending again. Investment in equipment and software is already well above pre-recession levels, basically because technology marches on, and businesses must spend to keep up. After six years during which hardly any new homes were built in America, housing is trying to stage a comeback. So yes, the economy is showing some signs of healing itself.
But that healing process won’t go very far if policy makers stomp on it, in particular by raising interest rates. That’s not an idle worry. A Fed chairman famously declared that his job was to take away the punch bowl just as the party was really warming up; unfortunately, history offers many examples of central bankers pulling away the punch bowl before the party even starts.
And financial markets are, in effect, betting that the Fed is going to offer another such example. Long-term interest rates, which mainly reflect expectations about future short-term rates, shot up after Friday’s job report — a report that, to repeat, was at best just O.K. Housing may be trying to bounce back, but that bounce now has to contend with sharply rising financing costs: 30-year mortgage rates have risen by a third since the Fed started talking about relaxing its efforts about two months ago.
Why is this happening? Part of the reason is that the Fed is constantly under pressure from monetary hawks, who always want to see tighter money and higher interest rates. These hawks spent years warning that soaring inflation was just around the corner. They were wrong, of course, but rather than change their position they have simply invented new reasons — financial stability, whatever — to advocate higher rates. At this point it’s clear that monetary hawkery is mainly a form of Puritanism in H. L. Mencken’s sense — “the haunting fear that someone, somewhere may be happy.” But it remains dangerously influential.
Unfortunately, there’s also a technical issue that plays into the prejudices of the monetary hawks. The statistical techniques policy makers often use to estimate the economy’s “potential” — the maximum level of output and employment it can achieve without inflationary overheating — turn out to be badly flawed: they interpret any sustained economic slump as a decline in potential, so that the hawks can point to charts and spreadsheets supposedly showing that there’s not much room for growth.
In short, there’s a real risk that bad policy will choke off our already inadequate recovery.
But won’t voters eventually demand more? Well, that’s where I get especially pessimistic.
You might think that a persistently poor economy — an economy in which millions of people who could and should be productively employed are jobless, and in many cases have been without work for a very long time — would eventually spark public outrage. But the political science evidence on economics and elections is unambiguous: what matters is the rate of change, not the level.
Put it this way: If unemployment rises from 6 to 7 percent during an election year, the incumbent will probably lose. But if it stays flat at 8 percent through the incumbent’s whole term, he or she will probably be returned to power. And this means that there’s remarkably little political pressure to end our continuing, if low-grade, depression.
Someday, I suppose, something will turn up that finally gets us back to full employment. But I can’t help recalling that the last time we were in this kind of situation, the thing that eventually turned up was World War II.
By: Paul Krugman, Op-Ed Columnist, The New York Times, July 7, 2013
“Pennies On The Dollar”: Congress Is Squandering The Opportunity Of A Lifetime
It’s the first Friday of the month, which means a jobs report. And this one isn’t bad. The economy added a net 195,000 jobs in June, with upwards revisions of 70,000 in April and May. Which means that, so far this year, the economy has added more than 1 million jobs. To repeat a point, this is why the 2012 election was so critical for Democrats—a Mitt Romney win would have given Republicans a chance to claim credit for the current job growth, and use the political capital to push a highly-ideological agenda.
But back to the numbers. Federal government employment dropped by 5,000, a likely result of sequestration, and part of an overall decline of public employment—since 2010, the public sector has shed more than 600,000 jobs. The unemployment rate remained unchanged at 7.6 percent, with a slight drop in long-term unemployment. Still, more than four million people have been out of work for longer than six months.
In other words, despite the improving economy, we’re still stuck in a period of mass unemployment. And, thanks the GOP’s categorical opposition to spending–and stimulus in particular—there’s no chance of relief for the economy.
What’s frustrating—and, given the cost of long-term unemployment to individuals, families, and communities, cruel—is that conditions are perfect for another round of large-scale government spending. Not only are there millions of potential workers (to say nothing of an overall demand shortfall), but—as Suzy Khimm notes for MSNBC—interest rates are still at historic lows. But that won’t last: “Already,” she writes, “there are early warning signs that this era of absurdly cheap borrowing will eventually come to an end: The interest rate on 10-year U.S. Treasury notes—the benchmark for long-term borrowing rates—rose to 2.66% on Monday, the highest rate since August 2011.”
There’s still time to act on this unprecedented opportunity by investing in new infrastructure: We could take advantage of these low rates, borrow, and use the cash to rebuild our roads, bridges, airstrips, and pipelines. The subsequent economic growth—from more jobs and a faster recovery—would be more than enough to pay back whatever we owe when the economy is stronger.
But Republicans have not budged from their commitment to spending cuts, monetary tightening, and other austerity-minded policies. They warn that greater public debt will lead to inflation and low growth, ignoring the extent to which inflation has held steady at just under 2 percent for the last four years, and disregarding the disastrous results of austerity in Europe, which has plunged several countries, including the United Kingdom, into a second recession. Because of this, their House majority, and their ability to filibuster in the Senate, there’s no chance Congress will move on new stimulus, or anything else that could boost the economy.
The sad fact is that the GOP’s dysfunctions—its hyper-ideological approach to government, hostility to liberalism, and opposition to compromise—will keep the United States from capitalizing on one of the great opportunities of the last 20 years. Thanks to GOP-driven gridlock and Washington’s myopic focus on debt reduction, we have squandered a once-in-a-lifetime chance to rebuild this country at pennies on the dollar, and bounce back from a long decade of mismanagement and neglect.
By: Jamelle Bouie, The American Prospect, July 5, 2013
“This Isn’t Complicated”: Congress Must Fix The Bankrupt Student Loan Proposals
Interest rates on student loans will double on July 1 unless Congress acts. Since the phrase “congressional action” has become an oxymoron, this will quickly degenerate into an unnecessary crisis, requiring parents and students to threaten their legislators to get any relief.
Why is action even a question? There is a universal consensus — left, right and center — that it is vital to our nation to educate the next generation. If we want to compete as a high-wage, high-skill country, our children will need the best in college or advanced technical training. And all agree that gaining that higher education is a necessary, if not sufficient, requirement for entering the middle class.
So just as we pay for public education for kindergarten through 12th grade, we should ensure that advanced training or a public college education is available for all who earn it. None of this is even vaguely controversial.
Yet, despite this consensus, we are pricing college out of the reach of more and more families. State support for public universities has lagged. Increasingly, the costs have been privatized, with the bill sent to students and families.
With incomes stagnant for all but the wealthy few, the result, not surprisingly, has been an explosion of student debt. U.S. students and parents now owe an estimated $1.1 trillion in student loan debt, a sum greater than credit card or automobile debt. In 2005, average student loan debt was just over $17,000. By 2012, it was above $27,250, increasing more than 50 percent in just seven years.
With the debt burden rising and good jobs scarce, the result is calamity. Thirty-five percent of millennials — debtors under 30 — are seriously delinquent on their payments. In total, delinquent student debtors on the verge of default owe $113 billion, more than the total sums state governments spent on higher education in 2012.
The young people who do everything we ask of them — study, graduate, go on to higher education — end up deep in a hole. Burdened by debt, they have a hard time affording cars or apartments. Starting a family becomes difficult, a down payment on a home an impossible dream. This not only crushes the dreams of our best young people; it puts a real damper on the economy.
This isn’t complicated. Washington should be moving boldly to make advanced education affordable for all. The federal government should be increasing grants to states for public colleges, on the condition that the states increase their own contributions and act to curb college costs. The government should crack down on private colleges that ripoff students. And of course, college expenses should be subsidized so that successful young people don’t graduate into debtor’s prison.
But common sense is an endangered species inside Washington’s beltway. Interest rates on federally subsidized Stafford loans are about to double to 6.8 percent. Republicans have passed a “solution” that pegs loan rates to the rate of a 10-year Treasury note plus an arbitrary 2.5 percent. (Or plus 4.5 percent for parental PLUS loans). Loans fluctuate each year with interest rates, with a cap of 8.5 percent for student loans and a stunning 10.5 percent for parental loans. Kids will end up paying more, while the government will make billions on the deal for deficit reduction. But we should be subsidizing the next generation to get the education they need, not making money off of them.
President Obama’s plan isn’t much better. He sets the rate at the 10-year Treasury note rate plus .93 percent for subsidized Stafford loans (3.93 percent for parental loans) with no cap. He does call for limiting what students have to pay to 10 percent of their income, insuring that students aren’t condemned to bankruptcy. His plan is “budget neutral.”
Sen. Elizabeth Warren (D-Mass.) has offered a plan that makes a lot of sense. She suggests we offer students the same rate that the Federal Reserve charges to big banks (about .75 percent) for the next year, while Congress gets serious about a permanent fix. Senators Tom Harkin (D-Iowa) and Jack Reed (D-R.I.) suggest that the Congress do the easy thing, simply extend the current rates for two years, paying for it with the closing of various loopholes.
Sen. Kirsten Gillibrand (D-N.Y.), like Warren, also makes sense. She would allow students and graduates to refinance into fixed 4 percent loans.
Is it any wonder that Americans grow cynical? Multinational corporations and wealthy investors stash literally trillions abroad to avoid taxes. The big banks rake in trillions in subsidies and discounted loan rates to rescue them from their own excesses. But Congress finds it impossible to make it affordable for the next generation to get advanced education and training.
As always, common sense won’t come to Washington unless citizens mobilize to force it on Congress. With graduations marked by student demonstrations across the country and pickets outside of Sallie Mae, the giant student loan bank, that movement may have begun. Student loans may be to this generation what the draft was to the boomers – the government folly that afflicts them personally and rouses them to act.
By: Katrina vanden Heuvel, Opinion Writer, The Washington Post, June 5, 2013
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