Once more with the vacuum economics
TRUE or false. If you shoot another person, you will be found guilty of murder. If you answered true . . . you’re wrong. If you answered false . . . you’re wrong. Why? Because murder is a particular charge that requires numerous elements to be proven. The only one we have proven is that you shot someone. What if that person were breaking into your home? Placing your family under imminent threat of harm? You shoot them not knowing they were standing behind a target you were shooting at? In law school, the most common answer professors gave to students’ hypos was “depends”. It was maddening, annoying, and, usually, correct. It was correct for the same reason both true and false are wrong; whether a person who shoots another person is guilty of murder depends on the context the shooting takes place.
As in law, context dictates the appropriate charge or policy prescription in economics. This is particularly true when some commentators and pundits take on Keynesians who believe the current depressed economy is due to low aggregate demand, and that government spending will, in the short-term, boost that demand a stimulate long-term growth. Is this spending supposed to last forever? According to Krugman and Keynes; no. The counter-cyclical policies of Keynesianism are exactly that, counter-cyclical–as in they move in cycles. During a depressed economy, the government slashes taxes and interest rates while boosting spending. This stimulates the economy, at which point the government decreases spending, and increases taxes and tax rates.
Kinsley, meanwhile, writes as though Krugman has just recently had an epiphany about government reigning in spending:
Krugman now says that what he is against is “premature” fiscal austerity. So is everybody. They just disagree on what is “premature.” You know what they say: Disputes in academia are especially vicious because the stakes are so small. The stakes in the austerity debate—the actual differences of opinion—get smaller and smaller even while the argument itself gets larger and louder.
Two things wrong with this. First, this idea of Krugman and Keynesians promoting “fiscal austerity” is not a new, recent, or nascent concept–it’s the other half of the policy prescription. Sure, there are likely some “crude Keynesians” out there, but Krugman is not in that camp. Their arguments for expansionary fiscal policy is due to the the current economic malaise the U.S. economy is stuck in. Ask anyone of them whether the government should increase spending, and their response is likely to mimic my law professors; it depends on the context (the state of the economy). Brad DeLong, who took issue with Kinsely’s article, writes regarding contemporary Keynesians:
There is no puzzle here: these are the policies that have been labeled “Austerian”. “Austerians” support these policies. They are the opposite of what people like Paul Krugman, Larry Summers, Ben Bernanke, Olivier Blanchard, me, and many others believe: that as long as interest rates stay low and economies stay depressed, more government spending now will produce a healthier economy in the short run and is highly likely to produce a lower long-term debt burden in the long run, for the debt-to-annual-GDP ratio has a denominator as well as a numerator.
DeLong also notes the second problem with Kinsely’s analysis, when he writes about the austerian policy prescription:
“Austerians” have been those advocating “Austerian” policies: that even the most credit-worthy sovereigns need to shift policy, starting right now, to:
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cut their spending,
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raise their tax rates
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even though economies are depressed
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even though interest rates–and thus the costs of carrying debt–are extraordinarily low as far into the future as the eye can see.
In other words, it’s austerians who promote policies without consideration of context or the current state of the economy. Moreover, while many austerians support tax hikes, the U.S. austerian is concerned with the spending side of the policy prescription while maintaining low tax rates. Why? Because as with government spending, tax rates are always too high, always to the right of the Laffer Curve apex, and always an inhibitor to growth. In short, for austerians there is never “premature fiscal austerity.” Only too much spending. Keynesianism is a little more nuanced.
More from the employment deniers (a/k/a MMers)
AS noted, 2013 is shaping up to be the year that Market Monetarists and the like ‘disprove’ the Keynesian fiscal multiplier and the liquidity trap. To do this, the MMers have to show three things. First, that the U.S. has undertaken fiscal austerity/tightening/contraction. Second, that the economy is improving. And third, that the economy is improving while we are at the ZLB. Most will agree that the U.S. is undergoing austerity in the form of decreased government spending (with some tax increases), but the degree varies. As I have stated, the U.S. has not experienced the full weight of the sequester, as Congress has delayed or complete repealed some of the sequester effects. Still, the U.S. has experienced stiff fiscal tightening over the past few years:
And as a total % of the economy:
I am going to skip over the second tenant of the MMer argument and go to the third; the issue that the economy is still moving despite being at the ZLB. One of the biggest advocates for the liquidity trap theory has been Krugman (though he has taken his foot off that gas pedal a bit). One commenter at Mark Thoma’s blog makes a very compelling case that the liquidity trap is something of a fiction–hence Krugman’s dodginess in the second linked piece. So the linchpin to the MMer argument is that the economy is getting better. Okay. Defining ’economic improvement’ is like nailing jello to the wall–only more difficult. Of course we have a variety of economic metrics we can use (inflation, economic growth, interest rates, etc.) to define economic improvement, but each to some level has is failings, and it would behoove us if we would move beyond the individual indicator when evaluating the economic environment. Here are two that get used by some MMers, such as Scott Sumner and Marcus Nunes. But there’s a bit of a problem with their arguments.
First, in separate posts Scott Sumner talks about the jobs report released at the beginning of the this month as evidence that monetary policy is working and off-setting fiscal drag:
And how many jobs have actually been lost? Zero. If we get a lousy employment number next month how many jobs will have been lost? Still roughly zero. We are far enough above the 2012 trend in job growth that we could get a mediocre report next month (131,000 jobs), and the Keynesian multiplier model would still have been a complete failure—predicting huge job losses where there were none.
And he quotes Barro who wrote:
After today’s good jobs report, my colleague Ramesh Ponnuru needles Paul Krugman: “So, I assume Krugman will now concede that market monetarism is working.”
Then there’s Marcus nunes crowing about the economic growth of the past three years in the face of fiscal tightening:
Both convincing, but both very myopic. Here are the long-term economic growth (NGDP) and employment growth of the past thirty years:
So, some growth is good–certainly better than what we had 4-5 years ago–but the employment issue is one that MMers and pro-austerians cannot get past. Sumner really is grasping at straws trying to find good employment news, while others ignore it. For instance, in a post today Tyler Cowen calls into question the issue of whether economic stimulus pays for itself, and that austerity is self-defeating:
OK, now here goes the potential story. We did fiscal austerity, it was self-defeating, that was a major factor, and we ended up in…a better budget situation than we had been expecting?
It is fine to say “our budget situation could have been better yet,” but then the fiscal austerity story then seems to collapse into one factor among many confounding factors. Which is fine by me, but it is not the story we seem to have been receiving.
I am myself comfortable arguing something like “when underlying fundamentals are sound, and/or there is monetary accommodation, an economy can withstand fiscal consolidation just fine.” That is simply a more specific variant of the above.
So, a bit of a variation of the Krugman argument that monetary policy will work depending on what the policy is (open market operations, cutting rates, etc.) and other factors. But my question is, what evidence is there that the economy has withstood the fiscal consolidation “just fine”? Okay, to be fair Cowen was discussing the issue of the debt/deficit and whether austerity is self-defeating, not necessarily jobs. However, both the Krugman piece and the Summers/DeLong paper that Cowen links to both commit substantial space to the impact of austerity on employment–specifically the long-term impacts of austerity on employment; hysteresis. Krugman writes:
But wait: what if there are long-run negative effects of a deeper slump on the economy? The WSJ piece showed one example: workers driven permanently out of the labor force. There’s also the negative effect of a depressed economy on business investment. There’s the waste of talent because young people have their lifetime careers derailed. And so on. And here’s the thing: if the economy is weaker in the long run, this means less revenue, which offsets any savings from the initial austerity.
Likewise, Summers and DeLong write:
It would indeed be surprising if economic downturns did not cast a shadow over future levels of economic activity. There is a clear and coherent logic underlying the analytic judgments that an economic downturn does cast a substantial shadow. A host of mechanisms have been suggested. These include reduced capital investment, reduced investment in research and development, reduced labor force attachment on the part of the long term unemployed, scarring effects on young workers who have trouble beginning their careers, changes in managerial attitudes, and reductions in government physical and human capital investments as social-insurance expenditures make prior claims on limited state and local financial resources.
Those are the long-term negative impacts of austerity, and there is nothing about current indicators to suggest that current short-term employment trends will not stretch out to the long-term–specifically that we should take little (if any) solace in the declining unemployment rate:
It is in this context that attention is drawn to the divergence between the behavior of the measured U.S. unemployment rate and the behavior of the measured U.S. adult employment-to-population ratio over the past two and a half years. Since the late-2009 business cycle trough, there has been little movement in the civilian employment-to-population ratio, but a substantial decline in the unemployment rate from 10.0% to 8.3%.
Of course, in his post, Cowen does not address the long-term employment implications of the current economic climate, nor does he address how future economic growth could be (negatively) impacted by those long-term employment implications. Why? Because the labor market is bad right now, and there are few signs that it is improving–in fact, the only good news is that there is little bad news.
UPDATE:
Just as I was posting this, I saw this on the news.
Jobs and Economic Growth in 1 Chart
I was playing around on FRED (I need a better social outlet) and came up with this. Not sure what to make of it, but if we are looking for correlations to economic growth . . .
Yes, there is still the R&R, chicken or the egg question to be answered, but job creation has leveled off over the past few years, suggesting that current economic policies are not working. Moreover, if jobs are not the trigger for economic growth, then they are an indicator . . . and all indications point to an economy barely above stall speed.
Reinhart and Rogoff on banking crises and financial liberalization
REMEMBER Reinhart and Rogoff? The famed duo whose paper on the relationship between economic growth and debt was recently called into question? While they’ve been accused of hamming up their work for the right, I recently found a passage from their other work, the book This Time is Different, that the right, opponents of stronger banking and financial regulations, would not agree with.
The basic premise of that book is that most (if not all) economic crises have the same genesis, and policymakers do themselves, and their countries, no favors by thinking ‘this time is different’–that the current crisis varies from previous crises. I disagree, and Noah Smith has a pretty insightful post about why the premise of the book that all crises are “inherently similar” is faulty. However, as with their now infamous paper (Excel errors aside), Reinhart and Rogoff compile a ton of invaluable data, including the following (which might be relevant to current U.S. policymakers and the issue of TBTF/Wall Street):
For the period after 1970, Kaminsky and Reinhart have presented formal evidence of the link between crises and financial liberalization. In eighteen of the twenty-six banking crises they studied, the financial sector had been liberalized within the rpeceeding five years, usually less. In the 1980s and 1990s, most liberalization episodes were associated with financial crises of varying severity. In only a handful of countries (for instance, Canada) did liberalization of the financial sector proceed smoothly. Specifically, Kaminsky and Reinhart present evidence that the probability of a banking crisis conditional on financial liberalization having taken place is higher than the unconditional probability of a banking crisis. Using a fifty-three-country sample for the period 1980-1995, Demirguc-Kunt and Detragiache also show, in the context of a multivariate logit model, that financial liberalization has an independent negative effect on the stability of the banking sector and that this result is robust across numerous specifications.
The stylized evidence presented by Caprio and Klingebiel suggests that inadequate regulation and lack of supervision at the time of liberalization may play a key role in explaining why deregulation and banking crises are so closely entwined. Again, this is a theme across developed countries and emerging markets alike. In the 2000s the United States, for all its this-time-is-different hubris, proved no exception, for financial innovation is a variant of the liberalization process.
Perhaps Krugman et al should champion this finding while they harp on the other.
Yay. Things aren’t getting worse . . .
This post from Sober Look reveals how bad the labor situation in this country is. Five years later and we are just seeing the labor market stabilize–i.e., it’s not getting any worse. Of course, as the post notes, the lack of bad news does not necessarily mean good news.
We are clearly seeing signs of stabilization in the US labor markets as new unemployment claims march toward pre-recession levels (though obviously not there yet). Also as we saw today, small businesses have been increasing the numbers of employees (see Twitter link). However, the nation’s labor market is still suffering form weak overall hiring. The pattern of hiring in the US has dislocated in late 2008 and has remained virtually unchanged since the recession (chart below). This relative weakness in hiring is consistent across most industries. Thus far the pace of hiring in 2013 has not been significantly different from other post-recession years.
Source: US Department of Labor (unit = thousands of workers) How is it possible that other labor market metrics are showing stabilization while hiring has not materially improved? The answer has to do with declining numbers of layoffs. According to the Bureau of Labor Statistics, the number of layoffs in the US has been at or below pre-recession levels since 2010.
While lower layoffs is a positive sign, a healthy economy is usually driven by improvements in hiring rates. So far however that hasn’t been the case in the US. Going forward, the number of hires will be an important metric to track in order to determine if the labor markets are indeed healing.
