Tag Archives: recession

The Federal Government HAS Been Cutting Spending – And That’s A Major Problem

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One of the my major frustrations as a blogger and as a follower of economic news is the way in which misinformation and falsehoods get repeatedly passed around as they were facts.  For example, one common meme that we hear a lot is that the  government, especially under Obama, has engaged in a massive spending spree.  The idea is pushed that government is growing out of control.  This idea has been pushed heavily by Republicans and Tea Partiers. It is often combined with the conclusion that “stimulus doesn’t work”.  The unfortunate part is that this idea of a government spending spree is completely untrue!

Look at this graph from the FRED database at the stlouisfed.org.  This shows the annual change in real dollars in government consumption and investment expenditures.  In other words, it shows how additional spending was added each year by all layers of government in the U.S.  During the recession, 2008 and 2009, governments were spending more.  They were spending approximately $60 billion a year more.  But notice that once the “official recession” ended in 2009 (the end of the shaded bars) governments began cutting back.  By late 2010 government has cut back so much that it is now spending less each year than the last year.

It’s no coincidence that this is the same exact timing when two things happened: the Republicans asserted control over the House of Representatives and began pushing to cutting spending, and the economy began to slow again and the recovery stalled. These two phenomena are related.  Cutting government spending when there is high unemployment and a slow economy is a sure-fire recipe for an even slower economy and even higher unemployment.

A critical thinking reader might ask “how can this be true (that government spending is lower than a year ago) if the federal government deficit is so large?”.   Well there’s two explanations.  The first is that the federal government deficit in the economy is largely due to the slow down in tax collections and the tax cuts that delivered little economic stimulus since they were saved, not spent.  Second, government in the U.S. is more than Washington D.C. There’s as much state and local government as there is national government, particularly when it comes to spending (as opposed to transfer payments).  State and local governments are cutting back and cutting back big time.  The 2009 “stimulus” bill of the national government actually had a large component that involved the national government transferring money to states and locals so they wouldn’t have to cut as much.  State and local governments cannot run deficits the way the national government can (they don’t have central banks).  That’s over now.  Now state and local governments are cutting big time – over 345,000 jobs lost at the state and local government level in just the last 12 months.  Of those, the majority are teachers in education.

Jobs And Unemployment Report For August 2011 – More Bad News, More Signs Economy Is Stalled, No Net New Jobs

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This being the first Friday of the month, the latest U.S. employment report was released this morning.  Not good news.  In a nutshell:  no new net jobs created and the unemployment rate holds steady at 9.1%. It disappointed even the weak expectations of forecasters. The news continues to show an economy that has stalled without recovering and is in danger of relapsing to recession. CalculatedRiskBlog does it’s usual exemplary reporting of the latest monthly jobs and unemployment report:

From the BLS:

Nonfarm payroll employment was unchanged (0) in August, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major industries changed little over the month. Health care continued to add jobs, and a decline in information employment reflected a strike. Government employment continued to trend down, despite the return of workers from a partial government shutdown in Minnesota.
…
The change in total nonfarm payroll employment for June was revised from
+46,000 to +20,000, and the change for July was revised from +117,000 to +85,000.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

Employment Pop Ratio, participation and unemployment ratesClick on graph for larger image in graph gallery.

The unemployment rate was unchanged at 9.1% (red line).

When looking at the detailed numbers we find that the private sector created a net total of 17,000 new jobs.  Unfortunately this was entirely offset by government reducing employment by 17,000 jobs.  I suppose for Tea Party and Conservative types who blame government for most all economic ills and who fantasize about a society with no government, this is moving towards their ideal economy.  Somehow, I don’t see it that way.

Further details behind the numbers show that the number of private sector jobs was likely understated by 45,000 since during the survey week the 45,000 Verizon workers who were on strike were not counted as having jobs.  Those jobs will return in the report on September, assuming Verizon doesn’t lay off some of them.

Overall, the picture for recovering from the Great Recession has been turning bleaker.  We were never on a very robust path for recovery at all during the last 2 years.  However, now what modest slow momentum we had towards job recovery has stalled and job recovery has essentially flatlined.  At the current rate, we never recover the jobs lost in 2008-09 until at least a decade has passed, if that.  This is definitely starting to look like depression territory, not “recession”.  The following graph, also from Calculated Risk,


Percent Job Losses During Recessions

The second graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

The red line is moving sideways – and I’ll need to expand the graph soon.

The current employment recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemploymentrate (only the early ’80s recession with a peak of 10.8 percent was worse).

The details in the report also show more depressing (sorry for the pun) news:

  • U-6, an alternate unemployment rate measure that includes both traditional unemployed (no job but looking), part-time workers who want but can’t full-time hours, and some other marginally-attached workers has risen to 16.2%, a new high for this year.
  • There are 13.967 million Americans unemployed now.
  • Of those unemployed workers, 6.0 million have been without a job and looking for work for over 6 months.
  • The previous reported totals for both June and July were revised downward.

 

Possible Good News – A Gasoline Price Drop Would Help.

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Ronald White of tthe LA Times brings us this nugget via CalculatedRiskBlog:

Since I haven’t posted on gasoline prices in some time … from Ronald White at the LA Times: Gas prices expected to fall

“If oil remains low, the national average for gasoline will fall to $3.25 to $3.40 in the next two to three weeks as retailers slowly lower their prices to reflect their drop in cost,” said Patrick DeHaan, senior energy analyst for GasBuddy.com, a website that lists retail gasoline prices.

Another price decline would be good news, but it just takes us back close to the late February and early March levels – and March is when Personal Consumption Expenditure (PCE) growth slowed, and consumer sentiment fell sharply.
If this comes to happen, then it raises the chances of avoiding another drop in GDP  and another recession.  It’s the first positive contingency I’ve seen for quite awhile.  Most of the “if this happens…” around today are all negative: Eurozone collapses, Bank of America hits more losses, state and local governments continue to layoff workers, etc.  Of course, gas prices dropping depends on oil prices staying down, and that depends on the big banks and hedge funds not speculating in the oil markets to drive them up.

We Have A Debt-Ceiling Deal. The Economy Loses.

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Earlier this week the absurd and totally unnecessary debate in Washington over raising the national debt-ceiling came to an agreement, both houses of Congress passed it, and the President signed it.  Earlier this week I gave this metaphor for the deal, wondering why we need enemies with “friends” like our representatives in Washington.  Now that I’ve had a little more time to reflect, read some more on the details, comment on radio & TV about it, I think I was too easy on it.  It’s worse than it first appears.

This deal doesn’t “guarantee” that the U.S. government will reduce it’s deficit and maintain “solvency” (a non-concept for a sovereign country with a central bank).  Instead, this deal is more likely to guarantee that our economic non-recovery does, indeed, become at least a lost decade, if not a depression.  Right now I want to look at the economic impact of the deal.  In another post I’ll look at another casualty of the deal and the probably political-economy impact.

So what does the deal do specifically?  Well the details are fairly complex, even by Washington standards.  Right now the debt ceiling rises by $400 billion – enough to last for probably 3-4 months.  No real cuts will happen for maybe 60 more days.  Then starting in October 2011, which is the start of the government’s fiscal year 2012 budget (see here for definition of fiscal year), the action begins. Caps on spending start.  There are no tax or revenue changes in the deal.  It starts modestly with only $21 billion in spending cuts in 2012, although many of those cuts will be felt painfully by many citizens.  Students in graduate school in particular will feel the pinch in their pocket. Then in the remaining 9 years of the deal, there will be at least another $896 billion in reduced spending, amounting to about $100 billion less spending per year than currently planned.

This total of $917 billion in reduced spending is only the start though.  Congress is going to appoint a “special joint committee” of 12 members to recommend and additional $1.2-1.5 trillion in either spending cuts or tax revenue increases over the next 10 years.  (if you believe that committee with half Republicans will allow any revenue increases, I have a bridge in Brooklyn for sale).  If Congress doesn’t adopt those cuts, then Medicare payments, defense spending, and other discretionary spending would automatically by cut across the board. Either way spending gets cut another $1.2 trillion for the years 2013-2022.

This deal is supposed to raise the debt ceiling enough to get us through the end  of 2012 and the presidential election before the debt ceiling has to be raised again, sparing us this debate.  Don’t bet the your house on that though because House Republicans are betting they can keep this debate alive through then.  Basically Congress has created an elaborate mechanism in this law that increases the debt ceiling in several steps between now and the end of 2012.  But the way it’s done is that the debt ceiling keeps going up unless Congress votes to stop it (which the President would then veto).  It’s  a way for Republicans to keep talking about the debt and deficit, to keep recording “votes” against it, but all the time knowing that the debt ceiling will rise because it has to.  Pure politics at the expense of the country.

Right now the economy has over 9% unemployment.  Inflation is so low that deflation is actually the threat. The economy has effectively stalled or at least reached “stall speed”, threatening another double-dip recession.  This is not the time to be cutting spending.  To the degree spending cuts are necessary, they should happen when the economy is at or nearing full employment, not now.  At this time the economy needs all the spending it can find whether it’s from consumers, firms, or government.  And right now, firms and consumers are pulling back and keeping their wallets closed.  The government needs to step up and fill the gap.

So bottom-line, what should we expect?  I’ve seen several estimates from folks with more sophisticated econometric models than I can access.  My own back-of-the-envelope calculations and intuition say the drag on the economy is significant.  In 2012, this deal is probably going to take up to another 0.4 percentage points off of GDP growth.  The real damage starts in 2013 with a reduction closer to 1%.  Remember we’ve only grown at 0.8% rate so far in the first half of 2011, so 2012 will be close to zero growth and 2013 will likely be negative unless some other source of growth and spending can be found.  Looking around, it’s hard to imagine where that could be.  Instead I see nothing but possible negative risks: Europe imploding in a currency and austerity crisis, China having to pull back to slow their inflation, the housing mess in the U.S. is still bad, U.S. banks aren’t as healthy as they claim.

The estimates I’ve seen are similar.  Economic Policy Institute says the debt ceiling deal with cost us 1.8 million jobs in 2012 alone. The same article reports:

Top economists and CEO’s have also weighed in against the deal and said that GOP concessions to the Tea Party will cost our economy dearly. Pimco CEO Mohamed El-Erian warned that the deal will lead to less growth, more unemployment, and more inequality. Nobel Prize-winning economist Paul Krugman called the plan “a disaster” and “an abject surrender” that will “depress the economy even further.”

The Center for American Progress’s Michael Ettlinger and Michael Linden argue that while the deal “goes straight in the wrong direction,” Congress can redeem itself by using the so-called “super committee” mandated by the bill to focus on job creation. The committee, made up of six Republicans and six Democrats, is tasked with finding an additional $1.5 trillion of deficit reduction over the next 10 years, and must report a plan by Thanksgiving.

It’s noteworthy that J.P.Morgan Chase Bank’s research department, as representative of Wall Street as any, says that overall with this deal, government budget policy in 2012 subtract at least 1.5% points from GDP growth rate in 2012.  Since  it takes at least 2% growth in GDP to keep unemployment stable and we haven’t even had a single quarter of growth at more than a 4% rate since the end of 2006, things look grim for employment.

The cutters and austerians have won.  They will make a wasteland of the economy in the name of fighting the deficit.

So We Have a Debt-Ceiling Deal. Whoppee. With “Friends” Like These…

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Ok, we have a “deal” in Washington to raise the debt ceiling.  Big whoop.  With friends like these, we don’t need enemies.  I don’t much time today (end of semester, grading, and all), but I’ll comment tomorrow in more depth.

Meanwhile, I’ll leave you with this metaphor for how I see the debt-ceiling deal and it’s spending cuts, new “super-congressional” committees, etc.   Picture the economy as a person crossing the street.  The person is frail, sickly from an infection, and has a broken leg in a cast.  That’s because the economy hasn’t healed from 3 years ago when it got hit by speeding truck called The Great Financial Crisis.   Just as the person is in the middle of the street, we see two cars driven by reckless youngsters drag racing down the street – a totally unnecessary activity.  Both drivers saw the person several blocks away but they kept speeding straight toward the person, yelling at each other that the other one should swerve or stop to avoid hitting the poor hobbled pedestrian.  Now at the very last minute, a shred of sanity prevailed and the two cars keep speeding, but they swerved just enough to miss hitting the economy.  But in the process of swerving, they’ve knocked our economy/pedestrian down to the ground.

The good news is we avoided being run over and possibly killed.  The bad news is that not only are we still sick, infected, and have a broken leg, we might also have more bruises and injuries from the close-call.

This Is No Movie Folks. It’s Real and It’s Scary.

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I don’t enjoy scary movies. Never have.  I also don’t enjoy scary “amusement” park rides.*  I know I’m kind of a fluke in our U.S. culture this way.  I just find that there’s enough excitement, thrills, and fright in the real world if you just open your eyes.

An example of real world things to be scared of is the current debate  childish tantrum in Washington over increasing the debt limit. I’ll admit I haven’t taken it seriously until now.  A couple months ago I called it Kabuki Theatre of the Absurd. The law itself, the debt “ceiling” law, is absurd.  It is also redundant. Raising the debt ceiling should be a like sending a form letter.  Routine. Perfunctory. The law should be simply done away with. If Congress doesn’t want to borrow more money then the time and place to make that point constitutionally is when the budget is adopted.

The Republicans and Tea Party types were unable to accomplish their goals of gutting Social Security, Medicare, and other programs when the budget bill was debated last March-April.  They simply didn’t have the political support and they couldn’t agree on just who to cut.  So instead of doing the constitutional thing and either win more elections and gain seats (they actually lost a special election in May because of their plans to cut Social Security), or waiting until the next budget for next year, they’re trying to accomplish their goals under a subterfuge.  It’s not about the debt. It’s not about the deficit.  If it were about debt, deficits, and “fiscal responsibility”, then closing tax loopholes for high-income folks like hedge fund managers and the commodity speculators that drive up oil prices would be an option.  But the Republicans and Tea Partiers have expressly stated that even closing a tax loophole is unacceptable.  Only spending cuts are acceptable.  So the truth is it’s not about “fiscal responsibility”.  It’s about eliminating government programs that people want as the New York Times explains today (possible paywall on link).

So back to the debate tantrums being thrown in Washington. I still expect there to be a last-minute deal when powerful folks on Wall Street give the call to their friends in D.C. and tell ‘em to knock it off and do it. In the meantime, the Republicans, Tea Party types, and Obama administration are playing a game of chicken.  Except that this is a bit different from movie versions of chicken.  Jeff Frankels provides an excellent analysis. The problem is three-fold: it’s not movie fantasy – it’s real, the folks in the Republican car aren’t rational and are fighting among themselves, and when these cars go over the cliff there’s a good chance they take our entire economy with them. Quoting Jeff:

In the 1955 movie Rebel Without a Cause, James Dean and a teenage rival race two cars to the edge of a cliff in a game of chicken.  Both intend to jump out at the last moment.  But the other guy miscalculates, and goes over the cliff with the car.

This is the game that is being played out in Washington this month over the debt ceiling.  The chance is at least 1/4 that the result will be similarly disastrous.

…

The game is not symmetric.  The Republicans are the ones who are miscalculating.   Evidently they are confident of prevailing:  they rejected the President’s offer, even though he was willing to cut entitlement programs.

The situation is complicated because there are a number of different people crammed into the Republican car.    There is one guy who is obsessed with the theory that, come August 3, the federal government could retain its top credit rating if it continued to service its debt by ceasing payment on its other bills.  But this would mean failing to honor legal obligations that have already been incurred (paying suppliers for paper clips that have already been bought, paying soldiers their wages for last month’s service, sending social security recipients their checks, etc.).  This is like observing that the cliff is not a 90 degree drop-off, but only 110 degrees.   It doesn’t matter: the car would still go crashing into the ocean far below.   The government’s credit would still be downgraded and global investors would still demand higher interest rates to hold US treasuries, probably on a long-term basis.

There are other guys (and gals) in the car who are even more delusional.   They are dead set on a policy of immediately eliminating the budget deficit (e.g., those opposed to raising the debt ceiling no matter what, or those campaigning for a balanced budget amendment), and doing it primarily by cutting nondefense discretionary spending.  This is literally impossible, arithmetically.  But they honestly don’t know this.   It is as if they were insisting that the car can fly.   Sometimes it can be a good bargaining position to adopt a very extreme position.  But if you are demanding that the car flies, you are not going to get your way no matter how determined you are.

It seems likely that the man in the driver’s seat – House Speaker John Boehner – does realize that his fellow passengers don’t have the facts quite right.   But there is also a game of chicken going onwithin the Republican car.  The crazies have said they will oppose in the next Republican primary election any congressman who votes to raise the debt ceiling or to raise tax revenues.   (Yes, they think they would support someone who would eliminate the budget deficit primarily by cutting non-defense discretionary spending; but remember, this is arithmetically impossible.)   The guy who is riding shot-gun in the car – the one who believes the car can fly — is trying to put his foot on top of Boehner’s on the accelerator pedal.

Yes, people who cannot do basic arithmetic are in charge here. And they’re throwing a childish tantrum because they can’t get their way.  Only unlike a child who’s threatening to hurt themselves if they don’t get their way, these folks could potentially take us all down.

The facts are that nobody knows for sure what happens if Congressional Republicans don’t raise the debt ceiling by August 3. But it defies imagination to think it will be smooth sailing. It depends on how the Obama adminstration reacts.  There might be ways around it.  A couple of proposals exist. The government could dispute the constitutionality of the debt ceiling law or it could mint some super-large coins (such as billion-dollar coins) that would only be used as Marshall Auerbach has noted:

Or the President could, as we and others have suggested in the past), simply invoke the 14th amendment and refuse to enforce a statute that he believes violates the Constitution.

Professor Scott Fullwiler has suggested an even more creative way around the debt ceiling: Fullwiler notes that Fed is the monopoly supplier of reserve balances, but that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum coins). Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed (for more details see here).

Curiously, the President won’t pursue any of these options.

These options would keep financial markets on an even keel but could provoke a constitutional and legal crisis as the Tea Party types would not doubt file endless lawsuits challenging it.  But thinking about these options is largely academic since Obama shows no inclination to exercise these options or to explain why he doesn’t.   Obama shares responsibility because he’s let the Tea Party types and Republicans take this charade this far.

Let’s consider a more likely intermediate case.  As mentioned in another post, to immediately stop all new borrowing and instantly balance the budget, the government has to cut 40% of it’s spending right now.  The federal government accounts for $3.8 trillion of spending in 2011.  GDP is expected to be in the $15 trillion range.  If the government cuts 40% of that $3.8 trillion instantly, that’s a $1.5 trillion cut in spending. Government spending is part of GDP (despite what far right-wing types believe).  So an instant balancing of the budget on Aug 3 means a 10% cut in GDP.  When the economy collapsed in 2008 it was only approximately a 5% drop in GDP.  So the “intermediate” case of default is an instant recession twice as big as the “Great Recession” of 2008.  Apparently the Republicans and Tea Party types loved 2008-09 and the bailouts so much they want to repeat it and double down.

Now what’s the worse case?  Well add into the scenario a financial crisis to dwarf 2008.  See US bonds are AAA rated because there’s no chance of default.  If there’s a default, or even a slight increase in the possibility of a future default, then pension funds, banks, and central banks around the world no longer have safe, interest bearing assets.  Chaos. Pension funds have to sell bonds.  Bond prices drop. Interest rates rise. Banks lose capital as the bonds fall in value. Nobody knows which banks are worst off.  A mess to make 2008 look simple.  And guess what, we’ll be back to bank bailouts only with even more unemployment.

Why can’t we have grown-ups in Washington?  These kinds of scary scenarios should be fictional and in the movies.  It shouldn’t be national policy to deliberately default and crush the economy just to make some political policy victory that you couldn’t win straight up.

 

* racing cars in real life is different.  ;-)

Robert Reich Connects The Dots to Tell What’s Happened To Our Economy In 2 Minutes

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Berkeley Professor and former U.S. Department of Labor Secretary Robert Reich has put together a good, short 2 minute 15 second video that explains a large part of what’s happened to the economy over the last 30 years.

In summary, Reich connects five “dots”:

  1. The economy has doubled since 1980 but wages have been flat.  So where did the money go?
  2. All the gains have gone to the super rich.   And…
  3. With money goes political power.  Taxes on the super rich have been slashed, government revenues have fallen, leading to…
  4. Huge budget deficits. The middle class gets agitated.  To balance budgets, governments slash spending and set middle class to fighting amongst itself…
  5. Middle class is divided.  It fights for scraps.  When borrowing ability dries up, spending slows and can’t return…
  6. We get an anemic recover.

He explains it better (and draws neat pictures, too), but that’s the jist of it.  I would add more such as how the financial industry gained such power in Washington and pushed an ideological but economically flawed agenda of deregulation that led to the monumental but avoidable financial crises in 2007-2009.  But Reich gets the basics right.

What to Call This Unpleasantness? Little Depression or Workers’ Depression?

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Brad Delong has had enough.  So have I.

“The Little Depression”

Back in late 2008 people asked me: is this a recession or a depression? I said that I would call it a depression if the unemployment rate kissed 12%. I said that I would call it a depression if the unemployment rate stayed above 10% for a year.

Neither of those has come to pass. But the unemployment rate has kissed 10%, and has stayed at or above 9% for two years now.

So I am moving the goalposts. I am adopting a suggestion in comments of Full Employment Hawk . Henceforth, I will call the current unpleasantness not “The Great Recession,” but rather “The Little Depression.”

It’s a good question.  In late 2008 when people were asking me, I said I wasn’t sure.  It would either be “The Great Recession” or “The Lesser Depression”, I said.  Eventually I fell in line with most commentators and referred to it as “Great Recession”.  But with the continuing bad, very bad, news on employment, wages, and growth, I’m with Brad.  We need to call this what it is.  It’s not been a “Great Recession”.  Recessions are events when the central bank says things have gotten out of hand, they raise interest rates, and everybody sobers up.  Then after an appropriate time of perhaps 6-12 months, the growth machine fires up and we start to regain lost territory.  This is different. We aren’t regaining lost ground and people are suffering.

What most folks are calling the “Great Recession” I think we ought to call the “Panic of 2008″.  It was, after all, a good old-fashioned financial panic updated with 21st century technology and corporate forms. It lasted roughly the time period the NBER says was the recession.

What has me going though is the continuing poor conditions for the millions of Americans.  This unpleasantness has gone on too long and been too severe to call it recession.  It’s a depression of some form.  The problem here is how to distinquish it semantically from the Great Depression of 1929-1940, or the Long Depression of 1873-1896.  My personal preference is for Workers’ Depression.  I think it sums it up.  For the banks and rentier classes, it’s good times again.  It’s only for working stiffs that things continue so ugly.  But if people want to use “Little Depression”, I could go along for the sake of clarity.

Why the Austerity Talk?

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Brad DeLong is as puzzled as I, but is more eloquent in expressing it.  In so doing he does my classes a favor in expressing a quick version of the history of addressing macro economic crises.

For nearly 200 years economists from John Stuart Mill through Walter Bagehot and John Maynard Keynes and Milton Friedman to Ben Bernanke have known that a depression caused by a financial panic is not properly treated by starving the economy of government purchases and of money. So why does “austerity” have such extraordinary purchase on the minds of North Atlantic politicians right now?

Let me speak as a card-carrying neoliberal, as a bipartisan technocrat, as a mainstream neoclassical macroeconomist–a student of Larry Summers and Peter Temin and Charlie Kindleberger and Barry Eichengreen and Olivier Blanchard and many others.

We put to one side issues of long-run economic growth and of income and wealth distribution, and narrow our focus to the business cycle–to these grand mal seizures of high unemployment that industrial market economies have been suffering from since at least 1825. Such episodes are bad for everybody–bad for workers who lose their jobs, bad for entrepreneurs and equity holders who lose their profits, bad for governments that lose their tax revenue, and bad for bondholders who see debts owed them go unpaid as a result of bankruptcy. Such episodes are best avoided.

From my perspective, the technocratic economists by 1829 had figured out why these semi-periodic grand mal seizures happened. In 1829 Jean-Baptiste Say published his Course Complet d’Economie Politique… in which he implicitly admitted that Thomas Robert Malthus had been at least partly right in his assertions that an economy could suffer from at least a temporary and disequliibrium “general glut” of commodities. In 1829 John Stuart Mill wrote that one of what was to appear as his Essays on Unsettled Questions in Political Economy in which he put his finger on the mechanism of depression.

Semi-periodically in market economies, wealth holders collectively come to the conclusion that their holdings of some kind or kinds of financial assets are too low. These financial assets can be cash money as a means of liquidity, or savings vehicles to carry purchasing power into the future (of which bonds and cash money are important components), or safe assets (of which, again, cash money and bonds of credit-worthy governments are key components)–whatever. Wealth holders collectively come to the conclusion that their holdings of some category of financial assets are too small. They thus cut back on their spending on currently-produced goods and services in an attempt to build up their asset holdings. This cutback creates deficient demand not just for one or a few categories of currently-produced goods and services but for pretty much all of them. Businesses seeing slack demand fire workers. And depression results.

What was not settled back in 1829 was what to do about this. Over the years since, mainstream technocratic economists have arrived at three sets of solutions:

  1. Don’t go there in the first place. Avoid whatever it is–whether an external drain under the gold standard or a collapse of long-term wealth as in the end of the dot-com bubble or a panicked flight to safety as in 2007-2008–that creates the shortage of and excess demand for financial assets.
  2. If you fail to avoid the problem, then have the government step in and spend on currently-produced goods and servicesin order to keep employment at its normal levels whenever the private sector cuts back on its spending.
  3. If you fail to avoid the problem, then have the government create and provide the financial assets that the private sector wants to hold in order to get the private sector to resume its spending on currently-produced goods and services.

There are a great many subtleties in how a government should attempt to do (1), (2), and (3). There is much to be said about when each is appropriate. There is a lot we need to learn about how attempts to carry out one of the three may interfere with or make impossible attempts to carry out the other branches of policy. But those are not our topics today.

Our topic today is that, somehow, all three are now off the table. There is right now in the North Atlantic no likelihood of reforms of Wall Street and Canary Wharf to accomplish (1) and diminish the likelihood and severity of a financial panic. There is right now in the North Atlantic no likelihood at all of (2): no political pressure to expand or even extend the anemic government-spending stimulus measures that have ben undertaken. And there is right now in the North Atlantic little likelihood of (3): the European Central Bank is actively looking for ways to shrink the supply of the financial assets it provides to the private sector, and the Federal Reserve is under pressure to do the same–both because of a claimed fear that further expansionary asset provision policies run the risk of igniting unwarranted inflation.

But there is no likelihood of unwarranted inflation that can be seen either in the tracks of price indexes or in the tracks of financial market readings of forecast expectations.

Nevertheless, you listen to the speeches of North Atlantic policymakers and you read the reports, and you hear things like:

“Obama said that just as people and companies have had to be cautious about spending, ‘government should have to tighten its belt as well…’”

Now there were—and perhaps there still are—people in the White House who took these lines out of speeches as fast as they could But the speechwriters keep putting them in, and President Obama keeps saying them, in all likelihood because he believes them.

And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, as a mainstream neoclassical economist. Right now the global market economy is suffering a grand mal seizure of high unemployment and slack demand. We know the cures–fiscal stimulus via more government spending, monetary stimulus via provision by central banks of the financial assets the private sector wants to hold, institutional reform to try once gain to curb the bankers’ tendency to indulge in speculative excess under control. Yet we are not doing any of them. Instead, we are calling for “austerity.”

John Maynard Keynes put it better than I can in talking about a similar current of thought back in the 1930s:

It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man’s speculative spirit. It would, they feel, be a victory for the Mammon of Unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy.

We need, they say, what they politely call a ‘prolonged liquidation’ to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity…

I do not understand it either. But many people do. And I do not understand why such people think as they do.

 

No do I understand why they think that way.  But I suspect that it has to do with political and rich elites preferring to have a more dominant share of a smaller pie than to rationally wanting to share a larger one.  As one of the commenters to Brad’s post put it:

We’ve been down this road before. “Auterity” is just a euphemism for getting the ignorant and foolish to support their own ruin in the name of wealth transference to the already wealthy by destroying government programs and services that benefit the middle class and needy.

 

 

So Where Are We? Part I

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A new semester is beginning, and with it get start another dialogue on the macro-economy with new group of students.  So to start the conversation I’m going to make a few posts that take a look at just where are we in the U.S. economy.

This first post is going to look at GDP and the growth trend (or lack thereof).  For my first expert witness I call Menzie Chinn of Econbrowser and the University of Wisconsin.  In a post last Monday (source here), he observes just how much the U.S. economy has lost as a result of the financial crisis and resulting Great Recession of 2007-2010.

In our forthcoming book [5], Jeffry Frieden and I tried to tabulate the likely costs of lost output associated with the Great Recession that followed the financial crisis driven by financial deregulation, lax fiscal and monetary policy, and ample capital supplies abroad. Using the January 2010 CBO projections, we calculated the cumulative GDP loss (relative to potential GDP) from 2007Q4-2014Q1 at 3.53 trillion Ch.2005$, 11349 per person (Ch.2005$), or about $12604 in current dollars).

Macroeconomic conditions, as well as the projections of potential output, have changed somewhat since I undertook that calculation earlier this year, so I decided to update the calculation. I present the estimated cumulative loss from 2008Q1-2010Q3, as well as the cumulative loss from 2010Q4-2011Q4.

cumloss1.gif
Figure 1: GDP, in bn Ch.2005$, 2010Q3 3rd release (blue), mean forecasted GDP from WSJ January 2011 survey (red), potential GDP as projected by CBO. Light green figures are cumulative output gap figures for indicated periods. NBER defined recession dates shaded gray. Sources: BEA, GDP 2010Q3 3rd release, WSJ January 2011 survey, CBO, Budget and Economic Outlook: An Update (August 2010) – additional data on potential GDP, NBER, and author’s calculations.

Fears of overheating, when counterbalanced against the costs of lost output, seem somewhat misplaced in this context. [

Menzie (one of the premier academic econometricians around), projects that by 2014 the cumulative lost output in the U.S. from the crisis-recession (and the weak recovery policies following it) will be over $3.5 trillion, or over $12,000 per person in the U.S.

As the graph also shows, our recovery is weak and nearly non-existent.  Instead of “healing” and returning to health (long-term trend) as the economy did after recessions during the long 1948-2000 period, we have effectively said good-bye to a large chunk of the U.S. economy. What’s left is returning to normal growth rates, but we are not really recovering what was idled.  This is not good.