Paul Krugman

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Jobs: Do We Give Up Too?

Mark Thoma has caused quite a stir. Which you probably missed because he’s a fairly unassuming academic in his normal guise, and a regular, sharp, commentator on his economics blog. He is one of those economists who pops up now and again in the media with a non-orthodox view, and a practical approach. Along with notables like Brad DeLong, Dean Baker, and Paul Krugman he has done much of the heavy lifting necessary to orient economics towards a real world solution and away from the loony stuff preached by our friends in Chicago.

His presence within the economics blogosphere looms larger than most so when he announced that he was ‘giving up’ hope that the Obama administration would attempt a significant job creating effort his words carried a great deal of weight. And stirred quite a debate.

He is correct, of course, that all the stimulus efforts so far have been inadequate and lightweight. Had we done more, sooner, the economy would be much further down the road towards robust health, and we would not all be wringing our hands over the turgid pace of recovery.

The really sad part is that the administration knows all this and yet still falters whenever pressed by ideological foes of stimulus. The recent ‘jobs bill’ – it deserves quote marks because of its derisory amount of spending – was more slap in the face for the unemployed than a help.

Equally sadly, the talking heads of the media have fallen prey to the silly chatter from the world of finance that America needs to switch towards belt tightening sooner rather than later. The fear of a spike in interest rates and portentous blather about a downgrade of US bonds by the rating agencies, grip the media’s attention far more than long unemployment lines. It has become as if we are resigned to a jobless recovery because we cannot afford the cure.

Fear, in other words, drives our decision making, not a focus on a solution or a determination to make our economy well again.

This implies we have not learned from the japanese experience of the past twenty years.

The Japan has become the poster child of what not to do after a huge asset price bubble collapses. The Japanese failure has been analyzed up and down by a veritable army of economists. It is the seminal reason that Paul Krugman shook off his allegiance to orthodox economics and embraced the Keynesian way. Practically every step a whole sequence of Japanese leaders took had a perverse impact. Japan lost wealth a prodigious rate; it piled up debt; it has impoverished its future; and has settled for mediocrity in the present, all because of its misdiagnosis and then timid response to its crisis.

We are following much the same course.

The simple reason is not economics, it is weak kneed politics.

The economists around Obama know what to do. They just cannot get themselves to argue strongly enough that we should do it.

They fear the cloddish opposition the Republicans will throw up: as if Jim Bunning knew anything at all about economics. Beyond the simply cloddish, they fear the calculated cynicism of people like Romney who object to government spending as a vote catching position rather than a well worked out economic policy. The procession of GOP leaders decrying big spending is long and shameless. Their position has instinctive appeal to a large number of voters. After all it seems intuitive that we should tighten our belts when money is scarce.

Wrong. Wrong. Wrong.

It is extraordinarily disappointing to realize how little attention many of our erstwhile leaders pay to history. It is even worse to realize that those who have learned the lessons of history are too weak to implement the knowledge they gleaned from that study.

Our one and only hope for a strong recovery is a demented spending spree, with the government printing money and handing it out to anyone willing to spend it.

Period.

Everything else condemns us to a Japanese experience, and the deliberate reduction of our children’s wealth.

But we have reached the point in our discussion of policy that folks like Thoma now give up. Publicly.

The effort to get the administration to do the right thing seems a hopeless cause. So Thoma quits and DeLong chimes in that he agrees.

So do we give up too?

Heck no.

We need more stimulus. Now.

Addendum:

Those of you who like pictures in order to understand things – I am with you believe me – should all rush to this chart on Brad DeLong’s site.

He shows the shortfall in economic activity, which he notes is about $1.3 trillion at the moment. Two points to note: that the gap is between current activity and projected activity as if the recession had never taken place. The idea being to put a number on the damage done by the downturn. The second point is to note that this loss is permanent. There is nothing we can do to recoup that lost spending. This is what I mean when I talk about impoverishment: we lost a ton of spending and, by extension, all the wealth that such spending implies, during this crisis. That lost activity is far greater than the cost of the bail-outs and the stimulus combined.

And it is to mitigate that loss, to shorten the period of loss and to lessen its amount, that we deploy government spending. In a vernacular sense we fill the void that the gap represents through artificial spending. We plug the hole.

By so doing we prevent much of the permanent loss. The cost is that we have to repay the amount we deploy. But that cost is a smaller burden on the future than the unfilled gap, because we kept ourselves on, or close, to our historic trajectory.

Pictures are helpful.

More stimulus. Now.

OK.OK. I know that we won’t get more stimulus. But it won’t be because we didn’t shout for it.

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Housing and Bernanke: Bleak House?

Hot after yesterday’s report on the ongoing weakness in home prices comes today’s shocking report on the sales of new homes. Just as was the case with the price data there is no way we can put a pleasant gloss on the sales news. It stinks.

Sales of new homes actually dropped in January to a record low level of 309,000. That’s a 11.2% decline, and the lowest level ever recorded in this data series which has been maintained since 1963. To put this in context: most of the pundits were looking for a slight increase.

So what the heck happened?

Nothing.

By which I mean that consumers see none of the recovery seeping through to them. At least not sufficiently to warrant taking on a major new expense. Wages are stuck in neutral and actually eroding slightly in inflation adjusted terms, so there is no impetus for households top upgrade their home. House prices are still weak which has two effects: one is to stop buyers from making a move in the hope that better deals will come along; the second is that people are suspicious that they could buy a new home and then find themselves holding an asset of declining value. Then there is the banking industry’s hibernation and current risk aversion – access to credit is limited to a much smaller pool of potential buyers because credit standards have been tightened so much.

Add all this together and we produce a potentially combustible brew. The populace is in a surly and introspective mood. They see nothing much being done to fix things – Washington’s gridlock is plastered all over the news. They see no improvement in the employment outlook. They see the hope for increased wages ebbing into the future. And they are acutely aware of their diminished asset values: especially the approximately 30% drop in home prices most parts of the country have experienced.

This is all culminates in the development of a fear driven siege mentality and a desire to hoard cash or pay down debts rather than indulge in discretionary spending. This is the Keynesian vision of the ‘paradox of thrift’ being writ large in our contemporary economy.

So the economy is crippled in some key areas.

An important point to recall is that during the grim employment years of the Bush administration, construction was a bright spot. With sales this low and with no prospect of much recovery in sight the outlook for construction will remain bleak. That kicks away the biggest source of jobs we have had over the past decade.

No wonder this recovery is jobless.

Just as the home sales report was released Bernanke was delivering his regularly scheduled update to Congress. His statement was less bullish than expected. To summarize: the recovery is in no way robust, and is yet to reach a self-sustaining level. This means that both fiscal and monetary policies have to remain stimulative. Any tightening now, or in the near future, would be disastrous.

That should pour cold water over the fiscal and monetary hawks who have been beating the drum for tightening. Within the Fed there is a growing faction advocating raising interest rates in order to stave off inflation. Apparently two of the votes at the last FOMC meetingwere cast in favor of a rate increase and the subsequent, and relatively benign uptick in the discount rate can be seen as a sop to that faction. The FOMC is the forum at which Fed policy is developed and voted upon, so there appears to be a growing division at that level about policy priorities. Which is more important: jobs or inflation fighting? The Fed’s official mission is to balance the two, and that balance is beginning to tip towards inflation fighting. In my view that’s a disaster.

The lesson of history is clear: a premature tightening will plunge us back into recession, and possibly even further into depression.

A superficial reading of the economic situation reveals that GDP grew at about a 4% rate over the last six months. But that is entirely specious. The underlying, self-sustained portion of that growth was much, much, slower – maybe in the 1.5% to 2.o% range. That is way too slow to justify either a rate hike or a budget squeeze.

So we need to keep the policy foot firmly on the gas in the hope that consumers perk up later in the year. If the hawks win the debate … then read up on the Japanese experience of the 1990’s and their ‘lost decade’. It may be more pleasant than our outlook.

Bleak house indeed.

Addendum:

Paul Krugman points to Martin Wolf’s comments in today’s Financial Times. The point they both make is that this recovery is getting more, not less, precarious. We need either a big increase in consumer spending, or a surge in investment. Either would boost final demand and get the private sector moving at a sustainable pace. Without either it is very difficult to construct a positive path through the next few quarters. No matter how you spin the outlook there is a gaping hole in the economy that needs filling. The filler has to come from somewhere. Right now it is the government trying to plug the gap. But such support can only last for so long: sometime the private sector – businesses and consumers – have to take up the slack.

Meanwhile, we need more stimulus.

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Thoughts on a Mixed Bag: Manufacturing and Construction

A brief update on today’s data:

  1. Manufacturing. The Institute for Supply Management released its monthly survey of manufacturers today. Its index of activity now stands at 55.9% up from 53.6% the prior month. Be aware that this data is a little old – the latest month reported is November – but clearly the industrial sector is headed in the right direction. This is the fifth straight month of increase and the highest reading since April 2006. Any reading over 50% is correlated with a growing economy, so today’s data supports all the other information we have been seeing: GDP is expanding. Also bear in mind that, while expansion seems to be broadly spread across the economy, some areas remain weak, and that this indicator gives us a less reliable guide to the future than it gives a ‘score keeping’ for the immediate past. With that caveat said I think we should take some comfort from the report especially with regard to the payroll figures we will be seeing on Friday.
  2. Construction. On the flip side the government released a gloomy construction report today. Spending on construction projects fell for the seventh straight month in November – by 0.6% – and is now off by 13.2% over the past twelve months. Non-residential construction is even worse: it has fallen by 20.6% over the last year. Making matters more depressing was the news that October’s data was revised from being flat to a decline of 0.5%. There is no way to put a rosy gloss on this information. The construction sector is shrinking fast and looks as if it will continue that way well into the current year.

Taking the two reports together makes it difficult to work up a great deal of enthusiasm for the next few months. All the signals are mixed. Some areas, such as manufacturing, are clearly improving, while others are still floundering. The net result is that we seem to be stuck in a series of cross currents making little substantive headway. Perhaps the best way to look at the near term outlook is that until we see data that is definitively supportive of growth, with a series of months of strong momentum, we cannot predict much beyond a mediocre spell of GDP numbers. And that could be for a long time.

This, of course, contrasts with the media cheering section where every step, however tentative, is seen as the beginning of a return to the glory days.

Just when those glory days were I have no idea: the entire decade of the 2000’s was a write-off for most people. Real incomes, stock prices, job growth … you name it, the 2000’s didn’t deliver anything at all. It was a decade we sincerely need to avoid replicating. Any policy enacted from 2000 through 2008 needs to be consigned to the trash, and any from last year copied only in a vastly scaled up version.

I think Krugman keeps on capturing it well: what seems to be missing in the analysis done by the cheering section is any hard thinking. All the evidence, and now there is tons of it, points to a very lethargic economy for many years to come. This lethargy results from one simple fact: our finance system is severely broken. Credit flows are weak. We are still unwinding from insanity the banks foisted on us. Asset values are still high – yes even housing is still expensive by historic standards in many areas. And far too large a portion of corporate profits flows out to managers rather than to shareholders or employees. Rent-seeking is rampant and corruption endemic.

We have deep and systemic problems, and we lack the willpower to fix them.

Let me illustrate what I mean: in Slate I read about the new record breaking passenger train being introduced in China. Following a glowing report about the technology and the benefits the high speed link would bring to the Chinese economy the reporter ended by stating, with abandoned ennui I presume, that ‘of course we could never introduce such a train here in the US’. For political and economic reasons. Our politics and economics, both of which we have lauded for decades as the model for the world to follow, now seem to be stopping us taking any bold action. Instead we are mired in petty bickering and endless culture wars. We have a Senate trapped in 1700’s posturing. We have an elite comprised of brilliant bureaucrats for whom triumph is avoidance of failure. Plus we have social sclerosis on a par with that much derided ‘Old Europe’, but with none of the benefits.

All of which apparently prevents us from carving our way through problems within the banking or health care sectors. Just look at the effort we expended to legislate a weak and borderline ineffective stimulus plan. At the very height of a national crisis no less.

I hope that Krugman turns out to be wrong. In his speech in Atlanta last week he spoke about Japan’s 1980’s experience and how we look very much as if we are emulating it. His point being that we have a model of what might be in store if we fail to be radical in our policy choices: Japan still hasn’t fully recovered from its deflation and asset price implosion of 38 years ago. He says that the Japanese evidence is why he remains more pessimistic than most about the next few years.

It may seem an odd thing to say, but if we want fewer of today’s mixed reports, if we want manufacturing and construction to drive rather than sputter forward, then we need substantial, significant, far-reaching, imaginative, and bold reform of finance. Without which we will have growth ho-hum growth and many lost opportunities. We will lose our vigor but retain a nice veneer of nearly acceptable performance. We will always be close enough to success that we cannot take aggressive action for fear of plunging downward. Yet we that same reticence will condemn us to watch opportunity pass us by.

And the chances of bold action are? Given this last twelve months?

Let’s just say I wouldn’t bet on it.

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Howard Dean and Health Care Reform

I don’t want to delve too far into health care reform at the moment. Frankly nothing is more distasteful to me than the current tangled and smoke filled room mess in the Senate. Apparently any single senator can derail anything, which merely highlights how undemocratic American politics can be at times. The Senate is an institution that acts as an anti-democratic impediment to change. This was rightly predicted by Thomas Jefferson who objected to its establishment for exactly that reason. He realized that the Senate, as it is constituted, is a bastion of vested and establishment interests. It is a bulwark against reform. Deliberately so. This role was created as a mitigant against the democratic zeal that the founders of American politics foresaw and feared might erupt in the House of Representatives – which remains to this day the only truly democratic institution in the Federal Governmental set up.

None of this matters too much. Nor does it concern the average citizen brought up as they are to believe in the mythology of America as the ‘great democracy’. Along the sliding scale of total democracy to total authoritarianism America obviously sits firmly on the democratic side, but its system is no paragon of democratic government. Instead it is stuck in a two centuries old republicanism that is no longer modern or even accepted anywhere else. The acid test is this: in the years since the establishment of America there have been hundreds of governments set up. Countries all over the world have had the opportunity to choose a governmental style. Newly freed nations have been able to copy the American system. Not one has. Not one.

That early mistrust of the people – the mob so feared by the gentlemen farmers who wrote the rules – resonates today in things like the bias within the Senate against the large states, and in the Electoral College for presidential elections. There is no tyranny of the masses here because the masses are deliberately under represented.

Which is why people like Joe Lieberman belong more in a Roman than a modern setting. The romanticized image of an orator holding back the tide of change on a senate floor by defying base populism, belongs in Seneca not in the 21st century. And certainly not when it is the masses that would benefit from the change.

It is all too apparent that the opposition within the Senate to health care reform is based upon upholding the status quo and the protection of existing vested interests. This has led to a debased proposal that accomplishes few if any of the original intended changes.

That America, of all the world’s nations the most capable of extending health care to all its citizenry, refuses actually to do so, is testimony to its legislative commitment to the past and to the defense of vested interests. Here’s one in the eye for the notion that America is a dynamic place!

I take little comfort that the Senate has been so wrong in the past so frequently on such vital and tumultuous topics: it has a long record of denying the march of history. We should expect very little from it now.

I leave it to Howard Dean to articulate the progressive view on the state of play. He says kill the bill. It’s not worth the effort. It could easily have been written – and probably was – by the insurance companies.

And for the contra view I give you a much disgusted Paul Krugman. He says hold your nose and try not to punch Lieberman on your way out.

I agree with Krugman, but my heart is with Dean. Pragmatism tells me to support the watered down and ineffective pablum that now masquerades as reform. Perhaps we can modify and improve it with time. I just hate the supercilious and triumphant look that Lieberman has as he single handedly hands billions over to his precious insurance lobby sponsors. If he keeps it up I will have to agree with Dean after all.

What a mess.

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Krugman on the 3rd Quarter

I pass along a link to Krugman’s blog because I think he makes a good point.

One of the more frustrating and amusing aspects of the entire stimulus debate was the apoplectic opposition that could muster nothing but the usual bromides about government spending. So it’s fun to see them all twittering about the success of the stimulus a few months later.

And that success is so beyond denial that no one I am aware of is arguing that the stimulus failed – I don’t watch Fox news so I am excluding their denial if it exists. Instead, and this is what Krugman tweaks, is the new mantra of the anti-government spending team is that while it may work it isn’t ‘real growth’.

Quite what real growth is in this context I am not sure.

As it became more and more evident that the stimulus is a success, its opponents shifted their target. Now they are vexed that once the ‘artificial’ growth subsides we will plunge back into recession.

Well yes.

I agree. Without a significant pick up in private demand we will, indeed, flop straight back. But that doesn’t mean the third quarter was somehow ‘unreal’. On the contrary the third quarter was very solid. Wonderful. Jobs were saved and money made. That inventories and stimulus were the primary drivers does not invalid the growth. It merely spurs us to press for an end to corporate retrenchment, and, if necessary, to spend more stimulus to provide another kick to the stubborn private sector. It is entirely specious, and dangerous if it means the future discussion about another stimulus is made more difficult, to argue that stimulus produced wealth is different or ‘artificial’.

Nonsense.

There are two points that need repeating:

  1. The stimulus is working, but has reached, or is reaching, the peak of its impact. By mid-2010 it will start to ebb. After that we will need either new stimulus or a revived self-sustaining recovery.
  2. There is absolutely no difference between growth created by private demand and that created by government demand. A job is a job. Wages are wages. As long as the job is secured and the wages are spent, the wealth generated is identical. The notion that, somehow, a job saved by the stimulus is tainted and is slightly ‘unreal’ is absurd.

But absurdity doesn’t stop the opposition. Nor is it exclusively the right wing press: there seems to be a whole mess of academic economists who are just as muddled as Fox news.

Not that I watch Fox.

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