Page 1

We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." - Grasping Reality with Both Hands

Dashboard

Blog Stats

10/24/10 2:20 PM

Edit Post

Grasping Reality with Both Hands The Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, RealityBased, and Even-Handed Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.

Economics 210a Weblog Archives DeLong Hot on Google DeLong Hot on Google Blogsearch July 06, 2010

We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." Keynes & Co. have lost the stimulus argument - The Week: My friends Kevin O'Rourke and Barry Eichengreen in the office next door were chief among those economists warning at the start of 2009 that the shock to the world economy inflicted by the financial crisis was greater than the shock that had caused the Great Depression. They were right. The good news is we have avoided another Great Depression. But it seems ill-advised for Barack Obama to stand up on a Friday morning in early July and say that the economy is "headed in the right direction" (even if, as he said, "we are not headed there fast enough") and to highlight "the sixth straight month of job growth in the private sector." The employment-to-population ratio has been flat since November. Over the past six months--since the downturn ended--the U.S. economy has not been recovering from its near-depression, and not been putting a greater and greater portion of its potential labor force to work. Rather, it has been bumping along the bottom. There is a big difference between the economy getting "better" and the economy "no longer getting worse rapidly." The president’s calm rhetorical pose is not helpful to policymaking. As Ezra Klein writes, "the White House's broad approach... is to emphasize how much improvement there is, rather than how much needs to be done. That makes political sense." But it also "makes it difficult for the White House to run around with its hair on fire about how bad things are and how necessary it is that Congress doesn't abandon the labor market in order to pretend to care about the deficit." Premature declarations of victory are especially worrisome because the Congress is only one of the many centers of power in the global economy that have decided too http://delong.typepad.com/sdj/2010/07/we-are-live-at-the-week-a-keynesian-voice-crying-in-the-wilderness-saying.html

Page 1 of 10


We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." - Grasping Reality with Both Hands

10/24/10 2:20 PM

much has already been done to boost global demand, and that the next policy moves must serve the opposite goals of austerity, retrenchment, and contraction. From the German and British governments to the U.S. Federal Reserve, and from all 50 U.S. states to the European Central Bank, economists seeking additional stimulus have lost the argument. Those of us who believe that double-digit unemployment, accompanied by less-than-single-digit inflation and record lows for nominal long-term government bond rates, signals a crisis of confidence not in the government but in the banking system and the private sector find that we have no policy traction. Our arguments lack even rhetorical effect—filtered, as they are, through a journalistic prism that cannot distinguish the financial travails of Greece from those of the United States. Similarly, in the Academy, a good many economists don't seem to be up to speed on the analytical advances made by Jean-Baptiste Say and John Stuart Mill in their 1829 analyses of the 1825-1826 recession in Britain, let alone the advances made by economists like Walter Bagehot, Knut Wicksell, Irving Fisher, Richard Kahn, Milton Friedman, John Hicks, Hyman Minsky, James Tobin, Charles Kindleberger, and John Maynard Keynes. Intellectually disarmed, we face U.S. payroll employment declining by 125,000 in June, forecasts predicting no decline in the unemployment rate for the rest of the year, and bond-market government yields and stock market equity prices that predict a more dire future than they appeared to presage last fall when the bleeding stopped. The situation is grim. So why isn't everybody running around with their hair on fire? Why aren't there irresistible political demands for more government action to steer us toward a better economic recovery --or at least to hedge against a double-dip in what seems likely to be called not a “recession” but a “depression” when historians get around to writing about it? I have my theories: 1. widening wealth inequality and an upgrading of the class position of reporters and pundits, who are no longer ink-stained wretches immersed in mainstream America; 2. the collapse of union power, which ensures that nobody who sees real workers on a daily basis sits at the table when the deals are made; 3. increasing job security for the powerful in Washington, aided by the growth of the lobbying apparatus that envelops the mixed-economy government; 4. the collapse of professional integrity among the Washington press corps, which no longer dares to call balls and strikes as it sees them, preferring to say only that the Democrats say it was a strike and the Republicans say it was a ball, and that opinions on the shape of the earth differ. I don't know which theories are right. But the situation does leave me feeling like one crying in the wilderness. (Say not "we are children of the market!”) I cry out to boost aggregate demand -- by banking policy, by monetary policy, by fiscal policy, by spending increases, by tax cuts, by anything -- I don't care what! (Well, I do, but not by much) More constructive, however, might be to go back to late 2008, when the incipient Obama Administration thought that it had put in place policies that would, by today, have reduced the unemployment rate safely below 7.5 percent. It’s time to review some of the ideas then being batted around about what to do if recovery reversed or stalled. Go back to December 16, 2008, when Ryan Lizza reported in The New Yorker on the http://delong.typepad.com/sdj/2010/07/we-are-live-at-the-week-a-keynesian-voice-crying-in-the-wilderness-saying.html

Page 2 of 10


We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." - Grasping Reality with Both Hands

10/24/10 2:20 PM

Obama Administration’s thinking. Council of Economic Advisors Chair-Designate Christina Romer believed the following: that the appropriate total value for the American Recovery and Reinvestment Act fiscal stimulus was something more than $1.2 trillion, but that to ask for a stimulus that large would risk gridlock in the Senate. (The result was an ARRA of about $600 billion of real stimulus tax cuts and spending increases alongside ineffective ornaments dear to the hearts of legislators.) Or go back earlier--to August of 2008, before the Lehman Brothers and the AIG bankruptcies, when Obama adviser Lawrence Summers was writing that "the remaining scope for monetary policy to stimulate the U.S. economy is surely very limited" and that "output and employment are likely to remain below their potential levels for several years in the best of circumstances.� The output gap even then was some $300 billion per year. To address it, some called for a stimulus program of roughly $500 billion. Yet the problem ultimately turned out to be four to five times larger than what economists were forecasting at the time Summers wrote. When Congress passed an ARRA on a scale that struck many of us who had done the numbers as worrisomely small, we told ourselves six things to reassure ourselves: 1. If unemployment rises faster and further than in the forecast--or even as fast as in the forecast--there will always be scope for another ARRA-like tranche of tax cuts and spending increases. 2. If high unemployment persists longer than in the forecast--or even as long as in the forecast--there will always be scope to extend ARRA for additional years and add additional fiscal stimulus. 3. The Federal Reserve has already increased the monetary base to a previously unimaginable extent and has doubled its balance sheet to $2 trillion. Even though there is good reason to think that further increases in the money stock alone will have little effect on the economy--that conventional monetary policy is tapped out-the Federal Reserve could always further increase its balance sheet to $3 trillion or $4 trillion. Such quantitative easing would be highly likely to eliminate fears of possible deflation or other lower tail risks and act as a powerful spur to investment. Such an enormous expansion of the balance sheet would produce a qualitative improvement in the assets held by the private sector, which would greatly reduce risk spreads and make funding available to American companies on much more attractive terms. 4. Even if the Federal Reserve does not engage in further quantitative easing, the Treasury could do so by leveraging its TARP authority to transform $2 trillion or so of risky assets that the private sector now holds into $2 trillion of assets backed by the faith and credit of the U.S. government. Such a transformation would produce a qualitative change in private assets, greatly reducing risk spreads and making funding available to American companies on much more attractive terms. 5. If things get bad enough, the Treasury can always force banks to lend to companies--either via temporary nationalization, or through using its TARP authority to capitalize new government-sponsored enterprises like the Depressionera Reconstruction Finance Corporation. 6. If all else fails, the Federal Reserve can always drop money out of helicopters. The reassuring thought was that the ARRA was just one -- and not necessarily the biggest -- of stimulative measures available beyond the standard Federal Reserve http://delong.typepad.com/sdj/2010/07/we-are-live-at-the-week-a-keynesian-voice-crying-in-the-wilderness-saying.html

Page 3 of 10


We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." - Grasping Reality with Both Hands

10/24/10 2:20 PM

framework of using open market operations to reduce short-term Treasury rates. In fact, a Rooseveltian amplitude of acronyms -- TARP, PPIP, MMIFL, TALF, CPLF, TAC, HAMP – are at policy makers’ disposal. But Congress is balking. Republican legislators from states with double-digit unemployment have put party above country. Blue Dog Democrats, who think that they can marginally improve their chance of gaining more terms in office if they publicly worry about the deficit to the exclusion of all else, have put self above country and party. And, significantly, the Obama Administration has never offered a grand bargain for tax increases and entitlement caps in the future in return for more spending now to restore full employment. Additional stimulus – as conceived in (1) and (2) above appear no longer politically feasible. (Dropping money out of helicopters (6), which would surely require Congressional authorization at some level, is likewise politically difficult.) But (3), (4), and (5) are all, in some form, still on the table. Under what circumstances should we break the glass and resort to them? And what political shots should we be making right now to set up the pool table in order to accomplish (1), (2), or (6) via Congressional authorization if necessary in the coming lame-duck session. So far, it seems the Obama administration has, at every stage, made honest forecasts within the bounds of consensus opinion. But it has been making policies appropriate to the 80th percentile outcome--to the situation in which we have quite good luck. It should have been making policies appropriate to the 20th percentile outcome—in effect, buying insurance against the possibility of bad luck. And we have had bad luck. So what is the administration’s Plan B? And who is drawing it up? As I await answers, I’ll dine on a simple meal of locusts and wild honey, and wash my spare goatskin. Brad DeLong on July 06, 2010 at 11:17 AM in Economics, Economics: Federal Reserve, Economics: Finance, Economics: Fiscal Policy, Economics: Macro, Obama Administration | Permalink Favorite

Reblog (0) | del.icio.us | Tweet This!

| Digg This | Save to

TrackBack TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f0800388340134853e1346970c Listed below are links to weblogs that reference We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying...":

Comments Neal said... The alphabet soup of programs was mainly aimed at restoring the financial sector

http://delong.typepad.com/sdj/2010/07/we-are-live-at-the-week-a-keynesian-voice-crying-in-the-wilderness-saying.html

Page 4 of 10


We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." - Grasping Reality with Both Hands

10/24/10 2:20 PM

without effectively addressing the fact that the consumer is tapped out, living beyond their means and working in sectors that were entirely dependent upon unrealistic credit. Short term palliative measures are required, but these will be very different than the fundamental restructuring of the economy that is required. These are (1) and (2), palliative only--- unless some clear, rational line from bad economy to stable, good economy can be plausibly drawn. Buying more assets,(3)and (4), is just more money in the pockets of those who have already received the most and who are the most equivocal about the need of vibrant society in the US. Forced lending to businesses (5) is insanity with the current levels of under-utilization. I personally want helicopters now, but I would then like to be on the first flight out, please. Reply July 06, 2010 at 11:41 AM John Chandley said... You left out the "deficit commission." If the recession/depression continues on its present bottom dwelling into December, then decent policy would demand they do the opposite of what the commission is likely to propose for the medium term. I thought back in early 2009 that it was a mistake to limit spending only to "shovel ready" projects, because that assumed we'd be moving up now -- instead we're bottom dwelling or worse. So we should have been lining up and funding longer-term investments from the beginning, and those would be looking wise today, and will be more so in December. Reply July 06, 2010 at 11:45 AM Min said... Brad DeLong: "I cry out to boost aggregate demand -- by banking policy, by monetary policy, by fiscal policy, by spending increases, by tax cuts, by anything -- I don't care what!" Keep on keeping on, bro! :) As for what is politically possible, don't current polls indicate that people are more concerned with cutting the deficit than with more economic stimulus, but that they are more concerned with doing something about unemployment than with cutting the deficit? I. e., they would approve of legislation specifically aimed at unemployment, even if it increased the deficit? If so, then shouldn't the Dems push an unemployment bill and, if the Reps filibuster, make the Reps own unemployment in the next election? Reply July 06, 2010 at 12:34 PM dd said... "Moreover, the Demand Siders write as if everybody who disagrees with them is immoral or a moron." Reply July 06, 2010 at 01:38 PM Robert Waldmann said... Can I be more of an Obamabot that you ? Seems so. You start by criticizing Obama. This is an extreme case of considering the President responsible for everything, including, in this case, the fact that all other power centers resist his call for further stimulus. His views are much closer to yours than that of any head of state or government of a major economic power and are much closer to yours than the median member of the House, the Senate or the FOMC. So why start by criticizing him ? I http://delong.typepad.com/sdj/2010/07/we-are-live-at-the-week-a-keynesian-voice-crying-in-the-wilderness-saying.html

Page 5 of 10


We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." - Grasping Reality with Both Hands

10/24/10 2:20 PM

think that the reason is that a reference to a Presidential speach is assumed to be required to demonstrate that the issue is important and topical. Uh come one, people out in real America know they are suffering. That is, and too alarm myself further, I am accusing you of adopting the standard verbal ticks of the MSM. I am not convinced by your quantitative statements about quantitative easing. You say that an additional $ 2 trillion will greatly reduce risk premia. That sounds very odd to me. It doesn't sound like a lot of money. Uh let me rephrase that. Feared assets outstanding at current prices are worth a vastly vaster and hugely huger amount of money. Cagnon says 5 trillion and he doesn't say "greatly." Oh and you say people like you thought there could be a second or extended ARRA. People like you include Krugman who confidently predicted that this would be impossible. You left off a lot of culprits. The US public wants something done about the economy, but thinks it would be helped by a reduction of the deficit. Keynes convinced a tiny fraction of people. This is probably more true in other developed countries.

Reply July 06, 2010 at 06:57 PM TomInPortland said... How about a massive public works spending program? I am thinking about 750 billion for projects already identified by the American Society of Civil Engineers as being necessary to prevent infrastructure collapse. How is it possible that doing such a thing when borrowing is so cheap is not politically tenable? Many of these projects would be labor intensive which would increase government tax revenues and spur consumer spending which is the only thing that will save private businesses. Reply July 06, 2010 at 07:07 PM beowulf said... Dropping money out of helicopters (6), which would surely require Congressional authorization at some level, is likewise politically difficult. The President and the Secretary have already been delegated all the power they need to declare partial or total tax holidays and to fund deficit spending without adding a dollar to the public debt. Its simply a failure of Administration will, not a lack of legal authority. Anyway, here's your helicopter Brad-One-- The President declares entire country a disaster area. Thanks for the assist BP! (i) “federally declared disaster” means any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. (ii) “disaster area” means the area so determined to warrant such assistance. 26 USC 1263(h)(3)(C) Two - The Secretary of Treasury determines that every taxpayer is affected by this federally declared disaster. He then may disregard "any tax liability" he wishes for up to one year (e.g. administratively enact Warren Mosler's payroll tax holiday or Alan Grayson's $35,000 standard deduction, etc). He can rinse and repeat next year if necessary. In the case of a taxpayer determined by the Secretary to be affected by a federally declared disaster... the Secretary may specify a period of up to 1 year that may be disregarded in determining, under the internal revenue laws, in respect of any tax liability of such taxpayer... 26 USC 7580A(a) http://delong.typepad.com/sdj/2010/07/we-are-live-at-the-week-a-keynesian-voice-crying-in-the-wilderness-saying.html

Page 6 of 10


We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." - Grasping Reality with Both Hands

10/24/10 2:20 PM

Three - And how to pay for it (without tripping over the statutory debt limit)-Seigniorage. Consider this, all coins produced by the US Mint are legal tender and are purchased by the Fed at face value. A $1 dollar coin costs only 12 cents to mint, the 88 cents remaining after expenses is not debt. It goes to the US Mint Enterprise Fund, which the Secretary can sweep into miscellaneous receipts at any time. So in a daily act of sacrilege, the US Mint dares to make money without first selling bonds (was it Cain who tried that, or Judas, I forget), a reminder that the government can create sovereign credit as easily as it can sovereign debt. As it happens, Congress has already delegated its constitutional seigniorage power rather generously. The Secretary can create money in any denomination, in any quantity, at any time out of thin air (well actually out of platinum, but same difference). My only advice to the Secretary would be to to remember that while a single $1 trillion coin is easier to handle than a 1000 $1 billion pieces, it'll be a bitch to make change for. (k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time. 31 USC 5112(k) Reply July 06, 2010 at 09:44 PM beowulf said in reply to beowulf... I apologize for screwing up the html tags. First two lines are quoting Brad. The three lines before each USC citation are from the US Code. Reply July 06, 2010 at 10:05 PM beowulf said in reply to beowulf... To correct a cite, 26 USC § 7508A. "Authority to postpone certain deadlines by reason of Presidentially declared disaster or terroristic or military actions". The current year tax liability doesn't go away, it can simply be pushed out year to year till Congress fixes it (which means, per Medicare Part B fee reductions, never). Reply July 07, 2010 at 12:27 AM lambert strether said... Permanently higher unemployment is not a bug. It's a feature. The elite want a single worldwide wage, and the baseline is, say, India. And so what if a lot of peasants die? Reply July 07, 2010 at 08:41 AM homunq said... Helicopter drop FTW. Imagine Republican heads exploding as Obama provided a massive short-term stimulus through tax cuts. He could send a letter to all American workers detailing how much extra they should be seeing in their paychecks due to the payroll tax holiday. And government workers getting paid with actual $1000 platinum "new dimes" - what's not to like? (Same guy's picture as the "old dimes", natch.) (The "dimes" would need a nanoscale diffraction-grating laser-verified hologram on some concave anti-scratch surface. Even cooler!) OK, it's a fantasy. But the Obama reality is too depressing, a little fantasy is healthy. Reply July 07, 2010 at 01:46 PM beowulf said in reply to homunq... You wouldn't actually have to be paid in coins of course. Geithner could just walk off into any bank and drop off a shiny, new $1 trillion coin (if you put Reagan on the front, "a Gipper") and a deposit slip. If being Tsy's "fiscal agent" means anything, it means http://delong.typepad.com/sdj/2010/07/we-are-live-at-the-week-a-keynesian-voice-crying-in-the-wilderness-saying.html

Page 7 of 10


We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." - Grasping Reality with Both Hands

10/24/10 2:20 PM

the Federal Reserve will accept for deposit any legal tender Tsy directs it to. Of course, direct Tsy issuance of "United States currency notes" (i.e. Greenbacks) would also work but Congress would have to amend 31 USC 5115 to remove the current limitations. Besides, although exempt from the statutory debt limit (no debt ceiling votes then), Greenbacks are booked as public debt, which in our day and age appears to be as praiseworthy as syphilis. In contrast, seigniorage revenue is booked to miscellaneous receipts, so its (to use Henry CK Liu's wonderful phrase) sovereign credit, not sovereign debt. You could keep using seigniorage revenue even under a Balanced Budget Amendment. Yes when we head towards full employment there'll be inflationary pressure, we'll have to set up Bill Vickrey's gross markups market before then. But its like Thomas Edison said (and every instinct tells me Tesla would agree), "If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good". http://www.prosperityuk.com/prosperity/articles/edison.html Reply July 08, 2010 at 05:43 AM Comments on this post are closed.

First, Kill all the Pensions

economics DeLong

Me:

The Atlantic (blog) - Oct 19, 2010 She may or may not have been the first major economics blogger, depending on whether we are allowed to throw outlying variables such as Brad Delong out of ... Related Articles » « Previous Next »

Economists: Juicebox Paul Mafia: Krugman Ezra Klein Mark Thoma Matthew Cowen and Yglesias Tabarrok Spencer Chinn and Ackerman Hamilton Dana Brad Setser Goldstein Dan Froomkin

Moral Philosophers: Hilzoy and Friends Crooked Timber of Humanity Mark Kleiman and Friends Eric Rauchway and Friends John Holbo and Friends

http://delong.typepad.com/sdj/2010/07/we-are-live-at-the-week-a-keynesian-voice-crying-in-the-wilderness-saying.html

Page 8 of 10


We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." - Grasping Reality with Both Hands

http://delong.typepad.com/sdj/2010/07/we-are-live-at-the-week-a-keynesian-voice-crying-in-the-wilderness-saying.html

10/24/10 2:20 PM

Page 9 of 10


We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..." - Grasping Reality with Both Hands

http://delong.typepad.com/sdj/2010/07/we-are-live-at-the-week-a-keynesian-voice-crying-in-the-wilderness-saying.html

10/24/10 2:20 PM

Page 10 of 10

 

Economics 210a Weblog Archives DeLong Hot on Google DeLong Hot on Google Blogsearch July 06, 2010 The Semi-Daily Journal of Economist J. Bra...