The Macroeconomic Situation and How We Got Here - Grasping Reality with Both Hands
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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 August 19, 2010
The Macroeconomic Situation and How We Got Here Back in December 2008 I thought that prudent macroeconomic policy-policy geared to deal with a 20%percentile outcome, that could then be cut back if and when it turned out that we had good or even neutral look--involved (a) a $1+ trillion fiscal stimulus, (b) the Federal Reserve taking the size of its balance sheet from $2 trillion to $3 trillion, (c) the Federal Reserve adopting a 3% annual inflation target and taking active steps to hit that target, and (d) the Treasury using its TARP authority to take tail risk on another $1-$2 trillion of risky assets. We got a real number of $600 billion in effective fiscal stimulus. We really needed more. And we could still have more--(a) requires congressional approval, but (b), (c), and (d) do not and are still on the table. Ryan Avent tells us why we need them: Labour markets: The wrong direction: I MENTIONED I wouldn't cover initial jobless claim announcements until they stopped hovering around 450,000, as they'd done since late last year. Well, they're no longer in the 400,000 range.... Last week, initial claims touched 500,000.... Long-term inflation expectations dipped again from July to August. The Cleveland Fed notes: The Federal Reserve Bank of Cleveland reports that its latest estimate of 10year expected inflation is 1.68 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next http://delong.typepad.com/sdj/2010/08/the-macroeconomic-situation-and-how-we-got-here.html
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decade. With the employment picture looking grim and inflation forecast to miss the Fed's target for years, it would seem to be an appropriate time to begin taking aggressive steps to reverse the economy's course. Perhaps what went on was that the economic advisers gave Obama a 50%-percentile forecast rather than a 20th-percentile forecast, that Obama thinks himself a lucky person who always gets the breaks, and so pushed for policies appropriate to an 80thpercentile forecast? Brad DeLong on August 19, 2010 at 08:57 AM in Economics, Economics: Federal Reserve, Economics: Finance, Economics: Fiscal Policy, Economics: Macro, Obama Administration | Permalink Favorite
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Comments Neal said... Perhaps it is time to question the assumption that the economy of 2006 was our birthright and a natural part of our economic progress. The perception of this crisis as a temporary blip in the big scheme of things is a fundamental error. The idea that re-animation of the economy will be done through the application of a jump-start stimulus is hopelessly optimistic. Perhaps it is worth spending a few days considering the possibility that the apparent strength of the economy of 2006 was significantly beyond the normal and sustainable capability of the US population considering the debilitating effects of out-sourcing, globalization, flat incomes, inflation, devaluation, automation and computerization. These are not normal times. Reply August 19, 2010 at 09:25 AM bay of arizona said in reply to Neal... So your solution is what exactly? Have more people starve? Reply August 19, 2010 at 09:32 AM Davis X. Machina said... "So your solution is what exactly? Have more people starve?" Not to be rejected out of hand, if only for its bracing moral effect. Greece is rignt now the most moral place in Europe. We think we live in an economy, but we live, all of us, http://delong.typepad.com/sdj/2010/08/the-macroeconomic-situation-and-how-we-got-here.html
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even or especially central bankers, in a morality play. Reply August 19, 2010 at 09:36 AM Rob said... We know that Obama said $900b in his Health Care speech in order to avoid saying the T-word. No reason to expect that was something new and so we got too small a stimulus in order to win the day. Reply August 19, 2010 at 10:07 AM the idler said in reply to Davis X. Machina... The primitive materialist "morality" of the high bourgeois their feculent minions in the media and the government. Instead of enduring the "bracing" effects of starving to death, I modestly propose that we go Atkins and eat the deserving yet well-fattened rich. I would pass on Limbaugh, tho. Reply August 19, 2010 at 10:20 AM Davis X. Machina said... "I would pass on Limbaugh, tho." Wise move. Start with the triathletes and tennis players, though, as PCB's and other nasties are said to concentrate in fat. Reply August 19, 2010 at 10:24 AM Neal said... I am not proposing starvation--I believe in a strong safety net. People need help, people need jobs. The government should run deficits at this time to pay for the needs of their citizens. There is a long distance between the economy of 2006 and starvation. If the goal is to revive the economy of 2006, it is my contention that it is not possible to do that in a manner that does not involve some unsustainable finagling. My solution? Stop the wars in Iraq and Afghanistan. Cut the funding for the pentagon and Homeland Security. Reduce dependence on fossil fuels. Eliminate the financial drag on the economy that is the result of our current and revised health insurance system. Increase taxes on corporations, in particular, financial corporations. Increase funding of social security and medicare by upper income earners. Means test social security and medicare. Crack down on fraud by for-profit schools. You can still have a birthday party, it may just not include the ponies, clowns and magicians of the 2006 party. To pretend that we won't ever have to feel the effects of out-sourcing, globalization, flat incomes, inflation, devaluation, automation and computerization is delusional.
Reply August 19, 2010 at 10:45 AM Davis X. Machina said... "....and with the possibility of even MORE neoliberalism in the wake of this crisis, I don't hold much hope. " Worse than that. Neoliberalism may be the least-bad outcome. There's a near-majority in Congress for conflated teachings of the Manchester School and the James-Younger gang. Reply August 19, 2010 at 10:47 AM http://delong.typepad.com/sdj/2010/08/the-macroeconomic-situation-and-how-we-got-here.html
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rickstersherpa said... Well, his luck just ran out. Reply August 19, 2010 at 11:21 AM rickstersherpa said... And as a result we will get the Tea Bag Congress of 2011-13. I expect the impeachment hearings will start in fall of 2011. Reply August 19, 2010 at 11:23 AM ronald said... Neal said... Perhaps it is time to question the assumption that the economy of 2006 was our birthright and a natural part of our economic progress. Amen! but go back to the Dot.Com boom which created the idea that instant riches were available via fast equity trades,stock options and creating worthless companies for IPO's, after the bust then RE speculation became the dominate get rich scheme. Reply August 19, 2010 at 12:23 PM Michael Pettengill said in reply to Neal... "Perhaps it is worth spending a few days considering the possibility that the apparent strength of the economy of 2006 was significantly beyond the normal and sustainable capability of the US population considering the debilitating effects of out-sourcing, globalization, flat incomes, inflation, devaluation, automation and computerization." It seems to me you left out the prime problem: the Bush tax cuts which destroyed the growth of the 20th century. After all, the point of the tax cuts is that you deserve money for nothing and services without costs. The number one point conservatives make is wealth comes from pump and dump asset price inflation. A house is not valued for the shelter it provides, but for the price inflation you deserve. A corporation isn't valued for the profit on the goods and services it sells, but for the stock price inflation. If asset prices aren't going up within two years, then you can't benefit from the lower capital gains tax rates. Romney is saying that lowering the rates to zero will be a boost to the economy, and who knows, for 2-3 years it probably would be - you buy a house or stock and see the price go up and you think about the profit in 23 months that won't be taxed, so you buy some more, and soon everyone is buying thinking about selling at a profit with no taxes in two years. In two years, everyone starts dumping to get the tax free profits, and boom, there goes the bubble. Conservatives won lower capital gains tax rates in the 80s and soon after we had the asset bubbles and collapse. In 1997, they got the capital gains taxes reduced, finally reversing the Clinton hike in capital gains taxes, and two years later after such great pump and dump growth like pets.com, boom, there goes the stock market bubble. Then Bush cuts capital gains taxes even lower and gets more exemptions for home real estate, and then does everything possible to fund the pump and dump with big bubbles building, and then collapsing as those dumping to get the low tax profits out numbers the buyers. The 50s and 60s are seen as horrid times because stock price didn't inflate to make getting rich quick without working or innovation possible. In those years, you had to work to get rich, and that took years of sacrifice.
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Conservatives see wealth without work as a right that government should ensure by making pump and dump asset price inflation wealth creation sustainable. Reply August 19, 2010 at 02:15 PM Michael Pettengill said in reply to ronald... "Amen! but go back to the Dot.Com boom which created the idea that instant riches were available via fast equity trades,stock options and creating worthless companies for IPO's, after the bust then RE speculation became the dominate get rich scheme." That happened after the 1997 tax cuts for cutting taxes on pump and dump. Like the 1987 bubble popped after the Reagan tax cuts after the pump and dump tax cuts. Like the recent bubble popped after the Bush pump and dump tax cuts. You need to hold for two years to dump for low tax profits, and profits are multiplied by high leverage, so government policy that produces really low borrowing costs can extend the length beyond the normal 2-3 years of pump after a cut in two years capital gains tax cuts. Reply August 19, 2010 at 02:21 PM Omega Centauri said... Neal, "Perhaps it is time to question the assumption that the economy of 2006 was our birth-right and a natural part of our economic progress. ... sustainable capability of the US population considering the debilitating effects of outsourcing, globalization, flat incomes, inflation, devaluation, automation and computerization." And missing from that list are the Malthusian effects of resource depletion coupled with greater competition for the fewer resources the planet has to offer. Any attempts at economic growth through productivity gains have to contend with the freshening Malthusian headwinds. We of course have had Malthusian headwinds throughout the industrial era, but those gentle breezes are going to be replaced by gales. Reply August 19, 2010 at 03:07 PM DFC said... At the end, in my opinion, there must be a combination of fiscal stimulus, low interest rate, public investment, industrial policy, trade deficit reduction and tax havens closure as a way out of this nightmare a.- The defense budget must be greatly reduced, and expend this money in infrastructures that acts as “economic multipliers”, for example= why not to build some nuclear power plants to have less energy imports, and have an advantage in production costs associated to the energy costs?. Also the green energy should be help in the research and development phase to get a real competitive energy prices b.- The interest rates should be maintained low in the next years, as an incentive to the investment, and also to avoid the nightmare a high interest rate could pose to the people with variable interest mortgage that can give the keys of their houses to the banks in millions, and then wrecking havoc to the now damaged financial system c.- There must have an industrial policy, helping new factories that produce jobs, and installing a “fair” trade policy, more than a “free” trade policy. USA cannot compete with an authoritarian state that maintains slavery labor conditions to his workers and no environmental constrains to the factories. This way of life in those countries are not http://delong.typepad.com/sdj/2010/08/the-macroeconomic-situation-and-how-we-got-here.html
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sustainable in the long term, but before it collapses they could destroy all the industrial base of the western countries, now very depleted (except Germany of course). Also the technology and know-how provide by the public universities and research centers should be not allowed to be sent oversea to give an advantage to others countries that do not invest in this kind of things d.- The tax cut for the rich must finish, also prosecute much hardly the black economy and tax havens where a huge amount of money is lost. The tax havens are really an scandal in this time, and nobody seems interested in close them Those are some things to start to change the course Reply August 19, 2010 at 03:11 PM bakho said... Perhaps Obama doesn't know jack about economics? Most of the lawyer senators (and even some of the banker senators) are pretty clueless. Obama ran on a platform that did not include dealing with an economic crisis. Obama got elected because of the economic crisis and people expected Obama to deal with unemployment like and FDR Democrat. However, Obama is a post-New Deal Democrat and had no basis for dealing with the crisis. Surrounding himself with Republican advisors who are not in line with New Deal policies gives him additional bad advice. Unfortunately for the country, the Republicans are even worse. So Obama's bad advice and bad economic policy tendencies get pushed further in a bad direction. His labor secretary comes from a Teamsters background, not exactly known for New Deal cheerleading. I don't see that Obama is getting much if any push from the economic left. It will take a double dip or economic collapse to get Obama to reconsider his policies. The best we can hope for is to not do any worse than the Japanese lost decade. Reply August 19, 2010 at 03:20 PM Michael Pettengill said in reply to bakho... Actually, he did run on addressing the economic problem that was very apparent in 2006, 2004, and 2002. But to avoid being partisan, he didn't attack conservative Republicans as free lunch tooth fairy money for nothing tax cut increase entitlement fossil fuel company whores. The stimulus plan had "two blades", the first blade was stimulus spending for infrastructure and ensuring energy innovation is funded, and the second blade was caps on carbon. The best option is the Senate passing the House energy bill, but that isn't possible politically because conservatives have convinced millions of people that investment in sustainable energy innovation requires hiring millions of skilled workers, and when the government is paying unemployment benefits to millions of skilled workers, the US economy can not afford to hire millions of skilled workers because it is cheaper to pay them unemployment than pay them more money to actually work. But Obama does have the second blade in the Clean Air Act, which has been declared by the Supreme Court to require preventing harmful pollution no matter what the pollutant is, and this was in a case where States were seeking approval for their clean air policies that require Federal approval. A cap on green house gas emissions is being imposed by the only method conservatives will permit Obama: big government dictates to the private sector on the technology
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they use. Conservatives have blocked any market system because that would require conservatives to abandon their free lunch philosophy of corporate pillage and plunder of the natural commons and the public commons held in trust by the Federal government. Obama is a strong supporter of capitalism while conservatives are decapitalists who believe the way to the good life is living off capital without working. Why maintain bridges which requires paying higher use fees when you can ignore the engineers and tell them to do the minimum to keep the bridge in operation for another six months? One of the leading conservative presidential candidates is just such an advocate of decapitalism, vetoing higher gas taxes and increased spending on bridges, and then going to Washington for earmarks to clean up the failed bridge and build a replacement. We see the conservatives pursuing these same policies with extreme determination today pretty much everywhere. After all, no private sector initiative was started by conservatives to raise money from the trillion in tax-cuts-to-support-wiser-that-government-private-sector-spending to privately replace the worst of the red-listed bridges and levies. Clearly the conservatives believe all the old investment in infrastructure was and still is wasted spending and we would be better off without all those bridges and highways. And if conservatives won't replace bridge and highway investment, they certainly support no other investment. Reply August 19, 2010 at 04:03 PM Neal said... Omega Centauri and Michael Pettingill: Generally agreed. But the question remains--is it possible to revive the economic activity levels of 2006? If reviving 2006 is the measure of success for "stimulus" programs, I'm afraid we will be waiting for many years. Reply August 20, 2010 at 06:21 AM Herman Newticks said... Prof. Delong's option (d)--using TARP authority to take tail risk on another $1-$2 trillion of risky assets--has been, I believe, legislated off the table. Sec. 1302 of DoddFrank amended EESA to end TARP early by prohibiting the Treasury Secretary from initiating any new assistance after June 25, 2010. My understanding is that, with the exception of meeting outstanding obligations, TARP is over. Reply August 20, 2010 at 09:10 AM Comments on this post are closed.
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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 »
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