Matt Yglesias

New Lows in Key Demographic Subsets

Heather Boushey dives deeper than the headlines in the latest unemployment report and finds little but bad news:

The dismal labor market for workers is evident in nearly every series the BLS has from its household survey, which measures labor market weakness. Nearly a million workers have left the labor force over the past year; two-thirds of those unemployed are out of work because they lost their prior job, dwarfing new and returning labor market entrants; 9.3 million workers are employed part-time even though they would prefer a full-time jobs; and the share of the population with a job has fallen to 58.5 percent, lower than at any point since 1983; adult men’s employment rates fell to 66.7 percent, hitting another all-time low (going back to 1948); and teens are seeing their worst labor market ever—unemployment among 16- to 19-year-olds is a record 27.6 percent.

The high unemployment among teens is going to retard their acquisition of basic labor market skills and they’ll suffer lifelong consequences as a result. You sometimes hear it said that we can’t afford to burden the future with additional debt and “printing money.” The reality is that we can’t afford not to. Surveying the political situation, there’s probably more room for action on the Fed side of things than the Congress/White House side, but either way we need more expansionary policies.

Politics and Public Works

Paul Krugman wonders why we don’t just do direct public works like in the WPA:

You can make a pretty good case that just employing a lot of people directly would be a lot more cost-effective; the WPA and CCC cost surprisingly little given the number of people put to work. Think of it as the stimulus equivalent of getting the middlemen out of the student loan program.

So why aren’t we doing this? Politics, of course: government is the problem, not the solution, even when it is, you know, the solution, and cheaper than running things through the private sector.

Possibly the best way to think about this would be as an alternative to the repeated extensions of unemployment insurance payments. Instead of saying to people whose UI benefits are about to expire “just kidding, here’s an extension” we could say “you’ll keep getting checks but you need to show up at such-and-such a place and pick up trash in parks.” This would be somewhat more expensive than a UI extension—you’d need to pay for garbage bags and supervisors—but it would have less of a disemployment effect than UI extensions and we’d also get cleaner parks in the bargain. It’s a little bit perverse to be paying people to do nothing when there’s work that could use doing.

But a problem modern advanced economies have in advancing this sort of scheme is that the people already working in the public sector don’t want to be squeezed out by facing competition from quasi-unemployed engaged in public works schemes. In other words, the key stakeholders on various different sides of the equation prefer the inefficient choice of just cutting checks—it involves less debt for the “centrists,” less competition for public sector unions, and less arduous demands on the unemployed.

Unemployment Passes 10 Percent

More bad news on the labor market front:

Takeaways: One, people need to stop worrying about inflation. Two, the federal government should deploy more aid to state and local governments. Three, instead of easing up on the easing of monetary policy the Fed needs to ease even more, probably by taking some advice from Scott Sumner about ways this is possible.

Nelson: Bad Economy Means We Should Wreck Economy, Destroy Planet, Let Health Care Languish

I suspect we’re going to be hearing a lot more of this sort of thing in the weeks to come:

Democrat Ben Nelson, a Senator from Nebraska, said the slumping economy and rising joblessness will be factors as Congress considers climate change and health care legislation. They are also driving concerns about the budget deficit, which widened to a record $1.42 trillion in the fiscal year that ended on Sept. 30, he said.

“When the economy’s not strong there’s a lot of interest in controlling spending,” Nelson said.

This really makes no sense. If Nelson thinks the health care and climate legislation before congress would have a ruinous economic impact or something, then of course he shouldn’t vote for either bill. But that’s independent of the current state of the labor market. In reality, neither bill will have much of any impact on a 12-18 month time horizon since their provisions take time to phase-in. Both are aimed at long-term problems—the economic devastation wreaked by an out-of-control health care system and the environmental devastation wreaked by out-of-control greenhouse gas pollution. There’s never a perfect day to tackle a long-run problem, but delaying action doesn’t help the economy in the short-run and only makes it harder to tackle the problem.

On controlling spending, this is nuts. With the economy weak Nelson wants to do . . . what? Lay off teachers? Halt infrastructure projects? Make sure that kids whose parents are unemployed end up malnourished? The economy is suffering from a catastrophic collapse in overall spending with households, businesses, states, and municipalities all pulling back. If the federal government pulls back too we’re going to go down the drain.

More Inflation Needed

Alex Tabarrok noted this morning:

I wish Arnold Kling were correct that inflation is around the corner. We could use some inflation to get back on track. Nominal wages are simply not flexible enough to get the job done in short order and there is much to fear from populist backlash.

I wish Tabarrok could do more to convince his fellow free market types that this is correct. Because instead the political system seems to be dangerously obsessed with the idea that we need to start fighting inflation.

Another data point in the inflation-would-be-good direction comes from this recent Wall Street Journal article on how businesses have started hoarding cash. The idea of “risky investments” has come to be associated with financial firms gambling on financial assets, and now there’s a backlash against the very concept. But the reality is that for the economy to grow, businesses need to be making investments in their own capacity. And all such investments always involve some risk. One problem with these traumatic downturns is that everyone starts getting extremely risk-averse and hoards money out of fear that investments won’t pay off. That belief becomes, in turns, self-justifying since with so little investment happening there’s little growth and investments don’t pay off.

One way to alleviate the cycle, however, is to have some inflation. Inflation makes it very costly to sit on piles of cash, and makes it look better to go out and do something with it instead. A period of zero or falling inflation, by contrast, makes hoarding look like a pretty reasonable course of action.

What Does a Focus on Jobs Mean?

Alexander Bolton runs down the desire of center-right Democrats in the House and Senate to defer action on the progressive agenda:

In the run-up to the 2010 midterm elections, they don’t want to be forced to vote on climate change, immigration reform and gays in the military, which they say should be set aside so Congress can focus on jobs and the economy.

“It’s hard; the most important issue in front of us is the economy right now, and that’s where most of us really want to stay focused, the economy and jobs, that’s what our constituency is concerned about,” said Sen. Blanche Lincoln (D), who is facing a tough race next year in Arkansas.

I’m more sympathetic to this idea than is Steve Benen. Realistically, the viability of progressive governance is going to be determined by the state of the economy in 2010 and 2012. But where my sympathy vanishes is with the fact that the very same people who are so eager to throw Obama’s agenda overboard in order to focus on jobs and the economy don’t seem to have any actual ideas for boosting the labor market.

Instead you get Bob Etheridge: “Three things ought to be the top priority: jobs, jobs and jobs.”

And Blanche Lincoln:

“That’s an awful lot to bite off and chew for right now,” said Lincoln, who described herself as “not in a hurry” to tackle climate change, an issue she has some jurisdiction over as chairwoman of the Senate Agriculture Committee.

And Evan Bayh:

Sen. Evan Bayh (D), who is running for reelection in conservative-leaning Indiana, said “jobs should be our top priority and we shouldn’t do anything that detracts from that,” echoing a sentiment of many colleagues in similar positions.

And John Tanner:

“If it was up to me, I would figure out how to handle the war and fix the economy,” said Rep. John Tanner (Tenn.), a senior centrist Democrat who has found himself in the crosshairs of the National Republican Congressional Committee, which has recruited a promising GOP challenger.

This is pathetic. Setting aside elements of the progressive wish list in order to focus on improving the labor market is a reasonable idea. But this crowd doesn’t have any actual ideas for doing that. It seems to me that there’s good reason to think that resolving uncertainty about the future direction of American energy policy and immigration policy would, in fact, help spur economic growth. But I’d also be amendable to having congress take up additional stimulus legislation as a way to spur economic growth. Or maybe they could do tax reform. But as best one can tell Tanner & Bayh & Lincoln don’t want to do any of those things or anything else. It’s sad.

Obama, “Credibility,” and Fear of Failure

In the course of an exchange yesterday with Rich Yeselson about the deficit and the prospects of more stimulus, Marc Ambinder wrote:

Telling Democratic leaders and the White House to ignore Evan Bayh’s pleas for deficit reduction just isn’t going to work. In general, my sense is that the White House does not believe that Obama has the credibility to make the argument that government has to spend even more.

I’m not really sure why Obama would lack the credibility necessary. His job approval split is at 50-41 and has been basically stable at that level for a couple of months. That’s not the best job approval rating in the world, but it’s pretty good.

But does “credibility” really matter? Probably not. Insofar as the issue is that Evan Bayh doesn’t want to vote for more debt, then the question is whether he can be persuaded on the merits. I, personally, find Christina Romer and Larry Summers pretty persuasive. But as far as I know, they’re not actively trying to persuade anyone because the White House is afraid that if they try to persuade key legislators they might fail. That’s circular. There seems to be some feeling that the President has an obligation to act like he’s a Prime Minister and not bring proposals to the floor unless he’s sure they can pass, even though he doesn’t have a Prime Minister’s ability to coerce people into voting for his bills. But that’s not how our system works and there’s little reason to believe that trying and failing would somehow turn out much worse than simply refusing the try.

Markets Really Do Convey What Market Participants Think

Paul Krugman on an underdiscussed point:

And right now, deficit-phobia has quickly congealed into the latest CW. You can see it in editorials (not from the Times, I’m happy to say, but almost everywhere else), in what the talking heads say, even in supposedly objective news reporting. Not a day goes by without my reading some assertion that “markets are anxious/jittery/worried about the deficit” — an assertion based on no evidence whatsoever. (Long-term interest rates on US debt are near historic lows; CDS spreads show no concern about default.)

It’s really maddening that at the same time preposterous idea like strong forms of the Efficient Markets Hypothesis continue to be respectable that people seem unwilling to trust financial markets to accurately convey the beliefs of participants in financial markets. I would add to Krugman’s observations the fact that we have Cato’s Chris Edwards blaming anticipating inflation for the lack of private investment when the TIPS spread shows that markets aren’t anticipating inflation.

Right now economic conditions are bad. And the budget deficit is high. So I find it understandable if the man on the street chooses to conclude that the budget deficit is causing or contributing to the bad economic situation. But people writing about these matters ought to know better—interest rates are low and markets are assessing both default risk and inflation risk as low. So what about the deficit is supposed to be causing the problem? Meanwhile, to repeat myself the wise elected official is going to spend less time worrying about what voters think is to blame for the economic situation than he does on fixing the bad economic situation. Results matter more than folk theories.

Stimulus and the Future

Paul Krugman makes the important point that those who claim fiscal restraint amidst a depression is a favor to young people don’t know what they’re talking about:

Deficit hawks like to complain that today’s young people will end up having to pay higher taxes to service the debt we’re running up right now. But anyone who really cared about the prospects of young Americans would be pushing for much more job creation, since the burden of high unemployment falls disproportionately on young workers — and those who enter the work force in years of high unemployment suffer permanent career damage, never catching up with those who graduated in better times.

Even the claim that we’ll have to pay for stimulus spending now with higher taxes later is mostly wrong. Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue. Stimulus spending probably doesn’t pay for itself, but its true cost, even in a narrow fiscal sense, is only a fraction of the headline number.

The objective correlation of interests actually goes the other way around. A deflationary situation is good for retired people. They’re not impacted by the labor market situation, and flat-or-falling consumer prices make their revenue from Social Security or bonds go further. Young people, by contrast, would be much better off getting a job and paying taxes later than being unemployed out of school and suffering for it indefinitely.

Growth Growth Growth

Like Brad DeLong, I’m a bit puzzled by Bill Galston’s theory that adopting “a meaningful shift toward fiscal restraint” would be a good strategy for the midterms. People say they want this, but I can only assume that’s because people think such a shift would improve the economy. In fact, it wouldn’t. If Democrats implement policies that tank the economy, running around the country saying “well it polled well a year ago!” isn’t going to help them.

When it comes to macroeconomic management, you need to listen to your economists not your pollsters. Christina Romer’s analysis says we should be running bigger deficits, not smaller ones.

Did Barack Obama Cause The Collapse in Private Investment

One thing’s for sure, the depths of the current recession can be seen in the low level of private investment. And this chart from Chris Edwards certain shows that despite the stimulus-driven return of GDP growth, private investment remains depressed. We won’t have a real recovery until it comes back:

That said, his interpretation of this data is ridiculous:

Business investment continues to be in a deep recession. Companies are simply not building factories or buying new machines and equipment.

Why not? I suspect that many firms are scared to death of higher taxes, inflation, health care mandates, increased labor regulation, and other profit-killers coming down the road from Washington. That is speculation, but I haven’t heard a better explanation of the death of private investment in America.

Note that though the steepest cliff-diving happened in 2008 Q4 and 2009 Q1, the decline actually began way back in 2006, so it’s hard to say how fear of Barack Obama could have caused it. As for a better explanation, how about the problems in the financial system that were accumulating during this period and then reached a true crisis point in the fall of 2008? Surely we haven’t forgotten about that already, have we? And since the collapse, we’ve been facing a problem of low aggregate demand and deflationary expectations, both of which discourage investment, combined with massive overcapacity in real estate. The idea that anticipating inflation would cause an investment drought is both illogical and flies in the face of the fact that markets are not anticipating inflation.

I would note that not only did the current decline in private investment start fully in the Bush years, but that there was a similar declining private investment phase during 2001. Does Edwards see that as caused by Bush embracing high taxes and health care mandates? Isn’t it more plausible that that was the dot-com bubble bursting just as this is the real estate bubble bursting?

Manufacturing and the Bubble

Atrios passes on an interesting contention:

Last night at a roundtable for our nations’s elite, that is to say, “bloggers,” Richard Trumka, AFL-CIO President, implied, though did not say outright, that one consequence of the real estate bubble was that manufacturing and other types of businesses were finding it difficult to obtain credit at favorable terms. As I said, this seemed to be the gist of what he was saying though I’m not 100% sure that was his point. So I’m curious! How much was credit being funneled away from all other sectors in the economy?

I’m not sure that’s right. But what I think is pretty clear is that foreign purchase of over-valued real estate-related financial products was intimately tied to the high price of the dollar and the large size of the American trade deficit. All this meant less manufacturing. The alternative to the real estate boom was a cheaper dollar, less construction, fewer imports, more exports, less construction employment and more manufacturing employment.

That said, it is worth learning the lesson of this chart:

Despite what people sometimes say, until the recession hit it’s not actually the case that America was becoming a country where “we don’t make things.” More goods were being made abroad, but more goods were also being made here. Beyond the ups-and-downs of the trade cycle, manufacturing employment is being undermined by increasing productivity in the manufacturing sector. That’s good—more stuff to go around—but it means that the manufacturing share of employment will tend to decline over the long run no matter what happens with the price of the dollar.

The short term fluctuations around the trend are, however, really big. Imports, exports, and currency values matter a lot. A so-called “weak dollar” means manufacturing jobs and an economy brought back into balance.

GDP Growth Returns

Growth is back: “Gross domestic product expanded at an annual rate of 3.5 percent in the three months ending in September, a significant spike from a relatively shrunken base. The economy had contracted at annual rates of 0.7 percent and 6.4 percent in the first and second quarters of this year, respectively.”

3.5 percent is solid growth. But given the prolonged period of increasing unemployment, the growth of the population during that period, the ongoing growth of the population, and increases in productivity, you’d have to sustain growth at that level for quite a few quarters before the labor market returns to good health. Another way of looking at it is that given the high unemployment rate and the recent contraction in output we should be able to sustain a period of abnormally high “catch-up” growth without sparking any inflation at all.

The key question going forward is will policymakers continue with growth policies until unemployment falls and wages are growing, or will they give in to demands from coupon-clippers and goldbugs to put the breaks on?

Bubbles and Inequality

There’s something that’s pretty . . . suggestive about the apparent historical link between huge runups in the share of income controlled by the very wealthiest people and the emergence of asset price bubbles and the subsequent crises:

But what would explain the link? Steve Randy Waldman speculates that it’s all about the difference between loose monetary policy creating consumer price inflation and loose monetary creating asset price inflation:

Whether an economy generates asset price inflation or consumer price inflation depends on the details of to whom cash flows. In particular, cash flows to the relatively wealthy lead to asset price inflation, while cash-flows to the relatively poor lead to consumer price inflation.

This is because richer people have a lower marginal propensity to consume. As Kevin Drum puts it:

So: as income inequality goes up, more money flows to the well-off, who use it to buy financial assets. Conversely, less money flows to the poor and middle class, who respond by increasing their debt level. Both of these mechanisms produce a higher demand for financial assets and therefore promote asset inflation.

This seems reasonably plausible to me.

Who Cares What the Chamber of Commerce Thinks?

Traditionally, the U.S. Chamber of Commerce has had clout not just because it has a lot of money, but also because it seems like the collective voice of American business is something you should take seriously when considering issues of economic management. But as Daniel Gross observes, we tried it their way and the results sucked:

The Chamber of Commerce may not have ruled the country during the Bush years. But it had the next best thing: a Republican administration in the White House and Republican control of Congress for most of that period. [...] These policies, the Bush administration economic team promised us, would be superior to the ones that prevailed in the 1990s. And the proof would be in the numbers: jobs, market performance, income, wealth.

But it didn’t work out for anybody. By pretty much any measure, the years from 2001 to 2008 were lost ones. Job creation was extraordinarily weak by historical comparison. In September, on a seasonally adjusted basis there were 108.544 million private (nongovernment) payroll jobs, which is about the same number there were in June 1999. (To see the data, go here and then check “nonfarm private.”) 10 ten years, in other words, the private sector hasn’t created a single job. That’s pathetic, especially when you consider that the population grew 9 percent during those years, from 282 million in 2000 to 308 million today.

Or in chart form:

But though the Chamber-friendly Bush years were much worse economically than the Clinton years, the Bush years were pretty nice for the after tax income of well-compensated CEOs.

Graduating During a Recession Has Big, Long-Lasting Negative Consequences

Over the summer, there was a tendency for rising senior interns to ask me if I had any advice for someone set to be graduating into the face of a horrible recession. Unfortunately, the best advice I can think of is “hope the United States rapidly becomes more committed to equality and social justice” because the empirical evidence is that you’re screwed. Peter Orszag at the OMB Blog reminds us:

The chart below illustrates this effect: a one percentage point increase in the national unemployment rate is associated with a 6 to 7 percent loss in initial wages. The annual wage loss declines over time, but is still statistically significant 15 years later. Comparing the wages earned by the class of 1982 (a peak unemployment year) with the wages of the class of 1988 (a peak employment year) over the first 20 years of a career, the wage difference resulted in a difference of nearly $100,000 in cumulative earnings in net present value.

The long-term effect isn’t just a residual of low first-year wages: the author suggests that poor job match, lower prestige placements, and fewer opportunities for training and promotion also play a role. Other researchers have found similar effects: Oreopolous et al find persistent wage effects for Canadian college graduates; Bowlus and Liu find persistent wage effects for high school graduates moving directly into the work force, and other studies assess how the macroeconomy affects impact newly minted MBAs and economics PhDs.

Fifteen years later! If you’re graduating from college this spring, you’ll be sitting around at the age of thirty-five still suffering from the fact that Susan Collins, Olympia Snowe, Ben Nelson, and Kent Conrad decided to make the stimulus bill stingier in order to better bolster their credentials as preening centrists. When thinking about short-term inflation-unemployment tradeoffs, this sort of thing is crucial to keep in mind. Inflicting a high unemployment rate on the population has incredibly punitive and deleterious long-run consequences for young people.

In Semi-Defense of Obama’s Social Security Pandering

Recipients of Social Security get automatic cost of living adjustments pegged to the rate of inflation. That makes sense. If there’s a lot of inflation, a retired person might need a lot more money. If there’s a little inflation, then a retired person might need a little more money. And what if there’s no inflation? Well, the logic here is easy enough to follow—no inflation = no COLA. And right now we have no inflation, so the formula that determines the Social Security COLA indicates that there should be no COLA. Well, can’t have that, so instead the Obama administration is proposing a $13 billion one-time bonus payment to seniors.

As public policy this reeks of opportunism. That said, you should read the Center on Budget and Policy Priorities’ detailed case against a 2010 Social Security COLA. They make the point that if congress is determined to do a COLA anyway, it’s much more fiscally responsible to do it as a one-off payment than to make a permanent upward adjustment. If you accept that political reality wasn’t going to allow the no-COLA scenario to happen, having the administration get out in front of a one-time payment may help preempt congressional pressure for a worse idea.

What’s more, the saving grace of this is that if Obama said “we need $13 billion in additional stimulus” then every Republican and the bulk of moderate Democrats would say “no way.” But if Obama says “we need a $13 billion giveaway to Social Security recipients” then the vast majority of Republicans and moderate Democrats are going to say “you betcha.” And judged as economic stimulus, what the administration is proposing isn’t a totally ideal use of $13 billion but it works pretty well.

Christina Romer vs Political Reality

I’ve seen a fair amount of commentary on the part of Ryan Lizza’s profile of the Obama economic team where Christina Romer recommends a $1.2 trillion stimulus proposal and they wind up with just a bit more than half of that out of deference to the tender sensibilities of the United States Senate. I’ve seen less commentary on this other part, where basically the same thing happen on financial system policy:

Romer believed that the banks wouldn’t lend again until they were well capitalized. For banks in severe stress, she favored creating a government-backed “bad bank” to take the toxic assets off the banks’ books and then recapitalize them with government funds—essentially a version of nationalization, and what the Swedish government had done during that nation’s financial crisis of the early nineties. This argument was quickly rendered moot because of the cost. There wasn’t much money left in the TARP kitty, and any chance of getting more from Congress had ended with that morning’s news: A.I.G., which had received a hundred and seventy billion dollars in federal money, had handed out multimillion-dollar bonuses to the executives responsible for the company’s demise. Axelrod said, “The one thing that was absolutely clear was, we were not in a position to go back to Congress.”

Axelrod’s argument seems absolutely sound. And Rahm Emannuel’s argument on the stimulus that congress wouldn’t appropriate $1.2 trillion also seems absolutely sound. But of course Romer’s arguments weren’t arguments about feasible legislative strategies. Of all the senior members of the Obama administration, Romer has by far the least experience with practical legislative politics and also has the job that’s the least concerned with practical legislative politics. And I think that it was in a lot of ways a masterstroke to appoint a very policy-focused academic with no practical legislative experience to the CEA job. When people work too long in Washington, their notions of what would be good policy in principle tend to become unduly corrupted by their knowledge of what’s possible in practice.

But what Lizza is telling us is that on the two biggest pieces of macroeconomic management, the Obama administration is pursuing policies that its in-house expert on macroeconomic crisis management believed were far too timid. He’s also telling us that this was done primarily not because people disagreed with her analysis, but because they felt it wasn’t possible, legislatively speaking, to do what was objectively necessary. It’s a bit of a scary situation.

Tax-Side Stimulus

Looks like the powers that be are finally starting to try to frame additional economic stimulus measures, specifically a tax credit to incentivize new hiring:

One version of the approach, to be unveiled next week by the Economic Policy Institute, a labor-oriented research organization, would give employers a two-year tax credit if they increased the size of their work force or added significant hours of work (for example, making a part-time worker full time). Employers would receive a credit worth twice the first-year payroll tax for each new hire, amounting to several thousand dollars, depending on the new worker’s salary.

“It’s beautiful if it can be timed at a dire moment like this, when unemployment is way too high and appears to be going somewhat higher,” said Mr. Phelps, an economics professor at Columbia, lamenting that the president dropped it from the $787 billion stimulus plan approved in February. “But it’s a pity that this wasn’t done a year ago.”

This seems like an okay idea to me, but dollar-per-dollar I don’t see any real reason to think that this relatively complicated scheme is in any real way preferable to just temporarily reducing payroll taxes. Among other things, a new jobs tax credit is somewhat pointlessly asymmetrical between creating incentives to reduce layoffs and creating incentives to hire new people. It also seems to me that it would be desirable to do something that can be seen as offering help to almost all families, rather than to something so narrowly targeted.

It also strikes me that some old-fashioned public works schemes could do some good here. There are cracked sidewalks in the United States of America and roads with potholes in them. There are also unemployed people who until recently were involved in the building trades. Is it really so impossible to hire those people to fix the potholes and the cracked sidewalks? This seems like common sense to me.

Bank Nationalization

I think Felix Salmon and Tim Fernholz are both unduly impressed by the arguments presented in Ryan Lizza’s Larry Summers profile as to why the administration was right to reject bank nationalization as a financial crisis-management effort. Here’s what Lizza reconstructs:

The memo was divided into four sections. First, Summers explained that there was no legal authority to take over large bank-holding companies like Bank of America and Citigroup. Next, he pointed out that full nationalization of a financial institution might trigger systemic shocks, as investors retreated from other banks, creating exactly the kind of panic that nationalization was intended to prevent. (As [Obama economic official Gene] Sperling often argued, “You might come out and say, ‘I’m gonna take over Bank of America and Wells Fargo, but everybody else is safe!’ Maybe they believe you. And maybe they don’t. But if you get this wrong the Dow’s at thirty-five hundred! You’re the worst economic manager in the history of the United States!”)

Furthermore, Summers said, there was a medium-term risk that nationalized banks would lose value, in the same way that the act of foreclosure decreases the value of a home. Summers pointed to the example of Sweden, which was regularly cited by economists who favored nationalization. But Summers noted that Sweden didn’t nationalize for two and a half years, by which time the situation had become so severe—interest rates had reached a hundred per cent—that there were no other options. In addition, Nordbanken, the largest bank nationalized in Sweden, was already eighty per cent government-owned. Summers concluded by emphasizing that nationalization was a strategy that governments turn to only after it is very clear that nothing else can work.

The results of the stress tests showed that the banks were not in as dire shape as commonly believed. Most of the nineteen banks were able raise money privately. “It worked,” the Treasury official said. “People had money to put into banks. The nationalization crowd would have had the government putting all that money in.”

The key thing here is that the arguments as being relayed to Lizza seem not to know that the proposal to apply the Swedish model to the banking sector was a proposal to nationalize insolvent banks and explicitly guarantee the debts of the solvent ones. This is precisely designed to deal with the “nationalization sets off larger panic” worry. The fact that the stress tests showed that many banks were not in such bad shape is also irrelevant. Nobody ever proposed that we nationalize banks that weren’t in trouble. The proposal was to guarantee the obligations of banks that weren’t in trouble, a low-cost move since these are the banks that aren’t in trouble. The Obama administration wound up implicitly doing that anyway, which is precisely why most of the banks were able to raise money privately. The exact same thing would have played out with the exact same banks if the troubled banks had been nationalized.

The last resort argument seems frivolous to me. Yes, Sweden did this as a last resort. And it worked. Which is why it was being suggested that we not wait through a grinding two-and-half-year financial crisis before employing the remedy. I don’t think Summers took from the 1929-1940 experience that the correct thing to do is wait through 11 years of Depression before stimulating aggregate demand.

The legal authority question, by contrast, is obviously a real concern. If there’s no legal way to do something, then you can’t do it. But by the same token, if lack of explicit legal authority was really the objection to the policy, then you’d be writing a memo about (a) options to get the authority, (b) options to do it without explicit authority, and (c) alternatives to nationalization. Instead, we got a memo in which lack of explicit legal authority was thrown in as part of the kitchen sink.

To me the whole thing looks political. If you’re going to do something that’ll get you tagged as having undertaken an unpopular “bank bailout” then you might as well do it in a way that makes the bankers happy. Nationalization sounds at first glance like a sunny populist solution, but it would have still been hugely expensive and still characterized by many as a “bailout” (and, indeed, the whole point is in fact to bail out the creditors of major financial institutions) and also gotten Obama tagged as a Communist. You can’t take the politics out of politics, so on one level I say so be it. But on another level you still do have to worry if the handling of this crisis has paved the foundation for the next crisis.

Accepting the Loss

The more we learn about how we wound up with a too-small stimulus the more I wonder about the slightly odd aversion of American presidents to accepting legislative defeats. After all, in our system of government it’s just a fact that you can only enact the legislation that congress is prepared to enact. Given that we don’t expect presidents to have views that are identical to those of the median legislator, and especially given the rise of the de facto supermajority rule in the Senate, it should be expected that the policy preferences of the White House will substantially diverge from those of the pivotal members of congress.

So would it be so terrible for the President to just say, “I’m glad congress passed this bill and I’m signing it because I think it would help the economy, but the considered judgment of the Council on Economic Advisers and the rest of the staff is that we could use hundreds of billions of dollars of stimulus over and above what Ben Nelson and Susan Collins were prepared to vote for?” Why is it felt necessary for the president to pretend to believe that what congress will pass is the same as what the country needs? It seems to me to create a weird confusion about who’s responsible for what. We’ve got Paul Krugman blogging about “Obama’s Anzio” instead of “Kent Conrad’s Anzio” or whatever. It’s just not the case that the White House gets to make domestic policy unilaterally.

Labor Market is Terrible

Unemployment is up, yes, but there’s more bad news where that came from:

At this point there’s obviously not going to be another stimulus bill this year, but as appropriations bills get written and passed they should be done so as to try to have stimulative effect.

Fiscal Policy Calvinball

Tyler Cowen endorses this from Arnold Kling:

From the Recalculation perspective, the economy needs to shift resources out of some sectors and into others. The government is either (a) permanently shifting resources from the private sector to government or (b) temporarily shifting resources from the private sector to government. If it is doing (a), then we are not facing mere temporary deficits but permanent increases in government spending, and eventually we will have to figure out how to pay for them. If it is doing (b), then the Recalculation problem isn’t really being solved. Instead, at best the government is redistributing the pain from the reallocation process out of the present and into the future. People who otherwise would be unemployed can find temporary work on government projects, but when those projects expire they will go back to being unemployed. This is what makes the fiscal exit strategy so problematic.

Like a lot of criticism of the Obama administration’s fiscal policies, I think this would benefit from some closer engagement with the actual provisions of the American Reinvestment and Recovery Act. I don’t, for example, really understand how this critique applies to either the tax cut provisions or the state fiscal aid provisions of ARRA. These are, however, by far the largest elements of the bill:

Of the remainder, a very large portion consists of temporary expansions of social safety net programs to help take care of the most vulnerable. Again, the economic logic of this seems to me to withstand Cowen’s complaints—there’s no evidence that needed economic restructuring involves getting people who’ve lost their jobs to go without food or basic health care. And even if it didn’t, the humanitarian logic of an expanded safety net during a period of high unemployment is unimpeachable.

What we’re left with then, it seems to me, is a relatively narrow disagreement about a minority of ARRA funds. It’s useful to have an argument about that stuff. The “race to the top” education money, for example, strikes me as sound public policy that has relatively little to do with economic stimulus and was just smuggled into the bill because the White House likes the idea. And on down the list. But the policy as a whole is what it is.

Meanwhile Cowen repeats his earlier complaints that “current GDP measures and projections aren’t picking up how well the stimulus is or isn’t working.” There are, of course, longstanding criticisms of GDP as a measurement of economic success or failure. And those criticisms have a lot of truth to them. But I don’t understand why it would make sense to suddenly drop GDP as a metric for this specific purpose—especially in the absence of any viable alternative proposal. The shortcomings of GDP are well-known, as are the arguments for sticking with it anyway. Nothing I can see about the financial crisis has suddenly made it a more inadequate measurement. Meanwhile, as Ryan Avent says this whole thing seems to involve inventing a brand new macro theory to specifically deal with the current recession.

People Don’t Know How They’re Being Helped

This chart from a new EPI survey does a lot to explain the public’s sour political mood:

The thing of it is that the public’s belief that the federal government hasn’t been stepping in to help them out is simply mistaken. For example, every single employed person in the United States of America received a tax cut as part of the American Recovery and Reinvestment Act. But as I’ve noted previously the eager beavers in the White House got their hands on some behavioral economics research which indicated that the tax cut would be a more effective stimulus measure if it was implemented in a way deliberately designed to obscure the fact that it was happening from people. And mission accomplished!

Another major invisible way ARRA is helping ordinary people is through aid to state budgets. Virtually every state in the USA has cut spending and/or raised taxes to deal with budget holes. But they’ve done less of this than they otherwise would have. But if you like the idea of police on the streets and teachers in the classroom, then ARRA has stepped in to help you out. But, again, people probably don’t realize this.

But not all of this can be chalked up to program design. Just 36 percent of the public thinks the government has done much of anything for those who’ve lost their jobs. In fact, ARRA extended eligibility for unemployment insurance and heavily subsidized COBRA purchasing, both of which are boons to anyone who’s lost a job. But there’s been much less focus on this stuff in the media than on bank bailouts and mythical death panels, so apparently most people don’t realize it’s even happening.

0.7!

Woo economy’s not as bad as we thought:

The Commerce Department reported that the gross domestic product — a billboard number that tallies the country’s economic output — shrank by an annual rate of 0.7 percent from April through June, a revision from earlier estimates of a 1 percent contraction. [...] The numbers for the second quarter appeared to get a lift from the government’s $787 billion stimulus package. Federal, state and local governments spent more, and business spending on equipment and software was better than first reported.

And fortunately the stimulus funds aren’t drying up imminently. Still, there are a lot of real questions about how quickly growth will translate into labor market improvements and thus improving living standards for most people.