Category: Equitablog

The Great Depression and the Great Recession in the North Atlantic

2015 McKenna Lecture :: Claremont-McKenna College

Back in 1959 Arthur Burns, lifelong senior Republican policymaker, Chair of the Council of Economic Advisers under President Eisenhower, good friend of and White House Counselor to President Nixon, and Chair of the Federal Reserve from 1970 to 1978 gave the presidential address to the American Economic Association. In it, he concluded that the United States and a lot of choices to make as far as its future economic institutions and economic policies were concerned. And, he said:

These… choices will have to be made by the people of the United States; and economists–far more than any other group–will in the end help to make them…

That’s you. “Economists”, that is. And I am glad to be here, because I am glad that you are joining us. For we–all of us in America–need you. Arthur Burns was right: you are better-positioned than any other group to help us make the right choices, at the level of the world and of the country as a whole, but also at the level of the state, the city, the business, the school district, the NGO seeking to figure out how to spend its limited resources–whatever.

So why did Arthur Burns say this? And why was he right? Two blocks away over at Harvey Mudd college, people will say that they understand technologies–and that you, we, like Jon Snow of “Game of Thrones” (who I strongly believe is really Jon Targaryen-Stark, but let that pass), know nothing.

I would say:

• While the engineering principles they know over at Harvey Mudd will endure, the knowledge of actual technologies they have will be largely obsolete in one decade and completely obsolete in two.
• Economists know about systems, and how systems work:
  • Supply and demand
  • Opportunity cost
  • General equilibrium
  • Incentives and behavior
• Get how the system works wrong, and your technological knowledge points in the wrong direction–is worse than useless.
• Get how the system works right, and there will be many opportunities to figure out how to use and apply the technologies–not least because people will learn that they can make money by offering to teach you.

But while your heads should swell, I don’t want your heads to swell too much. So let me tell you a story of today–and of how economists as a group, definitely including me, got it very wrong.

Let us return to Arthur Burns and his presidential address. In it, his first and his main point was that a business-cycle episode like the one we have just been through was not a realistic possibility. I quote, at extended length:

More than twenty-five years have elapsed since we last experienced a financial panic or a deep depression of production and employment. Over twenty years have elapsed since we last had a severe business recession…. There is no parallel for such a sequence of mild… [cycles] at least during the past hundred years…. The character of the business cycle itself appears to have changed….

The evolution of corporate practice, as well as the growth of corporate enterprise itself, has served to reduce the influence of a cyclical decline… on the flow of income…. The expansion and the means of financing of governmental enterprise… have had a similar effect…. In the classical business cycle… once business investment began declining… a reduction of consumer spending soon followed….

The specific measures adopted by the government in dealing with the recessions of the postwar period have varied…. In all of them, monetary, fiscal, and housekeeping policies played some part… [with] the most nearly consistent part of contracyclical policy… in the monetary sphere… influence… exerted only in part through lower interest rates. Of greater consequence… credit becomes more readily available… the money supply is increased… [and] the liquidity of financial assets is improved….

The net result has been that the intensity of cyclical swings of production has become smaller…. It seems reasonable to expect that the structural changes… which have served to moderate and humanize the business cycle will continue to do so…. Of late, many economists have been speaking… persuasively,though not always as grimly, of a future of secular inflation. The warning is timely…

That is the end of the quote.

Between 1959 and 2007–for nearly half a century–the overwhelming majority of economists would have endorsed Arthur Burns’s conclusions. In fact, things got better from the perspective of unemployment. After two moderate recessions in the middle and just after the end of the 1970s, the size of the business cycle in employment and production shrunk again, giving rise to what was called the “Great Moderation”. Arthur Burns’s warning that the big economic threat had become inflation was nearly a decade too soon to be properly timely, but it was correct. And as of 2007 the overwhelming bulk of economists were still keeping their weather eye on inflationary problems of too-much money chasing too-few goods: exchange-rate depreciation provoked by shifts in desired capital flows, legislatures that could not muster the nerve either to cut programs and benefits to what could be properly-funded by taxes or raise taxes to what was needed to properly-fund programs and benefits, or simply central banks that fell victim to growth optimism and so failed to properly raise interest rates in a boom.

Thus what happened after 2007 in the North Atlantic came to nearly all economists as an astonishing surprise. Economists like Nouriel Roubini, my co-author Paul Krugman, and me would have said “we told you so” if a drying-up of the flow of finance from China led to a crash of investment spending in the U.S., a steep fall in the dollar, the bankruptcy of underregulated large New York banks that had bet their futures on a stable dollar, and an outbreak of inflation that caused a painful stagflation episode of high unemployment, high interest rates, and a rise in inflation that left the government with only painful policy options. Economists like my teacher Marty Feldstein and Michael Boskin would have said “we told you so” if failures to either raise taxes or enact entitlement reform had given the Federal Reserve an unpleasant choice between raising interest rates to prevent inflation and accepting higher unemployment or lowering interest rates to preserve employent at the price of higher inflation. Only a very few–like my co-author Dean Baker–saw the housing sector as a potential source of serious danger. And what has happened since 2007 has been an order of magnitude worse than even Dean envisioned in his worst nightmares.

Even today, 8% of the wealth that back in 2007 we confidently expected the North Atlantic to have has simply vanished. Our workers have fewer jobs, and are less productive. Our businesses have idle capacity. Productive links in the global division of labor that would in the normal course of events have been made since 2007 have not been. Productive links in the global division of labor that existed back in 2007 have been broken. This year I can still say that those of you graduating who are male still face the worst job market for newly-minted male college graduates in American history–albeit slightly better than 2012-2014, and somewhat better than 2009-2011, but worse than in any other year or years.

The total properly-discounted losses from the Great Depression cumulated to 1.4 times the initial year’s GDP in the United States and half that in Western Europe–and perhaps that total is a mammoth underestimate, if one believes that in the absence of the Great Depression Europe’s downfall into Naziism and World War II would have been avoided. 40 million people were killed or left to starve during World War II in Europe–six million of them Jews. 10 million people were killed or left to starve during World War II in Asia–seven million of them Chinese. Restrict ourselves to the narrower totals, however. Assume that in the absence of the financial crisis of 2007-8 and what followed production in the entire North Atlantic would have followed its pre-2007 trend. Then sometime next year the total losses from the current unpleasantness in Europe will pass the Great Depression as a share of GDP. And if we stay on our current trajectory in the United States rather than finding some way to restore pre-2007 trends of growth, come 2026 the Great Depression will no longer be America’s greatest depression.

Diagnoses of how we got into this mess and why we are still mired in it–albeit to a substantially less degree than in 2009, and to a much less degree than in 2009 we feared we would be in 2010–vary. Let me give you my take–which is disputable, and indeed often disputed. I follow my next-door office neighbor at Berkeley, Barry Eichengreen, and find that one of the many important factors that has led to our current situation was the intellectual success of a book: Milton Friedman and Anna Jacobsen Schwartz’s A Monetary History of the United States. You can read Barry’s version of the argument in his excellent and brand-new book, Hall of Mirrors. Here is mine:

In the 1960s and 1970s monetarist economists drawing their analysis from Friedman and Schwartz’s Monetary History of the United States advanced their particular economic-historical interpretation of the causes of the 1930s Great Depression as due to an improper and not-neutral–a contractionary–monetary policy. They were opposed by others. Some others, call them Keynesians, focused on fluctuations in the irrational “animal spirits” of businesses and thus of business willingness to engage in investment spending, on the limited power of monetary policy to counter coordinated shifts in psychology, and thus saw the Great Depression as originating in an unstable private sector and an unwillingness or inability of the government to directly direct and command the flow of spending through the economy. Still other others–call them Minskyites, but they were always a small sect–saw the private-sector instability as a financial-sector instability driven by a failure to properly regulate, control, and limit credit: as my Minskyite friend Bill Janeway of Warburg-incus says: give the banking system too much unregulated credit and you know what they will eventually do–you just do not know against which wall they will do it.

The Great Depression, Friedman and his co-author Anna Jacobson Schwartz had argued, was at its root a failure of government. It was due solely and completely to the failure of the 1929-1933 Federal Reserve to properly and aggressively expand the monetary base in order to keep the economy’s money stock stable. Seeing the money stock stable is a neutral monetary policy. And no decline in the money stock, no Great Depression. It was the government’s failure to follow a “neutral” monetary policy–the active disturbance by government incompetence of what was by nature a stable full-employment market economy–that was the only reason the 1930s downturn became the Great Depression.

This interpretation was coherent sense. However, it rested on a particular premise: that the so-called velocity of money, the speed with which people spent the cash in their pockets and the demand deposits in their banking accounts, would vary little with changes in interest rates. And this interpretation involved some fast talk and fast dancing as to what a “neutral” monetary policy was. What Friedman and Schwartz called a “neutral” monetary policy in the Great Depression would have required that the Federal Reserve flood the zone with liquidity and buy bonds and print cash at a rate never before imagined, and that in fact the Federal Reserve in the Great Depression did not imagine.

But would a “neutral” monetary policy be enough? Suppose the velocity of money was interest-elastic. Then the open-market operations undertaken to expand the money supply would have pushed down interest rates. They would so cause a further fall in monetary velocity. And so that would have made Freedman and Schwartz’s cure impotent. And if Keynesian psychological shifts in the animal spirits of businessmen or fears provoked by a Minskyite financial crisis were to push interest rates down far enough and if the elasticity of money demand was high enough, the Great Depression would have come even had the money supply remained stable–even had monetary policy been “neutral” on Friedman and Schwartz’s definition. Then to have successfully stopped the Great Depression in its tracks would have required Keynesian expansionary fiscal and Minskyite supportive credit-market policies.

The monetarists won the economic-historical and macroeconomic debate in the 1960s and 1970s. My teacher Peter Temin’s Did Monetary Forces Cause the Great Depression did point out convincingly that there was no great contractionary surprise in anything the Federal Reserve did–no place where interest rates jumped up as it deviated from what people were expecting–and at most minor and irregular downward pressure on liquidity. Others picked away at the Friedman-Schwartz thesis on other details. But that didn’t matter.

Why not? I think it did not matter because the debate wa really two debates:

At one level, the debate between monetarists, Keynesians, and Minskyites was a simple empirical matter of reading the evidence: Was the interest-elasticity of money demand in a serious downturn low, as Milton Friedman claimed, or high, as in John Maynard Keynes’s and John Hicks’s liquidity trap? Were financial markets a near-veil because the money stock was a near-sufficient statistic for predicting total spending, as Milton Friedman claimed, or was the credit channel and its functioning of decisive importance, as Minsky warned?

At the second level, however, the debate was over whether market failure or government failure was the bigger threat.

The Great Depression had, before Friedman and Schwartz’s Monetary History, been seen as an unanswerable argument that market failure was potentially so dire as to require the government to take over direction of the whole economy. And that created a presumption that there might be other, smaller market failure might require a government to be interventionist indeed not just in macro but in micro as well. But if the Great Depression could be understood as a failure of government, then the cognitive dissonance between its reality and right-of-center economists’ presumption that government failure was always the bigger threat could be erased.

And of course, the textbook Friedmanite cure was tried á outrance over 2008-2010 and proved insufficient. The monetary policy that Ben Bernanke pursued was Friedman-Schwartz to the max. It cushioned the downturn–the U.S. has done better than western Europe about to the degree that Bernanke was more aggressive in lowering interest rates and buying bonds for cash than his European counterpart Trichet. That is evidence that Friedman and his monetarists were wrong about the Great Depression as well. There are thus few people today who have properly done their homework who would say, as Ben Bernanke said to Milton Friedman and Anna Schwartz in 2002:

You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

And right now Ben Bernanke, now at the Brookings Institution, has changed his mind. He is now calling for Keynesian cures–expansionary fiscal policy, especially infrastructure spending, as the bet road forward.

But, even in the 1970s, the empirical evidence did not weigh strongly enough on the monetarist side to account for its decisive victory. The completeness of the victory must, I think be attributed to the fact that economics is never technocratic economics, it is always political economy, which is always politics. And that means, as British economist and moral philosopher John Stuart Mill lamented back in the 1800s, that there is no position so absurd that it has not been advanced by some political economist of note and reputation.

To admit that the monetarist cure was inadequate would be to admit that the Great Depression had deeper roots then a failure of technocratic management on the part of central banks charged with maintaining a neutral monetary policy.

Such deeper roots in severe market failures would not be fully consistent with a belief back in the 1970s and 1980s that social democracy had been oversold, and that government failure was almost invariably a worse danger than market failure. There was thus an extremely strong elective affinity between a mainstream economics profession caught up in the gathering neoliberal currents of the age and the Friedmanite interpretation of the Great Depression.

And because the intellectual victory in the 1970s and 1980s was complete, policymakers in 2008-2010 were hesitant and unwilling to apply the Keynesian and Minskyite cures to severe downturns enthusiastically enough and on a large enough scale to adequately deal with the problems that emerged. When the collapse came, the economists advising the North Atlantic’s governments and central banks were not ready.

Why did the collapse come? Start with the huge rise in wealth among the world’s richest 0.1% and 0.01% from the 1970s into the 200s, and the consequent pressure for people, governments, and companies to take on increasingly unsustainable levels of debt. Continue with policymakers lulled into complacency by the widespread acceptance of the “efficient-market hypothesis”–believing that investors in deregulated financial markets were relatively good judges of risk. CEnd with hubris: the confidence in the Federal Reserve and elsewhere that grew because the Penn Central collapse of 1970, the Latin American financial crisis of 1982, the stock market crash of 1987, the S&L crisis of 1991, the Mexican crisis of 1995, the East Asian crisis of 1997, the Russian/LTCM crisis of 1998, and the dot-com crash of 2000 had not caused the Federal Reserve problems that it could not handle well enough to keep the unemployment rate from going up by more than two percentage points.

Thus in 2008 the North Atlantic had a trend rate of inflation at 2%/year too low to make people feel they had to spend their cash even in a time of great uncertainty. It had a great deal of subprime debt, and an even greater degree of debt that might be subprime–because your supposedly investment-grade counterparty’s ability to pay you depended on its subprime creditors paying it. Add in the peculiar problems of Europe, which is now a single currency but not a single government, a single financial system, or a single people. These were not problems that could be solved by the simple Friedmanite cure.

So when the 2008 financial crisis erupted, and policymakers tried to apply the solutions Friedman had proposed for the Great Depression to the present day, those solutions were not sufficient. It is not that they were counterproductive. The policies were enough to prevent the post-2008 recession from developing into a full-blown depression.

But from our standpoint today, we have reason to fear that partial success may turn out to be Pyrrhic victory. Politicians–Obama, Cameron, Merkel, and others–declare that the crisis had been overcome and the economy is strong. Yet by the standard of the pre-2007 period we have a depressed level and anemic growth, combined with acceptance of these as the new normal. Thus the North Atlantic is on track to have thrown away 10% of their potential wealth. And there have been insufficient changes in financial-sector regulation or in automatic stabilizers or in other institutions to keep the North Atlantic from once again developing the vulnerabilities it turned out to have in 2007.

That is the end of my story.

The little lesson from this story? We should not be satisfied with the current state of the economy. We should be pressing for policies to not just stabilize the situation but reverse the damage, and pick the fruit that back in 2007 we thought we would have today but that is still hanging.

The big lesson from this story? That your ideology, like fire and (we hope) fusion, turns out to be a good servant but a terrible master. Ideologies make sense of the entire world. We need them–our brains cannot handle too much complexity, for we have barely evolved barely enough smarts to have made it this far. But they break in our hands precisely because they force the world to make sense, and make a single kind of sense, and the world may not–or may not make that particular kind of sense.

Thus we can accept the conclusion that decentralized market economies and private property as societal institutions are among our greatest blessings. This is what John Maynard Keynes called “individualism”. And he wrote:

the traditional advantages of individualism will still hold good. Let us stop for a moment to remind ourselves what [its] advantages are…. The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed…. Individualism… is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future…

But Friedman started there and built a bridge to the conclusion that therefore episodes like the Great Depression were impossible if only the central bank maintained a constant money stock and thus a neutral monetary policy, and that that neutral monetary policy would all by itself be sufficient to guard against big depressions. And that bridge was a bridge too far.

Must-Read: Erik Loomis: Ideology Creators of the New Gilded Age: “I’m not surprised that people are creating ideological justifications for the New Gilded Age…

…I am surprised however that one of them is Eric Hobsbawm’s daughter…. Everyone knows that networking is in fact how people get jobs and how class distinctions get reinforced…. The problem is that rising in life because of who you know is pretty objectively a bad thing…. Selling the idea that networking is awesome and should be embraced is deeply problematic on a number of levels… repackaged bootstrapism. The finest will rise and the less competent of the elite will fall…. It’s all about elite, elite, elite in this article. What about those who aren’t elite?… And now for the winner:

Ironically, there’s a bootstrapping, almost American aspect to how Hobsbawm got here. Her father, Eric Hobsbawm, was a Marxist historian and one of the most renowned scholars of the 20th century, but young Julia didn’t excel in school. She credits her success to working harder than her more academically-gifted peers, taking on tasks they wouldn’t do, and refusing to coast on her last name. Some people think “there is a shortcut and you just ring the most powerful person on that Rolodex,” she says, but it’s not that simple, “and that’s a good thing.”’

Ha ha ha ha ha…. As we were just told, the British understand how to succeed because of their class system so now let me, scion of one of the most famous intellectuals in the world during the second half of the twentieth century, tell you, Oregon mill worker’s son, how to succeed in life through hard work and networking. Well, somehow I’m not buying any of this…

I have never gotten it straight whether Vladimir Lenin actually did say: “The worse, the better.” But Eduardo Porter does!:

The bloated incarceration rates and rock-bottom life expectancy, the unraveling families and the stagnant college graduation rates amount to an existential threat to the nation’s future. That is, perhaps, the best reason for hope. The silver lining in these dismal, if abstract, statistics, is that they portend such a dysfunctional future that our broken political system might finally be forced to come together to prevent it.

Talk about grasping at straws…

In a thumbnail, the plutocratic American right these days appears to try to:

• mobilize the top by promising an unequal distribution of wealth, and

• mobilizes the bottom by provoking them to hate “others”–the liberals, the minorities, the most recent wave of immigrants.

Policies to enrich and improve the lives of even their voters who are not at the top of the income and wealth distribution appear to be the furthest thing from their minds.

The contrast of the political economy of this Second Gilded Age with the political economy of the First Gilded Age a century ago is striking. Then even the most conservative politicians had a strong commitment to policies of social and economic betterment: the entire progressive agenda. Yes, there were policies to disadvantage “others”–Woodrow Wilson’s extension of segregation, Theodore Roosevelt’s flirtations with various forms of soft eugenics. But there were also policies to make the market economy one of opportunity and upward mobility on the one hand, and to curb the power of the “malefactors of great wealth” on the other.

That has fallen away…

Eduardo Porter:

Eduardo Porter: Income Inequality Is Costing the U.S. on Social Issues: “Thirty-five years ago, the United States ranked 13th among the 34… nations… today in the OECD in terms of life expectancy for newborn girls. These days, it ranks 29th. In 1980, the infant mortality rate in the United States was about the same as in Germany. Today, American babies die at almost twice the rate of German babies…. What’s most shocking… is how stunningly fast the United States has lost ground….

Much of America’s infant mortality deficit is driven by ‘excess inequality.’ American babies born to white, college-educated, married women survive as often as those born to advantaged women in Europe. It’s the babies born to nonwhite, nonmarried, nonprosperous women who die so young…. When it comes to the health, well-being and shared prosperity of its people, the United States has fallen far behind…. The labor market lost much of its power to deliver income gains to working families in many developed nations. But blaming globalization and technological progress… is too easy. Jobs were lost and wages got stuck in many developed countries. What set the United States apart… was the nature of its response. Government support for Americans in the bottom half turned out to be too meager to hold society together….

When globalization struck at the jobs on which 20th-century America had built its middle class, the United States discovered that it did not, in fact, have much of a welfare state to speak of. The threadbare safety net tore under the strain. Call it a failure of solidarity…. Is there a solution to fit [American] ideological preferences? The standard prescriptions, typically shared by liberals and conservatives, start with education, building the skills needed to harness the opportunities of a high-tech, fast-changing labor market that has little use for those who end their education after high school…. On the left, there are calls to build the kind of generous social insurance programs, which despite growing budget constraints, remain largely intact among many European social democracies…. [But] it remains a political nonstarter in a nation congenitally mistrustful of government. Just in time to kick off the presidential campaign, Republicans in the House and Senate were working on a budget that would gut Obamacare — most likely increasing the pool of the nation’s uninsured — and slash funding for programs for Americans of low and moderate income…

Must-Read: Noah Smith: Americans Get Free Trade’s Dark Side: “Mankiw is failing to give his readers much credit…

…For one thing, some of the opposition to the TPP comes from people who support free trade, and who worry that the treaty’s intellectual property provisions amount to a restriction of trade. As Krugman points out, Mankiw ignores this. Mankiw’s second problem is that this same old case has failed again and again to persuade the general public. Yes, economists overwhelmingly favor the idea of free trade. But the public remains stubbornly skeptical. Is this because they are just not smart enough to get the Econ-101-David-Ricardo thing even after hearing it a hundred times? Or is it because people are irrational and biased?

In his article, Mankiw lists three biases that he blames for people’s refusal to accept the free-trade argument. These are ‘anti-foreign bias,’ ‘anti-market bias,’ and ‘make-work bias.’ Essentially, Mankiw is telling you that you don’t believe the simple truth because deep down within you lurks a xenophobic socialist. Call me crazy, but I don’t think this is a beneficial, constructive way for economists to engage with the public. Maybe the public is neither xenophobic nor socialist. Maybe people are perfectly smart and rational enough to understand the David Ricardo idea, and also smart enough to understand something else that economists have known for 200 years — international trade doesn’t necessarily benefit everyone within a country. That’s right — trade creates winners and losers. Econ 101 says that the winners outnumber the losers in dollar terms, but not necessarily in people terms — if the richest 1 percent of Americans gain $1 billion from a trade agreement and the other 99 percent lose $900 million, then Ricardo’s theory says the country benefited overall. That outcome is perfectly consistent with Econ 101.

Most pro-free-trade economists, if you confront them with this fact, will say that this problem can be solved if we use redistributive taxes to compensate the losers. This ignores that we often don’t know who the winners and losers are from any particular trade deal — this is why you can’t buy insurance against the possibility of losing your job to a trade agreement. This also ignores that the tax system wasn’t set up to carry out this compensation. And on top of that, many pro-free-trade economists, Mankiw included, are almost always opposed to tax increases. In other words, Mankiw is giving the public a pro-trade argument that, even on its own merits, might be bogus. Econ 101 says that it’s possible that free trade might hurt the majority of Americans, and yet Mankiw doesn’t seem to think the public needs to hear that fact.

Like I said, I am in favor of the TPP. And, like most economists, I think free trade has, on balance, been a big net positive for most Americans over the past century, relative to any alternative we might have pursued. But I think the American people are intelligent and grown-up enough to hear the basic case against free trade, as well as the case in favor. Yes, Mankiw is smarter than most of us. That doesn’t mean we’re dummies.

Must- and Should-Reads:

• Jason Sanford: When science fiction authors are no longer grounded in reality
• Joshua Holland (2012): How an Astounding New Right-Wing Lie About the Economy Was Born
• Noah Smith: Wonks Abandon an Economic Dream
• Walter Johnson: The Economics of Ferguson: Emerson Electric, Municipal Fines, Discriminatory Policing

Might Like to Be Aware of:

• • Emily Mah: 14 Questions for S.M. Stirling
• Scott Raun: “I recall hearing… that sometime after Ethan of Athos, Jim Baen told Lois she could write anything she wanted EXCEPT a sequel to ‘San Francisco Planet’…”
• Walter Jon Williams: “By the midpoint of the year, I was a staggering, raging wreck, filled with madness and raw cunning. I was a complete convert to the Law of the Jungle.  Jim Baen had showed me that only ruthless sociopaths could expect to prosper in the world…”
• Josh Gans: One Week with the Apple Watch

Must- and Should-Reads:

• Peter Sullivan: “Pennsylvania Gov. Tom Wolf (D) on Friday outlined a contingency plan for his state in case the Supreme Court guts ObamaCare. Wolf’s plan calls for Pennsylvania to set up its own insurance marketplace if the court rules against the Obama administration in the case King v. Burwell. The case could revoke subsidies that help 7.5 million people afford healthcare coverage…”
• Jay Nixon (D-MO): “I don’t think that coming after working people is how you build an economy”
• Alexis Goldstein: Elizabeth Warren is Not Impressed with Your Diamond-Encrusted Ring
• Today’s Must-Must-Read: Steve Randy Waldman: There Is a Name for This
• Ernst Fehr and Simon Gächter: Altruistic punishment in humans
• Gillian Tett: What Detroit can teach us all
• Must-Read: Paul Krugman: This Is Not A Trade Agreement
• Josh Brown: “This morning the markets are shocked thanks to a year-over-year gain in US salaries and wages of 2.6%. The ten-year Treasury yield is now up almost 10% over the last four days….”
• Rich Yeselson: Is Cosmopolitan Communitarianism still Possible? Was it ever?
• Must-Read: Nick Bunker: The role of consumption in economic inequality
• Must-Read: Adair Turner: Money, Banking and Financial Markets:
• Catherine Rampell: Kansas shows us what could happen if Republicans win in 2016 – The Washington Post

At Equitable Growth—The Equitablog

• Needed: New Economic Frameworks for a Disappointing New Normal
• Over at Project Syndicate: An Even More Dismal Science
• Let Me Strongly Agree with Ben Bernanke on the Wall Street Journal Editorial Page: It Is and Has Long Been a Clown Show
• Let Me Strongly Dissent from Ben Bernanke’s Claim That the Critical Objective of Recovery Viewed in the Proper Metrics Is Being Met
• Nick Bunker: What does weak U.S. economic growth in first quarter mean for the current recovery?
• Nick Bunker: The merits and limits of “college for the masses”
• Nick Bunker: Weekend reading

Might Like to Be Aware of:

• Francis Fukuyama (2006): After Neoconservatism
• Molly Watt: “I was curious as Apple products have been more than just up market gadgets to me… my access to the many things… those of us with deafblindness particularly struggle with…. I am severely deaf and have only a very small tunnel of vision in my right eye…. I decided to order the Apple Watch Sport 42mm (the bigger face size) with white strap so I’d not lose it quite so easily…. The default settings I have on my iPhone are set to large text and I was pleased to be able to have this on my Apple Watch.  I also use Zoom large text set to the largest. The new setting ‘Prominent Haptic’ is perhaps my favourite in accessibility… definitely awesome for me as a deafblind person. So far for me the most useful App on the Apple Watch is Maps–on my iPhone I can plan my journey from one destination to another, for me it will be on foot with Unis my guidedog. This is where Haptics really come into its own–I can be directed without hearing or sight, but by a series of taps via the watch…. I am now very happy to own an Apple Watch and look forward to making it work well for me.”
• Micah Sifry: Civicist

When I was taught economics lo more than a generation ago now, I was taught that there were six major and significant political-economic market and governance failures that called for action:

1. failures of the distribution of income to accord with utility and desert, which called for social insurance–and we had about the right amount of that.
2. failures of the market in the area of public goods, which called for government spending on physical, organizational, and social infrastructure–and we had about the right amount of that.
3. failures of the demand for money to remain stable over time, which called for aggressive monetary policy to stabilize the path of total spending around its trend–and we needed to better at that.
4. failures of voters to understand that low interest rate policies were ultimately counterproductive and created costly inflation, which called for independent and conservative hard-money technocratic central banks.
5. voter myopia about spending and taxes, which called for pressure and institutions to make the public sphere of discussion fear deficits–and we were moving toward that.
6. failures of the financial markets to actually mobilize society’s risk-bearing capacity and so make the hurdle rate for corporate investment as low as it should be, which we could do little about save trying to open up finance and teach people the benefits of diversification–and, I was taught, the equity return premium was on the decline, and would be the time I was middle-aged no longer be a first-order economic failure.

All this was in the context of the age of Social Democracy–in which we could expect fast productivity growth, a relatively egalitarian income distribution, and in which the principal socio-economic problems were those of moving toward socioeconomic inclusion for more than just well-educated white guys and keeping populist policy mistakes from disrupting the mechanism via monetary inflation or excessive government debt burdens.

This entire structure is now in ruins. Our social-democratic income distribution has been upending in an appalling manner by the Second Gilded Age. Our government, here in the U.S. at least, has been starved of proper funding for infrastructure of all kinds since the election of Ronald Reagan. Our confidence in our institutions’ ability to manage aggregate demand properly is in shreds–and for the good reason of demonstrated incompetence and large-scale failure. Our political system now has a bias toward austerity and idle potential workers rather than toward expansion and inflation. Our political system now has a bias away from desirable borrow-and-invest. And the equity return premium is back to immediate post-Great Depression levels–and we also have an enormous and costly hypertrophy of the financial sector that is, as best as we can tell, delivering no social value in exchange for its extra size.

We badly need a new framework for thinking about policy-relevant macroeconomics given that our new normal is as different from the late-1970s as that era’s normal was different from the 1920s, and as that era’s normal was different from the 1870s.

But I do not have one to offer.

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Olivier Blanchard has thoughts:

Olivier Blanchard: Ten Take Aways from the “Rethinking Macro Policy: Progress or Confusion?”: “On April 15-16, the IMF organized the third conference on ‘Rethinking Macro Policy.’ Here are my personal take aways…

…I had implicitly assumed that this new normal would be very much like the old normal, one of decent growth and positive equilibrium interest rates. The assumption was challenged…. Ken Rogoff argued that what we were in the adjustment phase of the ‘debt supercycle’…. Larry Summers argued… more was going on… a chronic excess of saving over investment [with] keeping the economy at potential may well require very low or even negative real interest rates…. I am closer to Summers… than to Rogoff. What the new normal will be matters a lot for policy design….

[Has] financial regulation… successfully reduced financial risk.  There was agreement on ‘reduced,’ not so on ‘successfully.’… The discussion became granular…. Should monetary policy go back to its old ways?… Ben Bernanke’s answer was largely yes. Once economies were out of the zero lower bound, most of the programs introduced during the crisis should be put back on the shelf, ready to be used only if there was another sufficiently adverse shock…. Issue was taken on by others, in particular Ricardo Caballero…. If the central banks are in a unique position to be able to supply safe assets shouldn’t they do it? I see this discussion as having just started, raising deep issues about the private demand for safe assets, and the potential role of central bank in this context….

Judging the central bank on how it fulfills its mandate, rather than requiring it to follow a simple rule, [Bernanke] argued, is the way to proceed.  I agree…. Tucker however argued for the use of macro prudential tools to deal with ‘exuberance,’ not necessarily for fine tuning in more normal times. Rubin remarked that we were not very good at telling when times were exuberant…. Lars Svensson argued that a simple cost-benefit analysis suggests that monetary policy is a very poor instrument to deal with financial risk….
 
The traditional objection to using fiscal policy as a macroeconomic policy tool was that recessions did not last long, and by the time discretionary fiscal measures were implemented, it was typically too late. Martin Feldstein made the point that some recessions, in particular those associated with financial crises, are long enough that discretionary policy can and should be used…. Despite questions by the chair of the session, Vitor Gaspar, on potential improvements in the design of automatic stabilizers (based on the very interesting chapter 2 of the April 2015 Fiscal Monitor), the issue did not register, and I am still struck by the lack of action on this front….

What struck me most in the discussion of capital flows was the recognition that they have complex effects…. This… has one clear implication, namely that hands-off policies are not the solution.  I see this as one area where the rethinking has been striking, say compared to ten years ago…. There was no agreement on capital controls…. Ricardo Caballero touched upon the demand for safe assets by emerging market countries, and argued for a better provision of international liquidity by the IMF and by central banks….

Not all the questions I had raised in my pre-conference blog were taken up, and few were settled.  Still, to go back to the title of the conference, Rethinking Macro Policy III:  Progress or Confusion?, my answer is definitely: Both.  Progress is undeniable.  Confusion is unavoidable…

Micah Sifry: Civicist: “Hello, World! Civicist Is Born”