Category: Equitablog

Elizabeth Warren, Elijah Cummings, et al.: Middle Class Prosperity Project Forum:

As best as I can see, the thinking seems to be in an inchoate and half-formed implicit model. I cannot write it down coherently, because I do not think it is coherent. But in it there seems to be a full-employment future period f in which the real value of the debt will be determined by the fiscal theory of the price level with future primary surpluses at their maximum S_f, so that the future price level P_f, the future debt D_{f, and future real interest rates rf are related by:}

P_f = (D_f)(rf)/(Sf)

And there is a present period p in which prices are sticky, the current-period real interest rate r_p = 0, and the economy is depressed with a low level of output Y_p below potential because of an outsized preference for liquidity and as a consequence a low velocity of money:

Y_p = (V(r_p + π)(M)

Where the velocity of money depends on the current real interest rate, the inflation rate π, and the shift term φ from abnormally-high liquidity preference:

π = P_f/P_p – 1

Add that the current and the future debt are related by:

D_f = (1 + r_p)(D_p)

Now suppose that shift term φ goes away, and the central bank responds to the rise in velocity by shrinking the money stock M in order to keep the economy from overheating. This reduction in the money stock raises the current interest rate r_p. And a problem develops because the higher the current interest rate, the higher the future debt D_f, the higher the future price level P_f, the higher inflation π, and the higher the central bank must raise the current interest rate r_p in order to avoid overheating.

In order for this to work quantitatively, I think it has to be the case that expectations of future real interest rates on the debt have to be closely (and irrationally) connected to the current real interest rate: something like:

r_f = r_p

I would like to see evidence for that. I have, so far, seen none…

Without something like that, it simply does not work. Events happening now or in the near future–i.e., an end to extraordinary liquidity preference–have to somehow shake the intertemporal price system far into the future in such a way as to greatly raise the far-future primary surpluses the government must raise in order to amortize its debt, and so turn a debt that was sustainable yesterday into one that is unsustainable tomorrow.

OK: Now that I am awake and coherent and caffeinated, we may resume…

I draw somewhat different conclusions from the wavering track of potential GDP since 1990 than do the viri illustres Steve Cecchetti and Kermit Schoenholtz:

First, I think that monetary policymakers should not be looking at potential output and the output gap at all. They should be looking at the labor market. You can determine whether monetary policy is such as to accord with people’s previous expectations and thus balance supply and demand in the labor market much more easily than you can track whether actual production and demand are above or below what your retrospective estimate of potential output will turn out to be.

Second, I think that the most important macroeconomic research question of our age is the extent to which these fluctuations in the projected growth path arise because of signal-processing considerations in an environment in which the growth rate is subject to both transitory and permanent shocks, rather than to short-run shocks casting very long-run shadows. To the extent that it is the second–and the older I get the more it looks to me as though it might well be–the more it becomes the case that successful management of aggregate demand and the business cycle is the ball game, rather than just being an amuse bouche that it is nice to have.

Third, there is the question that I now harp upon incessantly of the relationship between measured real GDP and money-metric utility in a consumer-surplus sense. (Plus there is the question of the relationship between money-metric utility in a consumer surplus sense and societal well-being.)

Fourth, I question whether previous pre-1980 studies of the U.S. economy would reveal similar fluctuations in trend growth projections. In fact, as best as I can determine, it does not. Going back to the start of the 1890s, at least, and even with such enormous shocks as the Great Depression and World War II, straightforward projections of real GDP do not fluctuate nearly as much as those that have been made over the last twenty years:

We had good news about long-run growth between 1955 and 1970, bad news between 1970 and 1985 that more-or-less returned us to the state of things as of 1955, essentially no net news between 1985 and 2000–and now really bad economic growth news since 2000.

Is this an illusion? Accidental overlapping and offsetting shocks that just happened to sum to zero? It may well be. Certainly output per potential worker grew very slowly as the baby boomers entered the labor force. On the other hand, to have naively projected that a decline in the growth of productivity associated with the entry of an enormous wave of workers with experience far below average would be permanent would seem naive.

And, of course, other countries did not exhibit that same stability in 1929-2000 or 1890-2000 real GDP growth rates. Of course, other countries also suffered wars and revolutions…

Must- and Shall-Reads:

• Paul Krugman: Austerity and the Costs of Internal Devaluation
• Jason Furman et al.:: The Effect of Conflicted Investment Advice on Retirement Savings
• Steven Greenhouse: “On the nights when she has just seven hours between shifts at a Taco Bell in Tampa, Fla., Shetara Brown drops off her three young children with her mother. After work, she catches a bus to her apartment, takes a shower to wash off the grease and sleeps three and a half hours before getting back on the bus to return to her job…”

1. Nick Bunker: The Future of Retirement Savings: “Devlin-Foltz… Henriques, and… Sabelhaus focus… on… participation…. The participation rate among working-age households… was close to 80 percent between 1989 and 2007. But… has dropped to… 75 percent…. [And] younger workers’ participation rate has fallen below the level of previous generations of young workers—today’s young workers aren’t saving as much younger workers in years past… [with] the biggest decline… among workers in the bottom half…”

2. Stephen G. Cecchetti and Kermit L. Schoenholtz: Forecasting Trend Growth: Living with Uncertainty: “We should all be wary of anyone who claims to be able to forecast trend growth accurately and reliably. Even after the fact, it takes some time to discern the underlying trend. As a result, we need to build decision frameworks–for businesses and for policymakers–that are robust to the sorts of forecast errors we have seen in the past. Consider that approach the economist’s version of Keats’ negative capability. Second, our inability to get a precise fix on the output gap presents significant challenges for monetary policy, as this is commonly used as a prime indicator of inflationary pressures in the economy. If central bankers are unsure of the size of the output gap (or even its sign), then the likelihood of policy errors rises substantially. That reinforces the view of monetary policy setting as a problem of risk management in which policymakers must balance the hazards and costs associated with potentially large errors.”

3. Lawrence Mishel: Even Better Than a Tax Cut: “The challenge is to ensure that a typical worker’s wages grow along with profits and productivity. There is no silver bullet, but the key is… to reverse decades of decisions that have undercut wage growth. We need to start with monetary policy…. The most important decisions… are those of the Federal Reserve Board…. Before raising rates, it is essential we achieve a robust recovery, with roughly 3.5 to 4 percent annual [nominal] wage growth…. Another short- to medium-term policy decision affecting wage growth is to avoid trade deals, such as the proposed Trans-Pacific Partnership, that would further erode Americans’ wages and send jobs overseas. And… bolster… labor standards and institutions… [by] raising the minimum wage… rais[ing] the salary threshold for overtime…. Protecting and expanding workers’ right to unionize… moderniz[ing] our New Deal-era labor standards to include earned sick leave and paid family leave… stronger laws and enforcement to deter and remedy wage theft…. Wage stagnation is… a result of a policy regime that has undercut the individual and collective bargaining power of most workers. Because wage stagnation was caused by policy, it can be reversed by policy, too.

4. Nick Bunker: The Case for Inaction on Interest Rates: “Equitable Growth’s Ben Zipperer… [argued] average wage growth should be at least 3.5 percent a year…. Wen does wage growth cross above this threshold?… Not until the employment rate for workers ages 25 to 54 crosses 79 percent…. As of January 2015, this prime-age employment to population ratio was 77.2 percent. The ratio has been on the rise, but it still has a ways to go before it hits 79 percent. Growing at its current rate, that rate won’t hit 79 percent until 2017 at the earliest…. With inflation below its target, worries about stalled or slowing economic growth abroad, a strengthening dollar, and an incomplete labor market recovery, the Federal Open Markets Committee should consider the consequences of raising interest rates too soon. Perhaps the best move is to do nothing and simply wait…”

Should Be Aware of:

• Charles Pierce: “This thing should be thrown out while the lawyers are getting out of their cabs in front of the building. Dred Scott had an actual injury done to him. Brenda Levy doesn’t even know what injury she suffered. This is the ultimate crossroads for the institution of the Supreme Court. Legacy moment, Chief Justice Roberts. The ghost of Roger Taney awaits your decision to see if he’s finally off the hook.”

• Joe Mullin: Secrets Become History: Edward Snowden in Citizenfour Wins Documentary Oscar

• Elizabeth Stoker Bruenig: Giuliani: Obama Doesn’t Love America–“He Doesn’t Love You”: “For Giuliani and the Republicans who have shyly signaled agreement with him, it is America–the very idea of this state–that defines their selfhood, their emotional attachments, their moral sentiments, their love. And yet America is still just a state, among others: The fact that conservative identity is so wrapped up in the numinous notion of America suggests a strange relationship to their purported philosophy of small government. After all: states are temporary, they change, they are material organizations meant to confer certain material benefits. At least, that would be a limited view of government. Whatever Giuliani’s understanding of the American state is, it can’t honestly be called limited, no matter how low he would push taxes or how many programs he would cut, so long as it dominates so much of his soul.”

• Scott Lemieux: The IRS Issued Tax Credits to Cover Up BENGHAZI!!!!!!!: “If the facts are on your side, pound the facts into the table. If the law is on your side, pound the law into the table. If neither the facts nor the law are on your side, pound the Fox News talking points into the ground. [Brian Buetler]: ‘That Cannon is defending his case by nodding like a Fox News bobblehead to an unrelated pseudo scandal is not anomalous. In both the media and in their briefs to the Supreme Court, the law’s challengers have papered over weaknesses in their historical and legal arguments with conservative bromides familiar to talk radio consumers, Fox News viewers, and recipients of anti-Obamacare talking points. This kind of conservative argumentum ad reptilis, has a successful track record with at least one conservative justice on the Supreme Court. During oral arguments in the constitutional challenge to the Affordable Care Act three years ago, Antonin Scalia made reference sua sponte to the ‘Cornhusker Kickback’—a short-lived special deal for Nebraska in the Senate health care bill that became a metaphor on Fox News for the ACA’s corrupted legislative process, and was thus made national. But to those of us outside the conservative information bubble, it speaks to two themes that define challenge itself: that it is built on a fabricated history, and that it poses a de facto test to the cohesiveness of conservative movement infrastructure. Can a case built on an informational foundation that’s rejected everywhere outside the movement stand on the strength of the right’s intellectual and professional networks? Is the apparent internal consistency of a story and argument that only conservatives believe enough to carry the day in the Supreme Court, when the stakes are this high?’ Cannon’s argument use of Pelosi’s argument that passing the bill will show that conservative descriptions of it were a lie in order to defend making up additional lies about it is my favorite example.”

Can we finally all admit that even though the defined-benefit pension system was inadequate the 401(k) system is worse? And that we need not a smaller but a larger Social Security system?

I draw somewhat different conclusions from the wavering track of potential GDP than do the vires illustres Steve Cecchetti and Kermit Schoenholtz. But let me reserve that until some moment later on in the day when I am more awake…

There are the different agendas at different time frames–say two years, ten years, and fifty years. The smart young whippersnapper Marshall Steinbaum reports on the growing consensus that dealing with the Rise of the Robots is on our fifty-year agenda, and not on our two-year or our ten-year agenda. On the two-year and ten-year agendas, he says, are dealing with and reversing the enormous upward redistribution that has taken place with the rise in the social, political, and economic power of the Overclass. That is:

• Restoring full employment as a priority…
• Rebalancing the corporation so that shareholders and the financiers top managers who can initiate corporate control transactions are no longer the only stakeholders that matter…
• Restore long-run productive investment as a priority in public budgeting…

Underlying this position is a belief, perhaps, that so much of what is produced is so close to a joint Leontief product that something like the marginal product theory of distribution is profoundly unhelpful, and that questions of distribution are overwhelmingly resolved by economic bargaining power conditioned by social mores and politically-chosen institutions. Perhaps there used to be three sources of bargaining power, and thus three sources of durable advantage:

1. Possession of the intellectual property and expertise needed to construct the high-throughput mass-production assembly lines of what used to be called “Fordist” capitalism…
2. Control over the brands and other distribution channels necessary in order to sell the products of high-throughput mass-production factories to the middle classes of the North Atlantic who could afford to buy them at a good price…
3. A blue-collar working class that had sufficient class consciousness to bargain for itself, and that was insulated by the requirement that the factories be located near to the engineers and to the corporate headquarters which needed to be placed so as to keep their eyes on the market…

And then, perhaps, over the past generation the third has dropped away, with the coming of globalization and the successful war against private sector unions. The rest are now themselves in flux. And perhaps they have been joined as a source of rent-extraction by those with the ability to tap into the savings produced in this age of the Global Savings Glut…

But I think that the sources of this enormous upward redistribution have not yet been properly sorted-out.

Marshall Steinbaum: