James Kwak Thinks About Lessons from Steve Cohen’s and My “Concrete Economics”

Posted on by Brad DeLong

James Kwak has, I think, an attack of pessimism of the will–declares that our current dysfunctional economic institutions and policies benefit the “financial institutions, financial professionals, corporate executives, and rich people” who “basically control the American political system”, and so “things are unlikely to change anytime soon”.

I disagree:

Thanks Obamacare America s Uninsured Rate Is Below 10 For First Time Ever Forbes

And the uninsured rate is likely to dip below 8% when the remaining nullification states finally expand their Medicaid programs.

James:

James Kwak: Hamilton Everywhere, All the Time:

Alexander Hamilton is a big deal these days…. Stephen Cohen and Brad DeLong have titled their new book Concrete Economics: The Hamilton Approach to Economic Growth and Policy… about an overall attitude of which Hamilton cited as an exemplar: in short, a pragmatic rather than ideological approach to policymaking…. The best contrast is between the Republican Party c. 1955–which used state power to suburbanize the country, build up the military, and spin off the technologies that turbocharged productivity growth–and the Republican Party of the past 35 years….

The big question is why the we had this major transformation… [1] people suddenly started believing ‘neoclassical’ economic theories about the benefits of free markets (particularly for capital) and small government, and then acted on those beliefs… [2] financial institutions, financial professionals, corporate executives, and rich people generally all stood to gain…. Superstructure, base…. Both stories are true….

To turn the tide, it won’t be enough simply to tell people that they should be more practical and less ideological. Powerful interest groups have to decide that they would be better served by different policies based on different ideas…. But… the very wealthy–who basically control the American political system–seem to be happy with the way things are. Which is one indication that things are unlikely to change anytime soon…

James and the rest of us need to think harder about just how it is that “the very wealthy… basically control the American political system”–how it is that large chunks of the white working class votes for politicians like Mitt Romney who view them as losers:

Forty-seven percent of Americans pay no income tax. So our message of low taxes doesn’t connect. And he’ll be out there talking about tax cuts for the rich. I mean that’s what they sell every four years. And so my job is not to worry about those people–I’ll never convince them that they should take personal responsibility and care for their lives…

In my view, it used to be that there were conservatives and libertarians who believed in small government and low taxes. And it used to be the case that there was the Goldwater turn–that if one only made the jump to the position that the first and most important liberty was the liberty to discriminate against Black people, then you could build electoral majorities for conservative-libertarian economic policies. Maybe, then, with that alliance in place, James was correct

But now there is the new turn–ditching the conservative-libertarian economic policies and doubling down on discriminating not just against African-Americans but “Mexicans”, “Asians”, all Muslims.

And so things are once again in motion. And that is why I think–and Steve thinks–that pragmatic American technocracy may once again become possible.

Does stronger wage growth mean it’s time to hike interest rates?

Posted on by Bridget Ansel
Federal Reserve Chair Janet Yellen, right, walks past a frosted glass door at the Federal Reserve.

Late last week the U.S. Bureau of Labor Statistics released the latest data from the Employment Cost Index, providing policymakers with new insight into shifts in the U.S. labor market since the last update three months ago. According to the Employment Cost Index, real wage growth (after accounting for inflation) is now at levels posted before the start of the Great Recession in December, 2007. This is good news for workers, especially those already employed. But is this wage growth sustainable?

The Employment Cost Index shows that total compensation for all U.S. workers increased by 2.3 percent from June 2015 to June 2016. Wages and salaries grew at a 2.6 percent clip, continuing a recent trend of wage growth outpacing overall compensation growth. These figures are in nominal terms, however, which means that after accounting for changes in prices, real wage growth increased by 1.3 percent over the past year.

The Employment Cost Index is a useful measure of wage growth compared to the average hourly earnings measure from the monthly Employment Situation report because the index measures the shifting composition of the U.S. workforce when calculating wage growth. This makes it a better measure of the amount of slack in the labor market. Strong wage growth is a sign that labor market slack is diminishing and that the labor market is tight.

For now, at least, workers are seeing real gains. But this is primarily due to the low levels of inflation in recent years as nominal wage growth continues to be below pre-recession levels. If employers’ inflation expectations ratchet down to our current lower levels of inflation, then nominal wage growth might decline as well. The result would be weaker real wage growth. Which brings policymakers back to the question: Is slack gone from the labor market?

Accelerating wage growth evident in the recent Employment Cost Index data indicates that slack is indeed on the decline. At the same time, the Federal Reserve Bank of Atlanta’s Wage Growth Tracker shows very strong wage growth for workers who are already employed.

Is this a sign that the Federal Reserve Board should be ready to hike interest rates? Given that inflation could use a bit of a boost to hit the Fed’s 2-percent target, and that monetary policymakers might want to overshoot for once, such a wage-led inflationary pressure might be welcome. What’s more, recent evidence shows that U.S. wage growth doesn’t seem to lead to inflation as much as it did in the past. Stronger wage growth going forward could help shift income toward hourly and salaried workers—not such a terrible outcome for increasing demand in the U.S. economy and thus overall economic growth.

Must-Reads: August 1, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Eric Lonergan: A Brief Reply to Paul Krugman on Policy Equivalence

Posted on by Brad DeLong

Must-Read: Eric Lonergan: A Brief Reply to Paul Krugman on Policy Equivalence:

Helicopter money is partly useful precisely because it addresses the institutional failure of fiscal policy…

It gives central banks an effective policy tool and it maintains the important institutional division of labour between fiscal and monetary authorities (Simon Wren-Lewis is compulsory reading on this – bear in mind his preferred form of HM is direct transfer from independent CBs). We don’t have to get into philosophical differences between bond financing v monetary financing and whether money is unique…

Must-Read: Eric Lonergan: Helicopter Money Is Different

Posted on by Brad DeLong

Must-Read: Eric Lonergan: Helicopter Money Is Different:

There are some genuine policy innovations and some old policies in new clothes…

The two innovations are: (1) Transfers to the private sector from the central bank financed by changes in base money…. (2) Money-financed budget deficits, which attempt to alter beliefs about variables in the future….

The old policy in not-so-well disguised new clothes is simply money-financed government spending. The monetisation of deficits neither deserves nor needs a new name…. I want to focus on why (1) is novel, and is urgently needed, and why (2) is an unhelpful distraction…. The analytical confusion is straightforward: the central bank is not the national treasury; base money is different to government bonds, and a check (or perpetual loan) from an independent central bank is not a tax cut. None of these distinctions are trivial in practice or in law…. There are good reasons why we want central banks to issue money, and governments to issue bonds. They’re different. A rare voice of clarity in this discussion, Martin Sandbu at the FT, puts it succinctly:

It is more helpful to call policies involving the government budget fiscal policy and policies involving central bank money monetary policy. That avoids collapsing important distinctions….

So my first conclusion is straightforward: money-financed transfers to the private sector from central banks are a policy innovation. This is not ‘just’ fiscal policy. It is very different–and likely far more effective–than any fiscal policies currently on the table.

Now what about the other type… shocking our beliefs about the future[?]… The tedious theoretical games being played by some… which masquerade as policy insights, are confusing at best. The prevalent reference to ‘permanence’ seems determined to haunt us…. [But] when the answer to most questions pertaining to our long-term economic futures is ‘don’t know’, households have evolved to be rationally myopic, forming habits, and using sensible rules-of-thumb. Modelling their responses to receiving a check in the post from a central bank could be a daunting task–except we know what they do. Those on lower incomes tend to spend a large share, some save the windfall, others repay debt. Forecasting the increase in demand is imprecise, but far less so than with negative interest rates or QE…. Oh, and households in receipt of a check from the central bank don’t ask, ‘before I spend/save/repay debt with this windfall, can you remind me if the associated change in monetary base is permanent or temporary?’…

There is scope for policy innovation, contingency planning, and better policies for the long run. As it stands, granting central banks the power to make money-financed transfers to the private sector–as close as possible an approximation to Friedman’s helicopter drop–seems the best on offer.

Must-Read: Paul Krugman (2013): Helicopters Don’t Help

Posted on by Brad DeLong

Must-Read: A piece from Paul Krugman three years ago that I put aside to think about because I didn’t really understand what argument he was trying to make. I am pulling it out again because I was reading Adair Turner.

Adair, seeking supporters for his advocacy of helicopter money, recruits as authority number one Ben Bernanke. That’s great!

He then recruits as authority number two… me. That’s not so great. There ought to be somebody of more weight and reputation–and intelligence–on the pro-helicopter money side. I wish I could do something to boost my reputation overnight (my weight is already more than high enough, thank you very much). But I can’t. So all I can do is to try to become more intelligent, and think smarter thoughts about helicopter money. So the first question is: what argument am I (and Ben, and Adair) making?

Paul Krugman (2013): Helicopters Don’t Help:

David Beckworth has a good piece on… the irrelevance of the decision to finance budget deficits by printing money as opposed to selling bonds…

In case 1, the government runs a budget deficit, which it finances by selling bonds…. At the same time, the central bank… buy[s] bonds from banks with newly created monetary base. I think we’re all agreed that the second part of this story isn’t very effective in a liquidity trap; the limitations of QE are why we’re even talking about helicopter money.

But now consider case 2, in which the government pays for deficits simply by “printing money”, that is, adding to the monetary base. How do these cases differ?… You may say that… you wanted an increase in government spending financed by the printing press. But why couldn’t you do that same increase in spending financed by bonds that the central bank promptly buys back?…

It’s the spending increase, not the printing press, that does it. As Voltaire said, you can kill sheep with witchcraft if you also feed them arsenic….

What you need to get monetary traction, as I pointed out long ago (and for the record, I do think I was the first to make this point) is to convince everyone that the monetary base will stay larger — to credibly promise to be irresponsible. The only way I can make sense of the call for helicopter money is to argue that for some reason the institutional setup — having the central bank finance the government directly — makes it less likely that the central bank will snatch away the punchbowl later. But that’s a very different argument from the one the helicopter advocates seem to be making.

Must-Read: Willem Buiter: EU and China Ought to Use Helicopter Money

Posted on by Brad DeLong

Must-Read: Willem Buiter: EU and China Ought to Use Helicopter Money:

Helicopter money is a coordinated monetary and fiscal stimulus…

It is a fiscal stimulus funded permanently by the Central Bank. There are obvious win-win situations that we could have. Restructuring of debt if possible, haircuts if necessary, and then a well-targeted fiscal stimulus funded ultimately through the European Central Bank (ECB), people’s helicopter money….

The Central Bank itself provides a fiscal stimulus by sending checks to every man, woman, and child of the country…. In a country like Germany where infrastructure investment is needed, the government announces and implements a large-scale investment program and indirectly sells the debt to fund this program to the central bank, which monetizes it…. [China needs] fiscal stimulus targeted mainly at consumption, not at investment. Some capital expenditure like social housing, affordable housing, even some infrastructure. But organization supporting infrastructure, not high-speed trains in Tibet. It has to be funded by the central government, the only entity with deep pockets, and it has to be monetized by the People’s Bank of China…

Must-Reads: July 30, 2016

Posted on by Brad DeLong

Should Reads:

Weekend reading: “How many Big Macs will that minimum wage buy?” edition

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Weak U.S. productivity growth has been one of the most troubling trends since the Great Recession. Is it just a coincidence that productivity has been weak since the crash? Or did the recession have an impact?

The conventional wisdom about encouraging entrepreneurship is that policymakers should increase the return to starting a business. But increasing evidence shows that we should be concerned about reducing the cost of a failing business as well.

The permanent income hypothesis is an important tool for thinking about how people react to drops or boosts to their income. The idea, however, has some flaws and doesn’t hold up for the entire U.S. population.

With the policy conversation centered on proposals to raise the minimum wage to rates unseen in the United States, it’s hard to tell how such an increase would play out in the United States. New School economist and Equitable Growth grantee David Howell takes a look at the international data for answers. And Bridget Ansel pulls out some of the key graphs and takeaways from Howell’s brief.

Links from around the web

The Federal Reserve kept U.S. interest rates steady at its most recent meeting this week. Ylan Mui writes that the central bank is coming around to the view that U.S. economic growth in the future will be much weaker than it previously thought. [wonkblog]

Because the Federal Reserve has kept U.S. interest rates so low for so long, some economists have thrown out the idea that low interest rates are causing low inflation despite the established view that low interest rates increase inflation. Noah Smith reports on a new paper that tries to settle the question that has quite interesting results. [bloomberg view]

Speaking of unconventional monetary policy, the prospect of “helicopter money” becoming a real world policy is starting to sink in among economists and policy analysts. Neil Irwin gives some background on the idea. [the upshot]

How important is the U.S. government to economic growth and economic policy writ large? Mike Konczal reviews two books on the topic with very different opinions on the matter. [boston review]

“Red tape no doubt prevents some firms from making growth-boosting investments. But bigger gains might come from creating an economy in which firms found themselves needing to compete to attract workers.” Ryan Avent writes on the increase evidence that economic sclerosis in high-income countries is related to inequality and insufficient demand. [the economist]

Friday figure

Figure from “The employment effects of a much higher U.S. federal minimum wage: Lessons from other rich countries” by David Howell