Intellectual broker: Secular stagnation vs. Ben Bernanke

Posted on by Brad DeLong

Let me put here my first, much longer draft to what appeared on Project Syndicate: The Tragedy of Ben Bernanke

Ben Bernanke has published his memoir, The Courage to Act.

I am finding it difficult to read. I am finding it hard to read it as other than as a tragedy. It is the story of a man who found himself in a job for which he may well have been the best-prepared person in the world. Yet he soon found himself overmastered by the situation. And he fell and stayed well behind the curve in understanding what was going on.

Those of us with even some historical memory winced when, back in 2003, Robert Lucas flatly declared that the problem of depression-prevention had been solved “for all practical purposes, and has in fact been solved for many decades”. We remembered 1960s Council of Economic Advisers chairs Walter Heller and Arthur Okun saying much the same thing. Indeed, we remembered Irving Fisher in the 1920s saying much the same thing. Fisher’s hubris was followed by nemesis in the form of the Great Depression. Heller’s and Okun’s hubris was followed by nemesis in the form of the 1970s inflation. The joke was on Lucas.

But in a deeper sense the joke was on those of us who winced at Lucas–and also on the people of the North Atlantic. For, as we know, the economy since 2007 has not been a very funny joke the people of the North Atlantic.

Those of us with historical memory knew that the problem of preventing severe macro economic instability had not been solved. But even we believed that even sharp downturns would be transitory and short. Rapid recovery to full prosperity and the supply side-driven trend growth was all but guaranteed. Perhaps full prosperity could be delayed into an extended medium-run by actively-perverse and destabilizing government policies. Perhaps the full-prosperity equilibrium-restoring forces of the market would work quickly.

But they would work.

Indeed, back in 2000 it was Ben Bernanke who had written that central banks with sufficient will and drive could always, in the medium-run at least, restore full prosperity by themselves via quantitative easing. Simply print money and buy financial assets. Do so on a large-enough scale. People would expect that not all of the quantitative easing would be unwound. Thus people would have an incentive to use the extra money that had been printed to step up their spending. Even if the fraction of quantitative easing that thought permanent was small, and even if the incentive to spend was low, the central bank could do the job.

It is to Bernanke’s great credit that the shock of 2007-8 did not trigger another Great Depression. However, what came after was unexpectedly disappointing. Central banks in the North Atlantic–including Ben Bernanke’s central bank, the Federal Reserve–went well beyond the outer limits of what we had thought, back before 2008, would be the maximum necessary to restore full prosperity. And full prosperity continued and continues to elude us. Bernanke pushed the US monetary base up from $800 billion to $4 trillion–a five-fold increase, one that a naïve quantity theory of money would have seen as enough stimulus to create a 400% cumulative inflation. But that was not enough. And Bernanke found himself and his committee unwilling to take the next leap, and do another more-than-doubling to carry the monetary base up to $9 trillion. And so, by the last third of his tenure in office, he was reduced to begging in vain for fiscal-expansionary help closed-eared Congress, which refused. Some leading figures in the dominant Republican party made political hay by calling what he had done “almost treasonous”, and threatening, in the coded language applied a generation ago to civil rights and other agitators, to lynch him should he show up where he was not wanted.

So what went wrong? I have been thinking about this with mixed success, most recently for the Milken Institute Review. So let me try yet again to summarize:

As I understand Ben Bernanke’s perspective, he thinks that nothing fundamental went wrong. It is just that the medium-run it takes for aggressively-expansionary monetary policy to restore full prosperity has been artificially lengthened, and seems long to us indeed. Interventions by non-market–or perhaps it would be better to call them non-risk adjusted return maximizing–financial players have created a temporary global savings glut. Sovereign wealth funds for which loss aversion is key, the emerging-market rich seeing their positions in the North Atlantic as primarily insurance against political risk, and governments seeking to ensure freedom of action have pushed full-prosperity interest rates down substantially, and lengthened the medium-run it takes for shocks to dissipate. But, I believe Bernanke believes, these disturbances are ending. And so, if he were still running the Fed, he would think it appropriate to raise interest rates now.

An alternative view is held by the very sharp Ken Rogoff. He believes, I think, that Bernanke’s cardinal error was to focus on money when he should have been focusing on that. In our simple models which you focus son does not matter: when the money market is in full-prosperity equilibrium, the debt market is too. But in the real world a central bank and a broader government that focused not on expanding the stock of safe money but on buying back and inducing the writing-down of the stock of risky debt would have boosted private spending much more effectively and restored full prosperity much more quickly.

Yet a third possible view is that the Fed could have done it: if it had committed to a higher target inflation rate than 2%/year, and promised to do as much quantitative easing as needed to get to that target, it would have produced full prosperity without requiring anywhere near as much quantitative easing as has been, so far, undertaken without that favorable result.

And then there is fourth view, one that I associate with Larry Summers and Paul Krugman, that we have no warrant for believing that monetary policy can restore full prosperity not only not in the short-run, but not in the medium-run and probably not even in the long-run. As Krugman put it most recently:

In 1998… I envisaged an economy in which the… natural rate of interest… would return to a normal, positive level… [and so] the liquidity trap became a [monetary-]expectations problem… monetary policy would be effective if it had the right kind of credibility…. [But if] a negative Wicksellian [natural] rate… permanent… [then] if nobody believes that inflation will rise, it won’t. The only way to be at all sure… [is] with a burst of fiscal stimulus…

Their position is, after a long detour through the post-World War II neoclassical-Keynesian synthesis, a return to a position set out by John Maynard Keynes in 1936:

It seems unlikely that the influence of [monetary] policy on the rate of interest will be sufficient by itself…. I conceive, therefore, but a somewhat comprehensive socialization of investment will prove the only means the securing an approximation to full employment; though this not need exclude all manner of compromises and of devices by which the public authority will cooperate with private initiative…

The government, that is, will have to be infrastructure-builder, risk-absorber, safe debt-issuer, debt workout-manager, and to a substantial degrees sectoral economic planner of last resort to maintain full prosperity. Milton Friedman’s dream that strategic interventions by the central bank in the quantity of high-powered money would then be just that—a dream. And our confusion, and the attractiveness of Milton Friedman’s monetarism in the half-century starting with a World War II would be an accident of the particular circumstances of the uniquely rapid North Atlantic-wide demographic and productivity growth of the transient post World War II era.

I cannot claim—we cannot claim—to know whether Bernanke he will Rogoff or Krugman and Summers are correct here, or even weather if Bernanke he and his committee had found the nerve, and rolled double-or-nothing one more time to boost the American high-powered money stock to $9 trillion, we might have been back to full prosperity a couple of years ago. But I do think that the debate over this question is the most important debate within macroeconomics since the debate—strangely, a very similar debate, at least with respect to its policy substance—that John Maynard Keynes had with himself in the decade around 1930 that turned him from a monetarist into a Keynesian.

Noted for the Morning of November 5, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Question: What Are Our Biggest Economic Problems Right Now?

Posted on by Brad DeLong

I have been someone who takes the long-run secular decline in prime-age male employment as a canary in the coal mine: it has seemed to me via sign that information technology which greatly reduces valuable employment of human brains as cybernetic control elements for machines poses us with significant problems that are not necessarily economic but rather in the sociology of social roles. When Case and Deaton on the decline in life expectancy among the white and middle-aged crossed my desk earlier this week, I thought that case was reinforced.

But now I find myself updating and looking at this graph:

Graph Employment Rate Aged 25 54 Females for the United States© FRED St Louis Fed

It now looks quite different from how it looked a couple of years ago.

I had, a couple of years ago, taken the gender gap in trends here as an indication that those trained not to focus on social intelligence were having increasing difficulties finding valued social roles, and thus as a sign that information technology sociological apocalypse was drawing near. But now… relative to 2000, it is much easier to tell a slack-labor-demand-is-most-of-it story.

Thus I am now swinging toward thinking that if we could only focus on expansionary fiscal policy to restore the high-pressure full-employment economy of the Clinton years that we would find our longer-run structural problems solving themselves, or at any rate becoming smaller and moving further away into the distance. And I am now swinging toward understanding Case and Deaton as more evidence on the extremely high sociological costs of a low-pressure economy.

Must-Read: Michael Spence, Danny Leipziger, James Manyika, and Ravi Kanbur: Restarting the Global Economy

Posted on by Brad DeLong

Must-Read: Michael Spence, Danny Leipziger, James Manyika, and Ravi Kanbur: Restarting the Global Economy: “The global economy is not working properly…

…aggregate demand must be expanded, the gap between excessively large pools of capital and huge unmet infrastructure needs must be bridged, and… the distributional downside of rapid technological advances and global integration must be addressed. Change will come only when a global vision is put forth, coupled with political will…. The challenges represented by these mismatches intersect and interact, and play out differently in the short, medium and long term. One normally thinks of aggregate demand deficiency as a short-term challenge of the business cycle, but the current mismatch at the global level has lasted more than seven years…. Deficient labour demand, as the result of weak aggregate demand overall, either lowers wages or causes unemployment if wages are rigid–worsening the distribution of income in either case. This trend towards greater inequality will only worsen as the consequence of long-run trends in labour-displacing technologies….

These three self-reinforcing mismatches are an indication not only of market failure, but also of the failure of governments to address the challenges they pose…. Three areas of concerted public action–boosting global demand (with an emphasis on investment and essential services), unblocking the flow of surplus funds towards unmet investment needs, and mitigating rising inequality–are mutually reinforcing. The analytical arguments behind them are strong. Public policy solutions are possible to deal with many economic challenges if political consensus can be achieved on tackling them, both nationally and globally. What is needed is global vision and political will that can make them a reality and thus restart the global economy so it can meet its potential on growth and on distribution.

Must-Read: Larry Summers: Advanced Economies Are so Sick We Need a New Way to Think About Them

Posted on by Brad DeLong

Must-Read: Larry Summers: Advanced Economies Are so Sick We Need a New Way to Think About Them: “Standard new Keynesian macroeconomics… [and] to an even greater extent… dynamic stochastic general equilibrium (DSGE) models…

…imply that… the only effect policy can have is on the amplitude of economic fluctuations, not on the [average] level of output. This assumption is problematic…. The assumption is close to absurd. It is surely reasonable to assume that better policy could have avoided the Depression or the huge output losses associated with the financial crisis without having shaved off some previous or subsequent peak…. Contrary to the now common view that macroeconomics is best understood by studying the stochastic properties of stationary time series, the most important macroeconomic events are in some sense one off. Think of the Depression or the Great Recession or the high inflation of the 1970s. The problem has always been that it is difficult to beat something with nothing. This may be changing as topics like hysteresis, secular stagnation, and multiple equilibrium are getting more and more attention…

Must-Read: Walter Ong: Towards a Theory of Secondary Literacy

Posted on by Brad DeLong

Must-Read: Walter Ong: Towards A Theory of Secondary Literacy: “I have also heard the term ‘secondary orality’ lately applied…

…by some to other sorts of electronic verbalization which are really not oral at all—to the Internet and similar computerized creations for text. There is a reason for this usage of the term. In nontechnologized oral interchange, as we have noted earlier, there is no perceptible interval between the utterance of the speaker and the hearer’s reception of what is uttered. Oral communication is all immediate, in the present. Writing, chirographic or typed, on the other hand, comes out of the past. Even if you write a memo to yourself, when you refer to it, it’s a memo which you wrote a few minutes ago, or maybe two weeks ago.

But on a computer network, the recipient can receive what is communicated with no such interval. Although it is not exactly the same as oral communication, the network message from one person to another or others is very rapid and can in effect be in the present. Computerized communication can thus suggest the immediate experience of direct sound. I believe that is why computerized verbalization has been assimilated to secondary ‘orality,’ even when it comes not in oral-aural format but through the eye, and thus is not directly oral at all. Here textualized verbal exchange registers psychologically as having the temporal immediacy of oral exchange. To handle such technologizing of the textualized word, I have tried occasionally to introduce the term ‘secondary literacy’…

Austerity, inverse Say’s Law, and secular stagnation

Posted on by Bridget Ansel
Larry Summers by J. Scott Applewhite, Associated Press

After the worst of the Great Recession seemed to have passed in early 2010, policymakers, concerned with the run-up in public debt caused by the recession and policies intended to fight it, turned to fiscal consolidation, better known as austerity. Their thinking was that the response to the financial crises and the resulting recession had done what it could, and that governments across the globe should pull back from boosting growth through fiscal policy.

More than five years later, however, that turn to austerity so early during the recovery seems to have been premature. In fact, some economists are starting to wonder if we should have ever stopped the fiscal stimulus.

One of the arguments against continued fiscal stimulus, or any stimulus at all, was Say’s Law. Named after the early economist Jean-Baptiste Say, the “law” states that supply creates its own demand. According to this thinking, the government doesn’t need to be concerned about boosting demand during recessions because the system will equilibrate on its own. But this doesn’t hold up in the short run. In fact, the inverse of Say’s Law seems to be the case, at least in our current situation.

Austerity, according to a new paper by former U.S. Treasury Secretary and Harvard University economist Larry Summers, and INSEAD economist Antonio Fatas, seems to have actually hurt potential output, measured as our estimates of future gross domestic product. In other words, the amount of demand in the present very much has an effect on the economy’s future potential. Not putting the current resources of the economy to their full use can result in a poorer future.

This insight is important when thinking about the potential problem of secular stagnation. Early in the Great Recession, many economists, including Paul Krugman, thought that problem for macroeconomics was hastening the arrival of the recovery. A return to normal economic conditions would come around, but fiscal and monetary policy could get the economy there quicker. But now, after rethinking the case of the Japanese economy, Krugman is considering whether it’s possible for an economy to be in a state of constant demand deficiency.

If the natural rate of interest is permanently below zero, then policy has to be permanently stimulative. Whether this means the central bank pushes inflation permanently higher or policymakers run fiscal deficits in perpetuity, policymakers can’t just wait for the recovery to show up. To paraphrase Larry Summers, there will be no deus ex machina ending. Recovery needs to be brought about proactively.

And the costs of inaction would be tremendous. Even if the demand deficit were a temporary phenomenon, the costs of not accelerating recovery would still be large. But if it is a permanent problem, then the lack of demand would have larger and far-reaching costs in terms of supply as well. If workers aren’t employed in the short run, maybe they won’t be employed in the future. If high unemployment reduces the earnings of young workers early in their careers, that cost will project forward as well. If companies hold back on investment due to weak growth, that’ll impact future potential supply as well. A lack of urgency about the present could do major damage to the future.

Must-Read: Anne Case and Angus Deaton: Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century

Posted on by Brad DeLong

Must-Read: Anne Case and Angus Deaton: Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century: “This paper documents a marked increase in the all-cause mortality of middle-aged white…

…non-Hispanic men and women in the United States between 1999 and 2013… revers[ing] decades of progress in mortality… unique to the United States… confined to white non-Hispanics… at midlife… increasing death rates from drug and alcohol poisonings, suicide, and chronic liver diseases and cirrhosis…. Those with less education saw the most marked increases. Rising midlife mortality rates of white non-Hispanics were paralleled by increases in midlife morbidity. Self-reported declines in health, mental health, and ability to conduct activities of daily living, and increases in chronic pain and inability to work, as well as clinically measured deteriorations in liver function, all point to growing distress in this population…

Www pnas org content early 2015 10 29 1518393112 full pdf

Must-Read: Ben Thompson: Grantland and the (Surprising) Future of Publishing

Posted on by Brad DeLong

Must-Read:Ben Thompson: Grantland and the (Surprising) Future of Publishing: “As a reader this is frustrating…

…Vox stripped down to the political and policy coverage that is its raison d’être would almost certainly rate as a destination site for me; instead, faced with a deluge of rewrites and summarized videos, I miss most of the good stuff save for what I stumble across on social media. I’m certainly not going to waste my time wading through the filler on the homepage…. Still… Vox is… thriving while Grantland… is dead…. The only destination sites that really seem to be working either have massive brand equity that is being leveraged into subscriptions… or are tiny one-person operations that leverage the Internet to keep costs sustainably low while monetizing through small-scale native advertising (e.g. Daring Fireball and the now-retired Dooce.com, for example) or subscriptions (e.g. The Timmerman Report and the site you’re reading)…. The lesson of Grantland is that there is no room in the middle: not enough scale for advertising, and costs that are far too high for a viable subscription business…

Rising U.S. mortality and its potential economic causes

Posted on by Bridget Ansel
Doctor checking blood pressure of his patient by mangostock, veer.com

One of the promises of economic growth and advancement is that things will get better for everyone. A rising tide is supposed to lift all boats, even if we’ve acknowledged that some boats have risen higher lately. But a new study shows that this promise isn’t always fulfilled—and that sometimes, things can actually get worse. The paper, written by Princeton University economists Anne Case and Angus Deaton (the recent winner of the Nobel Prize), shows an increasing mortality rate for white Americans ages 45 to 54 since 2000. In other words, a middle-aged white person was more likely to die in 2013 than they were in 1999. This alarming new health trend coincides with a multitude of economic data documenting increasing economic insecurity over this same period—something the authors comment on in their paper and in reports about their findings.

Indeed, this health reversal stands in stark contrast to the trends in mortality prior to the start of this century. According to Case and Deaton, the mortality rate fell considerably for middle-aged Americans from 1978 to 1998. For middle-aged whites, the rate fell on average by 2 percent a year. This trend was quite similar to declines in other high-income economies like those in Western Europe. But in 1999, the mortality rates for middle-aged white workers in the United States begin to increase, in contrast to their European counterparts whose death rates continued to fall.

What’s more, the self-reported rate of morbidity—the frequency of sickness or disease—has also increased among American middle-aged white workers since 1999. They are much more likely to report their physical health as “not good” and that they are in pain. Such health problems put these men more at risk for mental health problems and heavy drinking.

What’s at the root of these huge problems for middle-aged white Americans? A likely cause, which Case and Deaton flagged, is a rise in general chronic pain among this population. The same time period (1999–2013) saw an increase in the use of opioids, first in the form of prescription drugs and increasingly in the form of heroin. The report doesn’t specify, however, whether the increase in self-described pain came first or if the increased use of opioids did. Either way, the increased amount of pain also shows up in higher suicide rates and alcohol abuse.

It’s very likely that increased economic insecurity since 1999 has been a factor in driving these health problems. In a Wall Street Journal article this week, Case notes that the inflation-adjusted median household income for high-school educated whites peaked in 1999. The downward trend in median household income that followed isn’t just for those with a high school degree—the median household income for all white Americans peaked in 2000, and the median market income for all households peaked in 1999 according to the Congressional Budget Office. At the same time, the share of white 45- to 54-year-olds with a job reached its zenith in 2000, just like the overall U.S. employment rate and the employment-to-population ratio for all prime-age workers. Of course, these declines in income and employment are happening to all racial groups, so they can’t be the sole cause of rising mortality for whites. But they certainly seem to be a major contributor.

This last trend and the increased pain among the U.S. population could also help explain both the rising number of workers on disability insurance and part of the decline in the U.S. labor force participation rate. Case and Deaton’s results, if they hold up, would show that rising disability claims aren’t due to workers being attracted to more generous benefits, but rather because they are increasingly unable to actually work.

On a number of fronts, the startling results from Case and Deaton’s research should cause us to think deeply about what’s been happening in the U.S. economy during this new century.