The highly-estimable Jared Bernstein has a very nice piece today. It attempts to sum up a great deal about the state of the economy in a very short space with five super-short equations;
- One is about our current likely-to-be-chronic inequality problems.
- Two are about our demand-management and maintaining-employment problems.
- Two more strongly suggest that the solutions to our problems are extraordinarily simple. They say that in our current dithering and paralysis we are frozen out of fear of dangers that simply do not exist. Thus we are leaving very large and very gourmet free lunches on the table.
So, first, let us listen to Jared:
: Five Simple Formulas: “Here are five useful, simple… inequalities…
…Each one tells you something important about the big economic problems we face today or, for the last two formulas, what we should do about them. And when I say ‘simple,’ I mean it….
[1] r>g… that if the return on wealth, or r, is greater than the economy’s growth rate, g, then wealth will continue to become ever more concentrated….
[2] S>I… Bernanke’s imbalance…. Larry Summers’ ‘secular stagnation’ concerns offer a similar, though somewhat more narrow, version. For the record, I think this one is really serious (I mean, they’re all really serious, but relative to r>g, S>I is underappreciated)…. In theory, there are key mechanisms in the economy that should automatically kick in and repair the disequilibrium…. Central bankers, like Bernanke and Yellen, tend to discuss S>I and the jammed mechanisms just noted, as ‘temporary headwinds’ that will eventually dissipate (Summers disagrees). But while it has jumped around the globe—S>I is more a German thing right now than a China thing (Germany’s trade surplus is 8 percent of GDP!)—the S>I problem has lasted too long to warrant a ‘temporary’ label….
[3] u>u… Baker/Bernstein’s slack attack…. For most of the past few decades—about 70 percent of the time, to be precise—u has been > than mainstream estimates of u, meaning the job market has been slack…. From the 1940s to the late 1970s, u*>u only 30 percent of the time, meaning the job market was mostly at full employment….
[4] g>t… [Richard] Kogan’s cushion…. For most of the years that our country has existed (he’s got data back to 1792!), the economy’s growth rate (g again) has been greater than the rate the government has to pay to service its debt, which I call t. Kogan calls it r since it’s a rate of return, but it’s not the same r as in Piketty (which is why I’m calling it t)….
[5] 0.05>h… the DeLong/Summers low-cost lunch…. When the private economy is weak, government spending can be a very low-cost way to lift not just current jobs and incomes, but future growth as well…. The ‘h’ stands for hysteresis, which describes the long-term damage to the economy’s growth potential when policy neglect allows depressed economies to persist over time…. As an increase in current output by a dollar raises future output by at least a nickel, the extra spending will be easily affordable. But how do we know if 0.05>h? In a follow-up paper for CBPP’s full-employment project, D&S, along with economist Larry Ball, back out a recent number for h that amounts to 0.24, multiples of the 0.05 threshold, and evidence that, at least recently, h>0.05…
The Piketty inequality, [1] r>g, tells us that we are going to be hard-put to become less of a plutocracy than we are now. Consider Donald Trump. He is, or was back before he decided to concentrate on making money by renting his name out as a celebrity to those who could do management, a lousy manager and a lousy investor. Depending on whether you choose a New York real estate benchmark or a broad stock market benchmark, Trump now is between a quarter and a half as wealthy as he would be if he had simply been a passive investor throughout his career. And that is if he is truly as wealthy as he claims to be. In an environment in which most money feels that it has to be prudent, the plutocracy which can’t afford to take risks has the power of compound interest raising its economic salience over time.
The global investment shortfall inequality, [2] S>I, and the labor-market slack inequality, [3] u>u*, tell us that our major and chronic economic problem here in the Global North is and is for the next generation likely to be an excess of prudent saving looking for acceptable vehicles and of potential workers looking for jobs. This is in striking contradiction to the era 1945-1980 in which our major and chronic economic problems were a potential inflation-causing excess of liquidity and governments that believed or hoped to control inflation via financial repression longer than was feasible. This “secular stagnation” problem of chronic slack demand and excess prudent saving has in fact, been the major and chronic economic problem in the Global North since 1980 in Europe and since 1990 in Japan. But we here in the United States paid little notice until the problem spread to us at the start of the 2000s.
Richard Kogan’s observation [4] g>t is this: The United States economy is not and has not been dynamically inefficient in a growth-theory capital-intensity sense. It has, however, been chronically short of federal government debt valued as a prudent investment vehicle for savers. The Treasury’s borrowing operations have, therefore, been on balance not a cost reducing the resources that can flow through from taxes to useful government expenditures, but rather a profit center. A national debt is thus, in Alexander Hamilton’s words, a national blessing. And in the range of debt the U.S. has possessed, a larger national debt has been a national blessing not just for the country as a whole but even from the narrow perspective of the Treasury, in that it is made it easier for the Treasury to balance its books.
And one of the major points of DeLong and Summers (2012), [5] 0.05>h, is that at current levels of debt and interest rates the United States does not run increasing risks but rather runs reduced risks by aggressively borrowing and spending. Whatever you think the risks of a U.S. debt crisis are, they are greater with a higher debt-to-GDP ratio. But the current configuration of the U.S. and Global North economies is such that higher government deficits now reduce the projected debt-to-GDP ratio and the associated debt-financing burden however serious you think that debt-financing burden is. And this will remain the case until (a) interest rates “normalize” (if they ever do), and (b) the economy reattains potential output (if it ever does).
The corollary, of course, is that state governments and the Republican Congressional Caucus and even Treasury Secretaries Jack Lou and Tim Geithner and President Barack Obama have been both retarding the short- and long-run growth of the American economy and raising the long-term risks of financial crisis by focusing so much on reducing the government deficit.
In my view, the economics of Abba Lerner—what is now called MMT—is not always right: It is not always possible for the government to spend freely to attain full employment, use monetary policy to keep the debt under control, and rely on rising inflation as the only signal needed of whether and when policy needs to be tightened. Why not? Because it is possible that the bond market can get itself into an unsustainable position, in which underlying inflationary pressures are masked until it is too late to rebalance government finances without a financial crisis.
But, in my view, right now the economics of Abba Lerner is 100% correct. The U.S. (and Europe!) should use expansionary fiscal policy to rebalance the economy at full employment and potential output. And interest rates are so low that doing so does not require any additional monetary policy steps to keep the debt under control.
Japan, alas, confronts us with a difficult and much more devilish program of economic policy. Partial and nearly painless debt repudiation via inflation and financial repression seems to me to be the best way forward—if that can be attained. But more on that anon.