Tag: Fiscal Policy

Why Is the FOMC So Certain the U.S. Is “Essentially at Full Employment”?

Posted on by Brad DeLong
Employment Rate Aged 25 54 All Persons for the United States© FRED St Louis Fed

Suppose you had, back in 1992 or 2004 or indeed any other time since 1990 and before 2013, asked a question of Charlie Evans—or, indeed, any of the other non-Neanderthal participants in the Federal Reserve’s Federal Open Market Committee meetings. Suppose you had asked whether a 25-54 employment-to-population ratio in the United States of today’s 78.5% was anywhere near “full employment”. What would they have said?

They would have said “of course not!”

They would have observed that the post-baby boom decline in fertility, wage stagnation among male earners, and the coming of feminism had greatly increased the share of 25-54 year old women who wanted paying jobs outside the home.

They would have pointed out that upward pressure on core inflation at an 80% 25-54 employment-to-population ratio in 1990 was small, that upward pressure on core inflation at an 82.5% 25-54 employment-to-population ratio in 2000 was minimal, and that upward pressure on core inflation at an 80% 25-54 employment-to-population ratio in 2007 was minimal.

They would have pointed out that today’s 78.5% was between between the 78.1% 1992 recession trough and the 78.6% 2003 recession trough.

They would have concluded that, by the standards of the post-feminist revolution era, a labor market with a 25-54 employment-to-population ratio of 78.5% was a labor market as bad from a business cycle perspective as the labor market got during the Great Moderation.

So why is Charlie Evans now saying that today the United States has “essentially returned to full employment”? Why no qualifiers? Why no “if you look only at the unemployment rate, and put the shockingly-low labor force participation statistics to one side…? Why no “it may well be the case that the U.S. has essentially returned to full employment? Why this certainty on the part of even the non-Neanderthal members of the FOMC—in public, at least—that the unemployment rate is the sole guide?

And why the puzzlement at the failure of core inflation to rise to 2%? That is a puzzle only if you assume that you know with certainty that the unemployment rate is the right variable to put on the right hand side of the Phillips Curve. If you say that the right variable is equal to some combination with weight λ on prime-age employment-to-population and weight 1-λ on the unemployment rate, then there is no puzzle—there is simply information about what the current value of λ is:

Charles Evans: Lessons Learned and Challenges Ahead: “These policies… produced results. Unemployment began to fall… https://www.chicagofed.org/publications/speeches/2017/05-25-lessons-learned-and-challenges-ahead-bank-of-japan

…more quickly than anticipated in 2013…. We were able to scale back the QE3 purchases…. Today, we have essentially returned to full employment in the U.S.

Unfortunately, low inflation has been more stubborn, being slower to return to our objective. From 2009 to the present, core PCE inflation, which strips out the volatile food and energy components, has underrun 2% and often by substantial amounts. This is eight full years below target. This is a serious policy outcome miss…

Charlie says a lot of good things in his talk. His discussions of “outcome-based policies… symmetric inflation target[s]… [and] risk management” are wise. But wisdom can be usefully applied only if you know where you start from. And we start from a position in which we really do not know how close the U.S. economy is right now to “full employment”—how much headroom for catch-up growth and catch-up employment remains, and how powerful and useful more aggressive policies to stimulate spending would be right now.

In 25 years my students are likely to ask me why the FOMC was so certain the U.S. was “essentially at full employment” today. What will I tell them?

Where US Manufacturing Jobs Really Went

Posted on by Brad DeLong

Project Syndicate: J. Bradford DeLong: Where US Manufacturing Jobs Really Went: In the two decades from 1979 to 1999, the number of manufacturing jobs in the United States drifted downward, from 19 million to 17 million. But over the next decade, between 1999 and 2009, the number plummeted to 12 million. That more dramatic decline has given rise to the idea that the US economy suddenly stopped working–at least for blue-collar males–at the turn of the century…

What Happened to the Trump Infrastructure Push?: Bunga-Bunga Policy, or No Policy at All

Posted on by Brad DeLong
Cursor and Preview of What Happaned to Trump Infrastructure Bunga Bunga Policy or No Policy at All

There seemed, back in November, two ways the Trump infrastructure fiscal expansion could have gone.

The first was driven by the facts that Trump seemed to have ambitions that were “Pharoahnic”, and that Trump had been a real estate developer.

There were then no Trump plans for the infrastructure program. There were, however, plans to have plans. And the plans to have plans were aided by the fact that building things was what you would expect someone who had been a real estate developer to focus on. Since there were no plans, there was an opportunity to develop for Donald Trump with a real, technocratic infrastructure plan. It would have had, from Trump’s perspective, three advantages:

  • It would actually work–it would boost American economic growth, and so make people happy.

  • It would be Pharoahnic. Trump would leave his mark on America’s landscape in a visible way–something that is, for somebody who has for two decades been playing the game of celebrity, a big win.

  • It would make Trump’s presidency both be and appear to be a success, from the desired perspective of helping to make America even greater than ever.

And the idea that the economy was already at full employment, and did not need additional stimulus of any kind? That extra stimulus would be offset by the Federal Reserve, and that the overall effect on employment would be very small? That, taking into account the Federal Reserve reaction, the only major effect would be to raise interest rates? Perhaps. But that would not have been a downside. If you do seek–as we do–to normalize interest rates in the medium term, and if you want to see whether there are discouraged workers out there, moving away from monetary to fiscal as the stimulative balancing item is exactly the right thing to do. An extra $300 billion/year of bond funded infrastructure would substantially normalize interest rates.

The second was driven by the fact that there are an awful lot of small-government fanatics and some fiscal conservatives in the Trump coalition. That way would have generated a politics in which the normal fiscal infrastructure stimulus that both the situation and Trump’s background seemed to call for would not happen. It would simply not be done.

Instead, the Trump infrastructure plan would wind up building infrastructure on the government’s dime. That infrastructure which would then have been given away to friends of the administration. They would then have charged monopoly prices for access to it.

Little good as infrastructure–monopolists charging monopoly prices are rarely public benefactors on any large scale. No good of stimulus. Think of Silvio Berlusconi, but not on an Italian but on a North American scale.

Another pointless episode of bunga-bunga policy.

The U.S. would have been likely to lose, substantially, if that was what the Trump fiscal expansion had turned out to be. And then, of course, there would be the Trump tax cut: another nail in the coffin of sane and prudent fiscal policy, and another brick in the wall of the Second Gilded Age.

We may still have this bunga-bunga policy.

But with each day that passes with not even a plan to plan to have a plan, it looks more as though there is no Trump administration–just the reality TV simulacrum of one, cabinet members following their own administrative agendas, White House propaganda aides following their own propaganda agendas, and a Congress that seems to lack any sort of positive leadership. Not constructive infrastructure policy. Not bunga-bunga infrastructure policy. Simply no policy at all.

Constructive infrastructure policy now looks completely off the table.

Destructive bunga-bung infrastructure policy is still a possibility, but a low probability one.

No infrastructure policy now looks like the way to bet at even odds…

Money Demand a Function of Private Consumption Spending, Not Income

Posted on by Brad DeLong

Note to Self: I alway find it interesting that Friedman and the monetarists formulated money demand as a function of income rather than of private spending, or even of private consumption spending. You don’t need or want money when your income is high, unless you want to spend it.

And it seems highly likely that the ratio of desired money holdings to planned spending is much higher for consumption than investment. Money demand should therefore be a function of private sector consumption spending–and nominal interest rates–not a function of income. We thus have:

C = MV(i)/P

Y = C + I + G + (X-M)

And from this accounting framework it is very difficult indeed to make strong monetarist conclusions appear obvious facts of nature rather than weird and tendentious claims. Mankiw and Summers made this point back in 1982. And they were totally ignored—even though it was and is a very smart point…

Has Academic Thinking About Countercyclical Fiscal Policy Changed?

Posted on by Brad DeLong

Has academic thinking about countercyclical fiscal policy changed recently? I would not say that thinking has changed. I would say that there is a good chance that thinking is changing–that academia is swinging back to a recognition that monetary policy cannot do the stabilization policy by itself, at least not under current circumstances. But it may not be.

If things are swinging back, it is as a result of a whole bunch of extraordinary surprises.

Back in 2007 we thought we understood the macroeconomic world, at least in its broad outlines and essentials. It has become very clear to us since 2007 that that is not the case. Right now we have a large number of competing diagnoses about where we were most wrong. We clearly were very wrong about the abilities of major money center banks to manage their derivatives books, or even to understand to understand what their derivatives books were. We clearly did not fully understand how those markets should be properly regulated.

Right now, however:

  • We have people who think the key flaw in the world economy today is an extraordinary shortage of safe assets. Nobody trusts private sector enterprises to do the risk transformation properly. Probably people will not again trust private sector enterprises for at least a generation.

  • We have those who think the problem is an excessive debt load where–I think we should distinguish between debt for which there is nothing safer, the debt of sovereigns that possess exorbitant privilege, and all other debts.

  • We have those who think we are undergoing a necessary deleveraging.

  • We have those who look for causes in the demography.

  • And then there is Larry Summers, as the third coming of British turn-of-the 20th century economist John Hobson. (The second coming was Alvin Hansen in the 1930s.) And the question: just what is Larry talking about?

    • Is Larry talking about the inevitable consequences of the coming of the demographic transition and of the end of Robert Gordon’s long second Industrial Revolution of extremely rapid economic growth?

    • Or is he talking a collapse of the ability of financial markets to do the risk transformation–to actually shrink the equity risk premium from its current absurd level down to something more normal?

If you look at asset prices now, you confront the minus two percent real return on the debt of sovereigns that possess exorbitant privilege with what Justin Lahart of the Wall Street Journal tells me is now a 5.5% real earnings yield on the U.S. stock market as a whole. That 7.5% per year equity premium is a major derangement of asset prices. It makes it very difficult for us to use our standard tools to think about what good policy would be…

Fiscal Policy in the New Normal: IMF Panel

More Expansionary FIscal Policy Is Needed: The Only Question Is Whether for a Short-Term Full Employment Attainment or a Medium-Term Full-Employment Maintenance Purpose

Posted on by Brad DeLong

J. Bradford DeLong: On Twitter:

If the Federal Reserve wants to have the ammunition to fight the next recession when it happens, it needs the short-term safe nominal interest rate to be 5% or more when the recession hits. I believe that is very unlikely to happen without substantial fiscal expansion. No, at least in the world that Janet Yellen sees, “fiscal policy is not needed to provide stimulus to get us back to full employment.” But fiscal policy stimulus is needed to create a situation in which full employment can be maintained. It would be a rash economist indeed who would forecast a short-term safe nominal interest rate above 3% when the time for the next loosening cycle arrives:

3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

Thus if we do not shift to a more expansionary fiscal policy–and the higher neutral rate of interest that it brings–now, what do we envision will happen when the next recession arrives? Do we trust that congress and the president will then understand and react appropriately in a timely fashion and at the right scale to deal with the slump in aggregate demand?

Once again, it would be a very rash economist who would forecast that. An FOMC that does not press strongly for more expansionary fiscal policy now is an FOMC that is adopting a policy that threatens to make life very difficult indeed for their successors between two and six years from now.

And, of course, there is the chance–I see it as a substantial chance–that full employment is attained at a prime-age employment-to-population ratio of not 78% but 80%–or 81.5%. In that case, Janet Yellen is wrong to say that “fiscal policy is not needed to provide stimulus to get us back to full employment.”

Employment Population Ratio 25 54 years FRED St Louis Fed

Musings: Donald Trump Ought Not to Be a Hard-Money Gold-Standard Austerian Pain-Caucus President

Posted on by Brad DeLong
3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

When I was working in the Treasury in 1993, I was struck by how much it was the case that President Bill Clinton was still the ex-Governor of Arkansas, and that arguments that would have been powerful and important when directed at a Governor of Arkansas still resonated in his mind much more strongly than they perhaps should have if they were evaluated purely on technocratic grounds.

Arkansas, remember, was a small, poor state, heavily dependent on coupon-clipping from the Walton family and on the ability of Tyson Chicken to export to other states as its engines of economic growth. Those put constraints on Arkansas and make certain factors salient for Arkansas in ways that do not apply to the country as a whole.

Donald Trump has been a real estate developer–and a failed casino manager. The same where-he-comes-from-determine-which-arguments-resonate should apply here.

There thus ought to be an elective affinity between Donald Trump and proper technocratic fiscal policy: he ought to be very responsive to the very strong case for a real and substantial infrastructure construction-led fiscal expansion–and remember that investing in the human capital of twelve year olds is a very durable piece of infrastructure indeed. The math that shows that at current interest rates borrow-and-build is indeed a no-brainer for the economy is math that ought to be very familiar to Donald Trump.

And he ought to be very responsive to the Yellen caucus in the Federal Reserve. Very much like Reagan in 1980, Donald Trump has been told and from personal experience knows very different things about the Federal Reserve. by some that we need rigid Taylor Rules and has been told by others that we need a Gold Standard, but he also knows that high interest rates kill real estate values, real estate deals, and the solvency of real estate developers. Reagan’s goldbug and loose-money staffers fought each other to a standstill, and Volcker was left alone to manage the economy as best he could. There is a potential fight between the Donald Trump who develops real estate and the Donald Trump who wants to be a good Republican fighting for Republican causes he doesn’t really resonate with. My bet is that, if the issue can be properly framed, the valid technocratic arguments for loose money will prevail inside Donald Trump’s head, given the natural elective affinity with his past career.

And there is much to be done here…

One of my proudest moments was when, back in 1992, Larry Summers and I egged each other on to tell the Federal Reserve at Jackson Hole that, given the magnitude of recessionary shocks and the vulnerability of an economy to the zero lower bound, it was too hazardous to try to push the average inflation rate much below 5%/year. Great call. Completely correct. Totally ignored. One that I am very proud of.

But a 2%/year inflation target was set in stone for the U.S. by Alan Greenspan in the 1990s. Thereafter the Federal Reserve system fell in line and coalesced around finding reasons why that target was a good thing–not analyzing whether it was in fact a good thing.

It is now clear that it is not a good thing: shocks are too large. Perhaps the 2%/year target was appropriate if the Great Moderation was permanent. It wasn’t. We have radical uncertainty of many kinds, and a 2%/year target will have us slam into the zero lower bound appallingly often. The target inflation rate should be raised to 4%/year.

The only argument for keeping the 2%/year inflation target is that it helps build the Federal Reserve’s credibility. But the credibility that comes from doing stupid things consistently and persistently is not the kind of credibility you want to build or have, is it? It is important that people trust your promises. But the promises that you want to make and that you want credibility for are promises that you will do the right and smart thing–not the wrong and dumb thing–and thus that you will correct policies that turn out to have been clearly mistaken.

European Fiscal Policy: And All Does Not Go Merry as a Marriage Bell

Posted on by Brad DeLong

I find myself thinking of Ludger Schuknecht’s very powerful and apposite comments about just what, even if you believe–as I do–that there are substantial spillovers for Germany and for the world for Germany to use its fiscal space for expansionary policies right now, it is supposed to use its fiscal space for…

The fiscal space is in Germany. The infrastructure needs are in Sicily. This is in the end the political and also the political-economic dealbreaker. It does speak to necessary reforms of the European Union so that things like this do not happen again.

I remember Maury Obstfeld saying once that at the start of the 1990s California and New York had no problem using the United States’s fiscal space to transfer 25% of a year’s Texas GDP to Texas to clean up the Savings and Loan financial crisis mess. This just was not an issue in American politics or political economy. Texas had bet wrongly on the real estate sector via lax regulation–both at the federal and state level–and financial engineering. It was regarded as a proper use of America’s fiscal space to spend money on this and pull Texas out of what was a shallow national but would have been a very deep regional recession.

The fact that the Chair of the Senate Finance Committee at the time was from Texas may, however, have had something to do with it.

The American institutions then were, somehow, a better set of institutions for dealing with this kind of crisis. That there was an alignment of interests, and that the prosperity of each would redound to the prosperity of all in the long even if not always in the short run was taken for granted.

In fact, perhaps, Europe’s institutions today are inferior along some aspects of this dimension than Europe’s institutions in the past. Back in 1200, say, the question of how Germany should use its fiscal space, if in fact the desired location of spending was in Sicily, was finessed. A Germany Hohenstaufen princeling would be married to a Viking-Sicilian princess, and she would then bring Sicily along with her into the Holy Roman Empire as her dowry, and Germany–at least Germany’s rulers–would have an obvious interest in upgrading Sicily’s infrastructure.

Admittedly, the German Emperor might then decide that he would rather spend time in his palace in Palermo than in Burg Hohenstaufen twenty miles east of Stuttgart.

Somehow, national borders and national communities constrain us in Europe in ways that are not the wisest today…

Fiscal Policy in the New Normal: IMF Panel

Note: Our Stabilization Policy Dilemma

Posted on by Brad DeLong

Note to Self: If we want to have a better world, we either need to change the politics to restore the stabilization policy mission to fiscal authorities–and somehow provide them with the technocratic competence to carry out that mission–or give additional powers to central banks, powers that we classify or used to classify as being to a degree “fiscal”.

See: http://www.bradford-delong.com/2016/11/imf-panel-fiscal-policy-in-the-new-normal-partial-transcript.html

Should We Use Expansionary Fiscal Policy Now Even If the Economy Is at Full Employment? Yes!

Posted on by Brad DeLong

When should you use fiscal policy to expand demand even if the economy is at full employment?

First, when you can see the next recession coming: that would be a moment to try to see if you could push the next recession further off.

Second, if it would help you prepare you to better fight the next recession whenever it comes.

The second applies now whether we are near full employment or not. Under any sensible interpretation of where we are now, using some of our fiscal space would put upward pressure on interest rates and so open up enormous amounts of potential monetary space to fight the next recession. It would do so whether or not it raised output and employment today as long as it succeeded in raising the neutral interest rate–and if a large enough fiscal expansion does not raise the neutral interest rate, we do not understand the macroeconomy and should simply go home.

Fiscal Policy in the New Normal: IMF Panel