Tag: Macroeconomics

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

Will the U.S. Economy Boom?

Posted on by Brad DeLong

The very sharp Ken Rogoff predicts a boom over the next four years: “The biggest missing piece… is business investment, and if it starts kicking in… output and productivity could begin to rise very sharply…. You don’t have to be a nice guy to get the economy going…. It is far more likely that after years of slow recovery, the US economy might at last be ready to move significantly faster…”

I really can’t see it as likely. Rogoff talks about:

  • “the prospect of a massive stimulus, featuring a huge expansion of badly needed infrastructure spending…” but Trump’s stimulus proposal as of now is for tax subsidies to projects that would be built in any event coupled with privatization to restrict use. There is definitely space for fiscal stimulus and infrastructure–and we should lobby and argue hard to use that space–but what appears to be on Trump’s agenda is a bunga-bunga Berlusconi-like policy.

  • “a massive across-the-board income-tax cut that disproportionately benefits the rich… [although it] hardly seems as effective as giving cash to poor people… tax cuts can be very good for business confidence…” but I haven’t seen cases in which this is true–rather, rich people say that tax cuts are very good for business confidence and then skip town with the money.

  • “repealing Obama-era regulation… businesses will be ecstatic, maybe enough to start really investing again. The boost to confidence is already palpable…” but I can’t see a bigger carbon-energy boom than we have had, I don’t notice other labor or environmental regulations binding–certainly not in the Seattle restaurant industry–and, this morning, Boeing is really not ecstatic about a president Trump.

  • “the huge shadow Obamacare casts on the health-care system, which alone accounts for 17% of the economy…” but ObamaCare is primarily a source of money for health care, not a regulatory drain. Repeal of ObamaCare would be–as every hospital and insurance company is right now telling everyone on Capitol Hill who will listen–a major downer. Who is Rogoff talking to? When he made this point earlier, he referred to the “substantial regulatory burden of ObamaCare on small business”. But there never was any. Small businesses–those with less than fifty employees–face no burden. Those few larger businesses–those with fifty employees or more–that do not offer employer-sponsored health insurance face a not-yet-implemented and often-postponed 2% of payroll tax. That’s a cost to them, but a benefit to their many, many competitors who have been offering employer-sponsored insurance.

And:

  • “Even steadfast opponents of President-elect Trump’s economic policies would have to admit they are staunchly pro-business (with the notable exception of trade)…” Enough said.

By saying that a boom is “far more likely” than the opposite, I think Rogoff is playing a 20% chance as if it were a 60% chance. And I do not understand what makes him see the world this way. Tax credits for already-planned infrastructure projects are not fiscal stimulus, ObamaCare is not a substantial regulatory burden on small business, etc. Or do I not live in the real world?

Kenneth Rogoff: The Trump Boom?: “Under President Barack Obama, labor regulation expanded significantly…

…not to mention the dramatic increase in environmental legislation. And that is not even counting the huge shadow Obamacare casts on the health-care system, which alone accounts for 17% of the economy. I am certainly not saying that repealing Obama-era regulation will improve the average American’s wellbeing. Far from it. But businesses will be ecstatic, maybe enough to start really investing again. The boost to confidence is already palpable.

Then there is the prospect of a massive stimulus, featuring a huge expansion of badly needed infrastructure spending. (Trump will presumably bulldoze Congressional opposition to higher deficits.) Ever since the 2008 financial crisis, economists across the political spectrum have argued for taking advantage of ultra-low interest rates to finance productive infrastructure investment, even at the cost of higher debt. High-return projects pay for themselves.

Far more controversial is Trump’s plan for a massive across-the-board income-tax cut that disproportionately benefits the rich. True, putting cash in the pockets of rich savers hardly seems as effective as giving cash to poor people who live hand to mouth. Trump’s opponent, Hillary Clinton, memorably spoke of “Trumped-up trickle-down economics.” But, Trumped-up or not, tax cuts can be very good for business confidence.

It is hard to know just how much extra debt Trump’s stimulus program will add, but estimates of $5 trillion over ten years – a 25% increase – seem sober. Many left-wing economics commentators, having insisted for eight years under Obama that there is never any risk to US borrowing, now warn that greater borrowing by the Trump administration will pave the road to financial Armageddon. Their hypocrisy is breathtaking, even if they are now closer to being right.

Exactly how much Trump’s policies will raise output and inflation is hard to know. The closer the US economy is to full capacity, the more inflation there will be. If US productivity really has collapsed as much as many scholars believe, additional stimulus is likely to raise prices a lot more than output; demand will not induce new supply.

On the other hand, if the US economy really does have massive quantities of underutilized and unemployed resources, the effect of Trump’s policies on growth could be considerable. In Keynesian jargon, there is still a large multiplier on fiscal policy. It is easy to forget the biggest missing piece of the global recovery is business investment, and if it starts kicking in finally, both output and productivity could begin to rise very sharply.

Those who are deeply wedded to the idea of “secular stagnation” would say high growth under Trump is well-nigh impossible. But if one believes, as I do, that the slow growth of the last eight years was mainly due to the overhang of debt and fear from the 2008 crisis, then it is not so hard to believe that normalization could be much closer than we realize. After all, so far virtually every financial crisis has eventually come to an end….

At the risk of hyperbole, it’s wise to remember that you don’t have to be a nice guy to get the economy going. In many ways, Germany was as successful as America at using stimulus to lift the economy out of the Great Depression.

Yes, it still could all end very badly. The world is a risky place. If global growth collapses, US growth could suffer severely. Still, it is far more likely that after years of slow recovery, the US economy might at last be ready to move significantly faster, at least for a while.

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

Why Does the Federal Reserve Take 2%/Year Inflation to Be a Ceiling Rather than a Target?

Posted on by Brad DeLong
Preview of Central Banks and Economic Structure Since 2009 the Federal Reserve and other global north

A Hypothesis: Some (many?) Federal Reserve policymakers seem to believe that if there is a recession, they lose.

And they also believe that if inflation gets above 2%/year they will be unable to reduce it to 2%/year without a recession.

Thus they do not take an “optimal control” view of the situation at all. Instead, they seek above all else to avoid getting into a situation in which they will have to take active steps to reduce the inflation rate, because they do not believe they can do so without generating something that will be called a recession.

This is a dangerous and a bad habit of thought for them to have…

Central Banks, Neutral Policy, and Economic Structure

Posted on by Brad DeLong

Since 2009 the Federal Reserve and other global north central banks have, first hesitantly and enthusiastically, been trying to sacrifice the health of the commercial banking sector in order to keep the life support machines that are keeping the rest of the economy alive going.

Your average commercial bank needs a 2.5% margin on its liabilities in order to cover the cost of its branches and its ATM network. Commercial banks are used to taking their deposits, sticking them in long term Treasuries and similar assets, and relying on time, diversification, the slope of the yield curve ,and the normal level of interest rates to generate the revenue so that they can earn profits if they manage their branches and ATM networks efficiently. Since 2008 that has not been a profitable strategy for commercial banks. Thus commercial banks have been under enormous pressure for a near-decade now.

It is there, I think, that central banks have been inflicting significant pain. It is not the case that extremely low interest rates on extremely safe assets has been keeping alive businesses that ought to shut down. For small businesses, credit is tight. Equity earnings yields are about normal–a company that is trying to think about whether to expand or payout its earnings is not facing any sort of environment in which there is a cost of capital that is in any sense “artificially low”.

So I do not see the Fed as having given any sort of pass to industry as a whole at all. It has kept the rest of the economy functioning while imposing very heavy pressures on the commercial banking sector. This is not normal. But it is not a bubble…

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

Some Questions About Low Investment, to Some of Which I Have Half-Adequate Answers…

Posted on by Brad DeLong
Gross Private Domestic Investment FRED St Louis Fed

I think the big part of the story is that the investment accelerator is a big thing, even though our models say it should not. Businesses do wait to invest until they are running flat out to invest. It’s a puzzle why they do this–they ought to act like the foresighted agents in our models, shouldn’t they?

I think a large part of the rest of the story of depressed investment is the growth of radical uncertainty. We used to see one 40% real collapse in the value of an important asset class every generation.

Now we have seen three in a decade.

Call it radical uncertainty, call it the collapse of risk tolerance, call it moral hazard in the credit channel’s ability to do the risk transformation as nobody will believe that investment banks produce AAA assets rather than sell you unhedged puts–the failure to satisfactorily mobilize the collective risk bearing capacity of the world to support risky investment is one of the biggest financial stories of the past decade. You look at the bonds of exorbitant privilege possessing reserve currency sovereigns and at the U.S. equity yield hanging up there at 5% real, and we have an equity return premium of the magnitude of the immediate post-WWII years and not seen since.

For residential investment, of course, we have to add regulatory uncertainty. Would you sell thirty-year fixed-rate nominal callable loans when there was no plan for how the mortgage finance GSEs will operate in a decade?

Private Residential Fixed Investment FRED St Louis Fed

Questions to which I do not have any good answers:
Why is it that capital is so very expensive for risky businesses and so cheap for the exorbitant privilege possessing reserve currency sovereigns? How much do we dare ask those sovereigns to take over the business of boosting investment globally via infrastructure for the next decade or so?

Gross Private Domestic Investment Fixed Investment Nonresidential Equipment FRED St Louis Fed

Note to Self: I Still Fail to Understand Ken Rogoff’s Medium-Long Term Macroeconomic Optimism…

Posted on by Brad DeLong

Ken Rogoff: “In nine years, nobody will be talking about ‘secular stagnation’. I’ve been debating Larry on this for a year, and I started saying ‘in ten years…, and so for consistency I now say ‘in nine years…”.

10 Year Treasury Constant Maturity Rate FRED St Louis Fed

This is a wager that the full-employment long-run in which money and its associates are a veil that does not affect or disturb the Say’s Law operation of the economy will come not more than 18 years after the shock of 2017–or at least that whatever remnants of the effects of that shock on the business cycle come 2025 will be dwarfed the effects of other business cycle shocks subsequent to now.

I do know from experience that one disagrees with Ken Rogoff at one’s grave intellectual peril. But is he correct here? I really cannot follow him to the conclusion he wants me to reach…

Things to reread and chew over:

  • Paul Krugman (2015): The Inflationista Puzzle: “Traditional IS-LM analysis said that the Fed’s [expansionary QE] policies would have little effect on inflation; so did the translation of that analysis into a stripped-down New Keynesian framework that I did back in 1998, starting the modern liquidity-trap literature. We even had solid recent empirical evidence: Japan’s attempt at quantitative easing in the naughties…. I’m still not sure why relatively moderate conservatives like Feldstein didn’t find all this convincing back in 2009…”

  • J. Bradford DeLong (2015): New Economic Thinking, Hicks-Hansen-Wicksell Macro, and Blocking the Back Propagation Induction-Unraveling from the Long Run Omega Point

  • Paul Krugman (2015): Backward Induction and Brad DeLong: “Brad DeLong is, unusually, unhappy with my analysis in a discussion of the inflationista puzzle–the mystery of why so many economists failed to grasp the implications of a liquidity trap, and still fail to grasp those implications despite 6 years of being wrong. Brad sorta-kinda defends the inflationistas on the basis of backward induction; I find myself somewhat baffled by that defense…”

  • Paul Krugman (2015): Rethinking Japan: “Secular stagnation and self-fulfilling prophecies: Back in 1998… I used a strategic simplification… [assumed] the Wicksellian natural rate… would return to a normal, positive level at some future date. This… provided a neat way to deal with the intuition that increasing the money supply must eventually raise prices by the same proportional amount; it was easy to show that this proposition applied only if the money increase was perceived as permanent, so that the liquidity trap became an expectations problem… [so] that if the central bank could “credibly promise to be irresponsible,” it could gain traction even in a liquidity trap. But what is this future period of Wicksellian normality of which we speak?… Japan looks like a country in which a negative Wicksellian rate is a more or less permanent condition. If that’s the reality, even a credible promise to be irresponsible might do nothing…. The only way to be at all sure of raising inflation is to accompany a changed monetary regime with a burst of fiscal stimulus…. While the goal of raising inflation is, in large part, to make space for fiscal consolidation, the first part of that strategy needs to involve fiscal expansion. This isn’t at all a paradox, but it’s unconventional enough that one despairs of turning the argument into policy…”

  • Paul Krugman (2015): St. Augustine and Secular Stagnation: “The assumption here is that the neutral rate will eventually rise so that monetary policy can take over the job of achieving full employment. What if we have doubts about whether that will ever happen? Well, that’s the secular stagnation question… a situation in which the neutral interest rate is normally, persistently below zero. And this raises a puzzle: If we worry about secular stagnation, should we then say that St. Augustine no longer applies, because better days are never coming? No. The way to deal with secular stagnation, if we believe in our models, is to raise the long-run neutral interest rate…. If we can do this via structural reform and/or self-financing infrastructure investment, fine. If not, raise the inflation target. And how do we get to the higher target inflation rate, when monetary policy is having trouble getting traction? Fiscal policy! If you’re really worried about secular stagnation, you should advocate a combination of a raised inflation target and a burst of fiscal stimulus to help the central bank get there. So the St. Augustine approach is right either way, with secular stagnation suggesting the need to be even less chaste in the short run.”

  • J. Bradford DeLong (2015): Must-Read: Paul Krugman: Rethinking Japan: “Paul Krugman’s original argument assumed that the economy would eventually head towards a long-run equilibrium in which flexible wages and prices would make Say’s Law hold… [with] the price level would be proportional to the money stock. That now looks up for grabs. It is the fact that that is up for grabs that currently disturbs Paul. Without a full-employment Say’s Law equilibrium out there in the transversality condition to which the present day is anchored by intertemporal financial-market and intertemporal consumer-utility arbitrage, all the neat little mathematical tricks that Paul and Olivier Blanchard built up at the end of the 1970s to solve for the current equilibrium break in their hands…. There is… more. Paul Krugman’s original argument also assumed back-propagation into the present via financial-market… and consumer-satisfaction intertemporal… arbitrage of the effects of that future well-behaved full-employment equilibrium. The equilibrium has to be there. And the intertemporal arbitrage mechanisms have to work. Both have to do their thing…”

  • J. Bradford DeLong (2015): The Scary Debate Over Secular Stagnation: Hiccup… or Endgame?

  • Paul Krugman (2015): On Being Against Secular Stagnation Before You Were for It

  • Duncan Weldon (2016): Negative Yields, the Euthanasia of the Rentier, and Political Economy: “I understand the mechanics of engine that took us here but not what the driver was thinking…”

  • J. Bradford DeLong (2015): Just What Are the Risks That Alarm Ken Rogoff?: “This part of Ken Rogoff’s piece appears to me to be very much on the wrong track: ‘Ken Rogoff: Debt Supercycle, Not Secular Stagnation: Robert Barro… has shown that in canonical equilibrium macroeconomic models small changes in the market perception of tail risks can lead both to significantly lower real risk-free interest rates and a higher equity premium…. Obstfeld (2013) has argued cogently that governments in countries with large financial sectors need to have an ample cushion, as otherwise government borrowing might become very expensive in precisely the states of nature where the private sector has problems…’ We need to be clear about what the relevant tail-risk states that Ken Rogoff is talking about are…. [They are that] even though it was sold at a high price and carries a low interest rate, the issuing of government debt is very expensive to the government [because] when the time comes in the bad state of the world for it to raise the money to amortize the debt, it finds that it really would very much rather not do so. It is clear if you are Argentina or Greece what the risk is: it is of a large national-level terms-of-trade or political shock, something that you can insure against by investing in the ultimate reserves of the global monetary system. If you are the United States or Germany or Japan or Britain, what is the risk? What is the risk that cannot be handled at low real resource cost by a not-injudicious amount of inflation, or of financial repression?”

  • J. Bradford DeLong (2015): Watching a Discussion: The Omega Point

Fiscal Expansion Needs to Be Done Right

Posted on by Brad DeLong
10 Year Treasury Constant Maturity Rate FRED St Louis Fed

Fiscal expansion now is really a no-brainer:

  • borrow at unbelievably low rates;
  • use it to put people to work doing useful things to make America more productive;
  • if we are near full employment, it will also push up interest rates, restore equilibrium to the banking sectors, and reduce the chances of future bubbly financial vulnerabilities;
  • if we are not near full employment, it will pull people back into the labor force and raise production and employment now as well as in the future.

What’s the downside? Implementation. Larry Summers thinks it will be very badly implemented indeed:

Larry Summers: A Badly Designed US Stimulus Will Only Hurt the Working Class: “Rüdiger Dornbusch made an extensive study of… populist economic programmes….

Over the medium- and long-term they were catastrophic for the working class in whose name they were launched. This could be the fate of the Trump programme given its design errors, implausible assumptions and reckless disregard for global economics…. Tax credits for equity investment and total private sector participation that will not cover the most important projects, not reach many of the most important investors, and involve substantial mis-targeting…. The highest return infrastructure investments–such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernising the air traffic control system–do not generate a commercial return and so are excluded….

Trump’s global plan… rests on a misunderstanding…. The plan seems to assume we can pressure countries not to let their currencies depreciate…. [But] not even US presidents… can repeal the laws of economics. Populist economics will play out differently in the US than in emerging markets. But the results will be no better…

Back in 1980 there were a great many people who thought they had Reagan’s approval and baton for:

  • cutting interest rates,
  • returning to the gold standard,
  • balancing the budget,
  • boosting military spending
  • cutting taxes,
  • cutting “weak claims” to federal dollars by successful rent seekers,
  • cutting off federal support to “weak claimants” who did not look or act like real America.

All six of these factions were correct: they all did have Reagan’s approval baton. But few of these goals were consistent with the others. The final policy outcome in the 1980s was random. It was disastrous for midwestern manufacturing, disastrous for fiscal stability, a negative for economic growth, but an extremely strong positive for the rich and superrich whose taxes were cut the most.

Because the last group speaks with a loud voice, there are lots of people today who think that Reagan’s economic policies were, in some vague way they do not understand, a success. But that is the wrong lesson. The right lesson is: incoherent and contradictory policy goals produce largely-random policies that are very unlikely to turn out well.

Principles that Should Govern American Fiscal Policy

Posted on by Brad DeLong
Employment Level 25 to 54 years FRED St Louis Fed

Well, that was a very interesting election night. Our failure in 2000 to introduce into the running code (as opposed to the specification document) of our constitution that electors switch votes so that the national popular vote winner wins the electoral college cost us dear in 2000, and may cost us even more today…

You may ask: How is one to judge what to do in such times? The answer is clear: As one has ever judged. Good and evil have not changed since yesteryear, nor are they one thing among Elves and another among Men. It is a human’s part to discern them, as much in the Golden Wood as in his own house. What would have been good policy yesterday would still be good policy today. What would have been bad policy yesterday would still be bad policy today. So we play our position.

I therefore set forth seven principles that should govern good technocratic fiscal policies that promise to enhance America’s societal well-being :

  • Preserve Our Credit
  • Our National Debt a National Blessing
  • Right Now Our National Debt Is too Low
  • International Agencies Agree
  • Benefits from a Higher Deficit If We Are at Full Employment
  • Benefits from a Higher Deficit If We Are Not at Full Employment

  • A Strong Argument for More Government Purchases Rather than Tax Cuts for the Rich

  • Preserve Our Credit: President-elect Donald Trump has been told by many that our national debt is too high and dangerous. He has responded as one would expect a real estate developer would respond. He has proposed taking steps to shake the confidence of our creditors, and then to buy back our debt, at a heavy discount, thus removing the danger. This is a substantial misreading of the situation. Market confidence in the credit worthiness of the United States of America is an extremely valuable asset, from which we derive much benefit, and which it would be folly to throw away.

  • Our National Debt a National Blessing: In fact, at the moment, with interest rates where they are now and are expected to be for the foreseeable future, our national debt is not a burden but a blessing. It is not a drain on the Treasury but a source of wealth for the Treasury. If we do our accounts using a reasonable benchmark–setting our goal to be keeping our available physical space constant–we find that, at the levels of interest rates we see now and expect to see for the foreseeable future, a lower national that would not allow us to lower but would require us to raise taxes in order to maintain the given level of spending. The United States right now is not in the position of a cash-strapped borrower forced to pay interest. The United States right now is, rather, in the position of something like the medieval Medici bank, which people pay to safeguard their money.

  • Right Now Our National Debt Is too Low: The fact is that our national debt, right now, is not a burden but a profit center. That implies that, whatever you think of the long-term multi-generational fiscal outlook, right now our national debt is not too high but too low. That is the case unless one confidently anticipates a rapid and substantial increase in interest rates in the relatively near future. This was, in fact, one of the major lesson of the big article that Larry Summers and I wrote for the Brookings Institution back in 2012.

  • International Agencies Agree: Note that, after four years of argument, the IMF and other international agences agree with Larry and my technocratic judgment that right now our national debt is too low, and thus that good economic policy requires higher deficits right now, not budget balance.

  • Benefits from a Higher Deficit If We Are at Full Employment: Right now, only the extremely rash would definitely claim to know one way or the other whether the United States is at full employment–whether further increases in the employment-to-population ratio would (1) start an inflationary spiral and require the Federal Reserve to raise interest rates to lower employment back down to its current level, or (2) bring large numbers of discouraged workers back into the labor force and make America richer. If the answer is (1), there are still substantial benefits to an economic policy stance, right now and for the foreseeable future as long as the global configuration of savings supply and investment demand is not transformed, with a larger deficit and tighter money and hence higher interest rates. Higher interest rates would restore the health of the banking sector. Higher interest rates might discourage the blowing of potentially dangerous bubbles. The drawback of raising interest rates–the reason that the Federal Reserve has not done so–is that it lowers employment. But if that reduction in employment is offset by an increase in the deficit that boosts employment, hit becomes a no-drawbacks policy.

  • Benefits from a Higher Deficit If We Are Not at Full Employment: Right now, only the extremely rash would definitely claim to know one way or the other whether the United States is at full employment–whether further increases in the employment-to-population ratio would (1) start an inflationary spiral and require the Federal Reserve to raise interest rates to lower employment back down to its current level, or (2) bring large numbers of discouraged workers back into the labor force and make America richer. If the answer is (2), there are massive benefits to an economic policy stance of running larger deficits–the benefit of raising employment and making people richer, and making those people richer who have suffered the most since the subprime crisis and crash of 2008.

  • A Strong Argument for More Government Purchases Rather than Tax Cuts for the Rich: If America does decide to run larger deficits, there are large benefits from choosing to do so by increasing government purchases than by cutting taxes, especially for the rich. Increasing government purchases puts to work and improves the lot of the people who have suffered the most since the subprime crisis and crash of 2008. And cutting taxes–especially for the rich–has much smaller effects on the balance between savings and the capital inflow on the one hand and investment and government borrowing on the other. Since the effectiveness of the policy in putting people to work and in creating space for the Federal Reserve to raise interest rates to a healthy level without harming employment depends on this investment-savings balance, there is much more bang for a buck of government purchases than from a buck of tax cuts.