What will it take?
On the op-ed page of today’s New York Times, Peter A. Diamond explains why he’s withdrawing as a nominee to the Fed. A professor of economics at M.I.T. who won the Nobel Prize for his work on unemployment and the labor market, Diamond has been told by Republican senators that he isn’t qualified. In March Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, wondered aloud why President Obama would even consider nominating someone with Diamond’s background: “Does Dr. Diamond have any experience in conducting monetary policy? No. His academic work has been on pensions and labor market theory.” In his op-ed Diamond says Senator Shelby’s criticism reflects a “fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy.”
[U]nderstanding the labor market — and the process by which workers and jobs come together and separate — is critical to devising an effective monetary policy. The financial crisis has led to continuing high unemployment. The Fed has to properly assess the nature of that unemployment to be able to lower it as much as possible while avoiding inflation. If much of the unemployment is related to the business cycle — caused by a lack of adequate demand — the Fed can act to reduce it without touching off inflation. If instead the unemployment is primarily structural — caused by mismatches between the skills that companies need and the skills that workers have — aggressive Fed action to reduce it could be misguided.
In my Nobel acceptance speech in December, I discussed in detail the patterns of hiring in the American economy, and concluded that structural unemployment and issues of mismatch were not important in the slow recovery we have been experiencing, and thus not a reason to stop an accommodative monetary policy…
If structural unemployment isn’t a good argument against accomodative monetary policy, it isn’t a good argument against stimulus spending either. Does anyone doubt that if Professor Diamond had reached the opposite conclusion, no one in the GOP would have questioned his competence to be a governor of the Fed? (There are seven governors, by the way, so there’s no reason any one of them has to be an expert about every problem the Fed must consider.)
Diamond’s work both qualifies and confirms a theory the Republicans have been attacking for over three decades — the Keynsian theory that there’s a positive correlation between total employment and aggregate demand. According to this theory, so long as there’s inadequate demand, neither monetary easing nor stimulative spending will cause inflation. If companies aren’t hiring because no one’s buying enough of their products – rather than because they can’t find workers able to do the jobs they need done — then the government can help by injecting more money into the system: more money will mean more demand and more employment, not higher inflation. Only when the economy is already operating at full capacity could such intervention cause inflation, and we are nowhere near full capacity now. More than 14 million Americans are currently unemployed, and millions more are underemployed.
Unemployment, then, and not public debt, is our most urgent economic problem. The priority of the unemployment problem is not only chronological (we worry that the government will go broke later; we see that people are out of work now); it’s also functional. There’s a good reason to think that doing whatever it takes to get unemployed Americans back to work will improve the government’s balance sheet, but there’s no good reason to think that doing whatever it takes to cut the deficit will help get the unemployed back to work. Never mind what Paul Ryan and the Wall Street Journal say: most investors care more about demand than about debt-to-GDP ratios.
In an excellent piece in the New Republic, Dean Baker argues that if the government doesn’t start doing more soon, we may be headed toward a second Great Depression after all. If this were only a national slump, then we might make up the shortfall in domestic demand by increasing exports (in which case we’d want more inflation, not less); but, as Baker notes, many of our trading partners are in even worse shape than we are. That leaves U.S. consumers or the federal government. As Baker writes:
Demand must come from some discrete source and it is very difficult to see where that might be if the country continues on a path of deficit reduction. To see why this is the case, first note that nearly 70 percent of demand in our economy is from consumption, but consumption has been growing slowly for two reasons. The first is that the economy has been creating few jobs. Furthermore, in a weak labor market workers do not have the bargaining power to push up their wages. The slow growth in jobs and stagnant wages mean that most families, who get nearly all their income from working, are seeing little growth in income. Slow growth in income means slow growth in consumption. [...]
[T]his leaves the government as the only remaining candidate for boosting the economy. But additional stimulus is not even on the agenda in Washington. Instead, we are seeing cutbacks at all levels of government. These cutbacks led to a loss of 29,000 jobs in May.
Baker points out that it wasn’t the New Deal but World War II that finally pulled the U.S. out of the Depression. During the war, “deficits peaked at more than 25 percent of GDP. This would be the equivalent, in today’s economy, of running annual deficits of $4 trillion.”
There was no economic reason that the government could not have spent on this scale in 1931, as opposed to 1941; the obstacles were political. Then, as now, politicians in Washington were obsessed with the budget deficit. They never would have countenanced such spending, apart from the threat to the nation posed by Hitler and the Axis powers.
What would it take today to get our politicians to stop spending all their time worrying about the government’s long-term solvency and to start worrying about the people who have been out of work for years and are running out of unemployment insurance and savings? It’s hard to take seriously the GOP leadership’s unctuous expressions of solicitude for future generations burdened by our fiscal profligacy when that same leadership demonstrates so little interest in the plight of Americans who are suffering now: the jobless, the homeless, the uninsured. Politicians can’t protect future generations by allowing the immiseration of this one. Solidarity, too, starts at home — with our neighbors, not their grandchildren.
“It’s hard to take seriously the GOP leadership’s unctuous expressions of solicitude for future generations burdened by our fiscal profligacy when that same leadership demonstrates so little interest in the plight of Americans who are suffering now: the jobless, the homeless, the uninsured. Politicians can’t protect future generations by allowing the immiseration of this one. Justice, too, starts at home — with our neighbors, not their grandchildren.”
Because they won’t confirm a Fed Reserve Governor?!?!?! Give me a break.
No, Jeff: Because they say it’s fiscally irresponsible to spend more money on programs that would get people back to work, and because they fight extensions of unemployment insurance. I’d be happy to give you a break, if only you’d take one. Your perpetual outrage (“?!?!?!”) with a blog no one is forcing you to read is starting to become tedious.
Excellent post, Matt. Reading Diamond’s op-ed this morning was discouraging, for all the reasons you mention. It seems the “Party of No” obstructionism is part and parcel of the economic blindness — that there are no good reasons for the stonewalling, just loud assertion. The nomination of Goodwin Liu went a similar route, even though GOP senators who pledged not to hold nominations hostage did just that.
What’s the end game, though? Or is there one? Who wins when one party makes things so bad that the people turn someplace for a savior?
Matthew –
The Republicans constantly fault Obama for his lack of any program to combat the recession. But beginning with his campaign he has proposed two basic ways to combat the recession: first, by repair of the nation’s infrastructure (the highways and bridges that are starting to fall apart). This would produce a huge increase in jobs, though not the best paying ones, but not only would this get some off of welfare it would turn welfare recipients into tax payers. Second, Obama proposes federal support of the alternate fuels industry. This would also create jobs, and alternate fuels would make us less dependent on the Arabs for oil, plus it would help with the pollution and weather problems.
Milton Friedman, the archconservative economist, said, “We are all Keynesians now” (at least about some matters). Even Alan Greenspan, the de facto fiscal godfather of the recession, admitted that the conservative economic theory didn’t work. Too bad the current Republican economic theorists are still forcing us to live in their 1930s economic garden of sorrows. They had no solutions then, they have none now.
Oops — that should have been Greenspan, the de facto *monetary* godfather of the recession.
“Your perpetual outrage (”?!?!?!”) with a blog no one is forcing you to read is starting to become tedious.”
What is tedious, and has been for some time, is the shrill partisanship you engage in under the guise of analysis. The extent to which you seem to go to blame Republicans/conservatives for various and sundry world evils is becoming farcical. As for “not being forced to read this blog”, well I guess somewhere in “Catholic, Independent, Opinionated” I missed “people who disagree with me need not bother.” The only “perpetual outrage” I see is from the commentators on this blog who have essentially written off people who hold conservative opinions as, well to paraphrase another commentator’s opinion of Paul Ryan” liars paying lip service to Catholicism, and seem incensed that some people outside of the Upper West Side still hold to such silly notions. I keep waiting for your trenchant review of Gretchen Morgensen’s new book showing that liberal lion Barney Frank’s upstanding efforts to block common sense reform to Frannie and Freddie; in fact I keep waiting for any piece that fairly and accurately analyzes the nation’s economic challenges that doesn’t read as though it was written by the Democratic National Committee.
And it seems that even the Europeans are abandoning Keynes these days:
http://www.telegraph.co.uk/finance/economics/8560490/Cut-taxes-to-boost-economy-IMF-tells-George-Osborne.html
JEff –
That article doesn’t mention Keynes. Are you thinking that because the IMF said it would be OK for Britain to ease monetary policy a bit it was abandoning Keynes?
@Jeff Landry (6/6, 8:11 pm) Hey Jeff, sorry to pile on but FWIW I’d go even further than Mr. Boudway and say, “It’s hard to take seriously the GOP leadership’s unctuous expressions of solicitude for future generations burdened by our fiscal profligacy….” Period. Without even tying it to “the plight of Americans who are suffering now”. Here’s why. Over the last 30 years:
*Reagan gets elected, cuts taxes, increases spending and deficits soar;
*Deficits rise again (as they will during a recession) under Bush Sr., a bipartisan deal between Bush and Mitchell raises taxes and cuts spending to reduce deficits;
*Clinton’s deficit-reducing 1993 budget passes without a single Republican vote;
*Bush Jr. adds roughly $5 trillion to the federal debt during what is mostly a time of economic growth.
Do Republicans get some “fiscal responsibility” points for the Clinton-Gingrich budgets of the mid-1990s? Do Democrats lose some for the bipartisan votes for Reagan’s 1991 budget and Bush’s 2001 and 2003 tax cuts? Sure.
But as Ronaldus Magnus himself said (quoting the irascible John Adams), “facts are stubborn things”. The facts are that Republicans bear responsibility for most of the current outstanding federal debt. Yes?
“What is tedious, and has been for some time, is the shrill partisanship you engage in under the guise of analysis.”
Whether or not you agree with it, his analysis is clearly stated. What seems shrill to you are the conclusions that you disagree with. But you seem to be demanding that someone come up with a “fair and accurate” analysis that you can agree with.
How about if instead of characterizing Boudway’s analysis as shrill partisanship, you look at the analysis itself and tell us why you think it is wrong? Or are you waiting for someone else to come along and state your position?
“Whether or not you agree with it, his analysis is clearly stated. What seems shrill to you are the conclusions that you disagree with. But you seem to be demanding that someone come up with a “fair and accurate” analysis that you can agree with. ”
Not at all. I take it that this latest heap opprobrium on Republicans is for sacrificing the short-term suffering of unemployed persons for long-term re-structuring of the social contract, or perhaps for some nefarious ideological reasons. Fine, I say. But if the issue is really “interest in the plight of Americans who are suffering now: the jobless, the homeless, the uninsured”, then why the selective opprobrium? Why leave out facts like the following:
- The Republicans still control only 1 half of 1 branch of government;
- The Democrat-controlled House failed to pass a budget last year, and to date the Democrat-controlled Senate has failed to pass a budget in 700 something days. Indeed the President’s own budget didn’t receive a single Democratic vote in favor of it when it was finally brought to floor;
- Speaking of the President, where pray tell is his plan to stem the tide of unemployment? Perhaps after he finishes his round of golf with Speaker Boehner he’ll have a plan – probably to delegate the task to VP Biden for more talks.
So my problem with his “analysis” lies in the curious telling of his sordid tale. What, I wonder, are the Democrats doing that is, if not praise-worthy, at least enough to insulate them from this moral opprobrium? Sexting?
In short, I’ve long gotten over my dismay at the uniformly leftie opinions this blog espouses come what may (its breathless declaration of “independence” notwithstanding); its the shaping of a narrative in support of those conclusions that is so lop-sided that it risks reducing an intriguing publication into the Fox/MSNBC of Catholic opinion that is so disturbing to me.
I believe a couple of the Governors have expertise in employment policy; I think they need more people with a background in consumer affairs. Governor Gramlich had been terrific on that in the past, I think his passing left a hole that hasn’t been filled.
My amateur exercise in reading between the lines is that Professor Diamond believes that the money supply should increase, which should lead to fuller employment and (in his judgment) would not spur inflation.
As to whether and why Republicans would oppose this policy, I’m not certain. Absent any alternative evidence, personally I’m running with the theory that this situation is no different than the blocking of a judicial nomination – there is something about Diamond or his policies that Republicans don’t like, and Senator Shelby’s criticism may or may not point to the real issue.
@Jeff Landry (6/7, 9:40 am) Hey Jeff, I’ll play.
In my view, the biggest thing Democrats have going for them “to insulate them from this moral opprobrium” is the fact that they’re the modern Republican Party. Given the bias our constitution has towards a two-party structure, we’re all almost always reduced to voting for the “lesser of two evils”, as we perceive it.
The late Molly Ivins used to say that primary elections are for voting with your heart; general elections are for voting with your head—meaning, among other things, that you often end up voting for the “least worst” candidate. (This is as opposed to, say, Israel’s constitution which has proportional seating by party in the Knesset, so that there’s a bias towards many, more ideologically “pure”, political parties.
Speaking just for myself, I’ve got plenty of criticisms of how Obama and the Democrats have governed over the past 2 1/2 years—especially about unemployment and the economy. But there’s only so much time in a day, and we all have to choose among competing priorities. I tend (and this is partly a function of my age) to spend less time these days debating with those in the center-left of American politics, and more time trying to point out the problems I perceive with the far right (which seems to have taken over most of the Republican Party…at least in my view).
(Note: I’m just explaining myself, not necessarily defending myself.)
“I tend (and this is partly a function of my age) to spend less time these days debating with those in the center-left of American politics, and more time trying to point out the problems I perceive with the far right (which seems to have taken over most of the Republican Party…at least in my view). ”
That’s an interesting perspective, Luke, and one I share, albeit about the party I used to belong to (and that my family still belongs to, at least nominally- its an old Southern thing)- the Democratic Party. I concluded a while ago that the far left of the Democratic Party (represented best by Pelosi) has taken over the party and that I’d rather debate center-right than center-left (I’m not happy about Palin et. al. either, but pick your poison I guess). Perhaps its having had a stake in both sides that I’m a bit sensitive to the issue of fairness in representing the other side; although I disagree with their conclusions, I respect that they have legitimate insights into the issues at play and generally seek what they think to be in the best interests of the country. Its also why I have less tolerance for the kinds of narratives in which opprobrium is heaped on one side only, when there’s lots of blame to go around, and no one side represents the “fullness of truth”. That, and its also politics, of which I have a decidedly Augustinian view.
There are no far left Democrats as far as I can tell (Nancy Pelosi is pretty centrist). My beef with the Democrats is that they all seem like Republicans; I can’t tell the difference any more. Which is why I don’t really understand the intense partisan fighting; they’re both pretty much the same.
@Jim P, is that what it’s about? (It seems you read between lines better than I do; I thought the whole thing was just politics as usual.)
Increasing the money supply means intentionally inducing inflation, right? Inflation is good for people who have irresponsibly incurred debt they can’t afford to pay off and bad for people who have responsibly saved for emergencies and retirement. (The former’s debts and the latter’s savings both get effectively shrunk.) It encourages people to behave irresponsibly.
Isn’t that a pretty good reason to be against it?
“Increasing the money supply means intentionally inducing inflation, right? Inflation is good for people who have irresponsibly incurred debt they can’t afford to pay off and bad for people who have responsibly saved for emergencies and retirement. (The former’s debts and the latter’s savings both get effectively shrunk.) It encourages people to behave irresponsibly.”
Inflation comes when the money supply outpaces demand. This was why people were sitting on the edge of their seats when the Fed kept cutting interest rates for a decade. But the feared inflation never occurred because we had a real estate bubble (and a financial bubble to go along with it) to absorb this demand.
We have a demand problem in the US now with unemployment so high. So we would probably be safe from inflation until this demand gap was eliminated.
A criticism of Pres. Obama’s fiscal policies with respect to jobs from a noted Harvard economist:
http://online.wsj.com/article/SB10001424052702303657404576363984173620692.html?mod=WSJ_Opinion_LEADTop
And to be nice, a fair criticism of Republicans, too, from a noted conservative:
http://www.bloomberg.com/news/2011-06-07/republicans-job-growth-supply-side-time-warp-ramesh-ponnuru.html
“Increasing the money supply means intentionally inducing inflation, right?”
Felapton –
Thanks for making that point about the mechanism of inflation. One of the basic problems politically in this country, I think, is that too many people still don’t understand the most basic economic relationships. Worst of all they don’t understand that the generalizations in economics are of the “if P, then Q” type, not the “P and Q, no matter what” kind. In econ, everything all depends.
I’ve been saying for 40 years that economics needs to be taught in the high schools. It could be done. Many years ago I saw a charming TV program about teaching six-year-old grammar school kids about supply and demand, etc. They were too cute — quite serious about it, and very proud of themselves. But even that program over-emphasized the problem of inflation. I guess it’s the triumph of history over science. Hyper-inflation has destroyed economies and led to wars, so people learn to dread it without understanding it, which is the worst kind of fear.
What’s the difference between a Harvard economist and a “noted” Harvard economist?
A noted Harvard economist is a Harvard economist who was chairman of the Council of Economic Advisers under President Reagan and is on the Wall Street Journal’s board of contributors.
The Wall Street Journal thinks Obama should lower taxes, cut the deficit, and shore up the dollar? Stop the presses!
“What’s the difference between a Harvard economist and a “noted” Harvard economist?”
No, “noted” is that he’s trained an entire generation of economists of all stripes, including 2 one-time members of Obama’s administration, Larry Summers and Doug Elmendorf, and a diversity of views.
http://www.thecrimson.com/article/2011/5/23/feldstein-economics-professor-harvard/
Unagidon is correct – increasing the money supply lights the fires of inflation, except when it doesn’t.
For those who are interested in wading just a little farther into the weeds of the Fed and monetary policy generally, there is a pretty good primer online, put out by the Fed itself. http://www.federalreserve.gov/pf/pdf/pf_2.pdf Here is an applicable excerpt:
“Often, a slowing of employment is accompanied by lessened pressure on prices, and moving to counter the weakening of the labor market by easing policy does not have adverse inflationary effects. Sometimes, however, upward pressure on prices are developing as output and employment are softening – especially when an adverse shock, such as a spike in energy prices, has occurred. Then, an attempt to restrain inflation pressures would compound the weakness in the economy, or an attempt to reverse employment losses would aggravate inflation. In such circumstances, those responsible for monetary policy face a dilemma and must decide whether to focus on defusing price pressures or on cushioning the loss of output and employment.”
These things always seem so clear when they’re laid out in textbook fashion like this, but of course the art of economic policy consists in looking at the real life situation and discerning what’s actually going on.
It seems pretty clear that Diamond has done his analysis and has his recommendations figured out. I admit I haven’t studied Diamond’s piece closely enough to plot out the timeline of when he gave his Nobel acceptance speech and when his various nominations were blocked, but it seems possible that he made the political blunder that Supreme Court nominees are counseled to avoid at all costs: he was quite specific in that speech about policy – maybe too specific.
So, would it be possible for these goofballs to just sit down together and see what CAN be done to help the unemployed and all those suffering from the misery of this depression/recession? Finally our California Bishop’s conference has spoken out with one voice advocating a sensible, caring and thoughtful approach to our state budget crisis. They support neither party but call for a blend of solutions that will protect the most vulnerable and those in greatest need. It would be great to see a similar letter to the congress and administration from all our U.S. bishops. We cannot wait for absolute failure of the economy or the verdict of 2012 to help people who are so clearly suffering now. Responsible people can put aside political one-ups-manship to address the common good. It would seem that would be a gospel value…
Firstly, as I learned and observed from Chicago friends, one of the incumbent’s tool as a community organizer was “uncertainty”. The economic cost of “uncertainty” can be calculated, but none of this rubbed off on Obama as the Law School is several hundred feet away from the Economics Department at the University of Chicago. Quite simply, employers are adding hours and adding temps to deal with increased demand.
In an environment in which Boeing is denied the use of its plant in the Carolinas, where manufacturers are wondering whether to site new plants in the US or overseas owing to “cap and trade”, where the favored class of unions and connected corporations like McDonalds are exempted from new health care legislation what can one expect of job growth? How can an enterprise make capital budgeting and hiring decisions in this era of unnecessary uncertainty?
Monetary policy is a tool with only adverse consequences…just ask Arthur Burns.
…and by the way, just the dollar increase in my unemployment insurance would have been satisfactory to add an additional worker. How’s that for a wolf ticket?
Mr. Walton,
The only “certain” economy is a planned economy. Markets — especially globalized markets — are always uncertain. This is why entrepeneurs can get away with calling themselves risk-takers; they are supposed to have an admirably high tolerance for uncertainty, and their wealth is supposed to be a reward not only for their intelligence, but also for their courage. But of course in practice most capitalists would like the government to minimize the uncertainty of doing business by making sure that whenever there is a conflict between the interests of capital and the interests of labor (as there sometimes is), the government will protect the former. If employers are still adding hours and temps instead of hiring regular full-time eployees, it’s because, with real unemployment in double figures, they can, not because of too much uncertainty. For a nice critique of this feeble excuse, see this.