Grasping Reality with Both Hands

Alan S. Blinder: Our National Jobs Emergency

Alan S. Blinder: Our National Jobs Emergency.

Martin Wolf: The U.S. Should Be Running Bigger Deficits

I'm going to have a t-shirt made up with the 10-Yr Treasury graph and "I'm one of the few non-hysterics" on the front...

Martin Wolf:

Utopia vs reality: It is not that tackling the US fiscal position is urgent. At a time of private sector deleveraging, it is helpful. The US is able to borrow on easy terms, with yields on 10-year bonds close to 3 per cent, as the few non-hysterics predicted. The fiscal challenge is long term, not immediate. A decision not to allow the government to borrow to finance the programmes Congress has already mandated would be insane.... Yet, astonishingly, many of the Republicans opposed to raising the US debt ceiling do not merely wish to curb federal spending: they enthusiastically desire a default. Either they have no idea how profound would be the shock to their country’s economy and society of a repudiation of debt legally contracted by their state, or they fall into the category of utopian revolutionaries, heedless of all consequences.

Meanwhile... Europe is trapped in its own utopian project: the single currency. Just as members of the Tea Party hate paying taxes for those they deem unworthy, so, too, do solvent Europeans hate transfers to those they deem irresponsible. Alas, as many have long predicted, what would, in the absence of the currency union, have been a straightforward currency crisis has now morphed, within these constraints, into an agonising fiscal cum financial crisis. Worse, spreads on Spanish and Italian 10-year bonds over German bunds have reached 328 and 296 basis points, respectively. In slow-growing economies with overvalued real exchange rates, these spreads begin to be dangerous. If they became and remained, say, 400 basis points, the real interest rate on long-term debt would be 5 per cent. These countries would then be slowly shifted from a good equilibrium, with manageable debt, to a bad equilibrium, with close to unmanageable debt. Italy, with the fourth-largest public debt in the world, is probably too big to save: Italians themselves must make the decisive moves needed to restore fiscal credibility. That, in turn, requires both a sharp tightening and measures to raise the growth rate. Can this combination be managed? Only with difficulty, is the answer.

These are dangerous times. The US may be on the verge of making among the biggest and least-necessary financial mistakes in world history. The eurozone might be on the verge of a fiscal cum financial crisis that destroys not just the solvency of important countries but even the currency union and, at worst, much of the European project. These times require wisdom and courage among those in charge of our affairs. In the US, utopians of the right are seeking to smash the state that emerged from the 1930s and the second world war. In Europe, politicians are dealing with the legacy of a utopian project which requires a degree of solidarity that their peoples do not feel. How will these clashes between utopia and reality end? In late August, when I return from my break, we may know at least some of the answers.

Gavyn Davies: No, Bernanke Does Not Think That the Economy Is Growing too Slowly

Gavyn Davies:

Bernanke and the divided Fed: The financial markets seem determined to interpret today’s statement by the Fed chairman in a dovish light, but a careful reading of his words does not support that point of view. True, Mr Bernanke outlined the possible ways in which monetary policy might be eased further if recent economic weakness should prove more persistent than expected. But he gave equal weight to the possibility that “the economy could evolve in a way that would warrant less-accommodative policy”.

There was no hint in the text about which of these outcomes he considered the more likely....

Mr Bernanke’s description of the economic background was almost exactly the same as he offered after the June meeting. Economic activity was described as weaker than expected, and not all of that weakness was attributed to temporary factors.... Meanwhile, on inflation, some of the recent rise was also attributed to temporary factors, but the entire emphasis was on the headline rate, which he said had been running at over 4 per cent so far this year. There was no mention whatsoever of the much lower core inflation rate, a previous favourite of the chairman’s.

In other words, his overall message was that the economy might be undesirably weak, but that inflation was too high for the Fed to be able to respond to that weakness. That is the main point which we should all take from today’s evidence: no imminent change in policy is likely.

Non-Peevish Balance Sheet Recession Watch

Matthew Yglesias:

Bill Galston Discovers The Balance Sheet Recession: I have genuinely no idea why William Galston thinks the point that the mortgage-debt overhang is playing a huge role in the recession constitutes a “new” theory of the recession. But I’m not peevish, so I’ll just say he’s correct.... I believe that the best resolution would be to set a higher Nominal GDP growth target and clarify that the Fed is willing to accommodate Reagan-era levels of inflation if that’s what’s necessary to achieve it. Most mortgage debt, and a decent share of other debt, is denominated in nominal terms, so inflation accommodation would speed the process of getting people out from under debt overhangs. But unlike targeted mortgage relief, it would also help people (like, say, me) who have mortgages but aren’t underwater. Last, such a commitment from the Federal Reserve would also encourage high net wealth individuals and cash-rich firms to reduce their holdings of safe low-yield assets and increase their purchases of real goods and services or riskier private business investments.

Journalists Suffering from Stockholm Syndrome Department

If the Speaker of the House, the Minority Leader of the House, the Majority Leader of the Senate, the Minority Leader of the Senate, and the President all stood up and said we need to raise the debt ceiling: let's raise the debt ceiling tomorrow then the debt ceiling would be raised--tomorrow.

The people who are blocking the raising of the debt ceiling tomorrow are the Speaker of the House--Boehner--and the Minority Leader of the Senate--McConnell.

With that in mind, let's watch the videotape. Clive Crook:

Mitch McConnell's Good Idea: What McConnell is suggesting is absurd in an inimitably Washington way, but may very well be the best way of out of the impasse. He suggests... let[ting] the president propose a raising of the ceiling, which the House would then vote down, leaving the president to veto the rejection.... Republicans... can vote against the raising of the ceiling.... I like the idea because, at a time when more intelligent options appear to have no traction at all, it is way to get the ceiling raised, and that should now be the overriding priority...

But the reason that "more intelligent options appear to have no traction at all" is... McConnell (and Boehner).

This is Stockholm Syndrome: the identification of the hostage not with the rescuer but with the hostage taker.

Crook's bottom line:

I see this as sensible damage control for Republicans (judged against the hit they would take under the relevant alternative: default); a good thing for Democrats; and a good thing for the country. Go McConnell.

I would suggest an alternative, better bottom line:

McConnell: start acting like a grownup.

Why oh why can't we have a better press corps?

Menzie Chinn Causes Me to Raise My Estimate of the Multiplier

Menzie Chinn reviews fiscal multiplier estimates:

Econbrowser: Multiplier estimates, across countries, across states, across time: Today's two sessions -- one in the NBER's International Finance and Macro group and one in Monetary Economics -- included papers that tackled multipliers from a variety of directions. The general results indicated to me that, while multipliers are sometimes below unity, for conditions prevailing in the United States in 2011, they are typically above.

The first paper, by Ethan Ilzetzki, Enrique Mendoza, and Carlos Vegh, entitled "How Big (Small?) are Fiscal Mutlipliers?", too a cross country view....

[W]e find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero....

Why is the multiplier larger for countries fixed exchange rates? One interpretation, consistent with the Mundell-Fleming model (under high capital mobility) is that expansionary fiscal policy is more accommodated under pegged rates.... Paul Krugman has interpreted this finding as applying to the United States, to the extent that the Fed is pursuing an accommodative policy; and to the extent that we are at the zero interest rate bound for what appears to be indefinitely, given recent reports of economic weakness, that conjecture seems right to me. Another finding is that closed economies have larger multipliers.... So, ask yourself -- is the US a small country with the monetary authorities actively moving the interest rate around in order to respond to fiscal impulses; or is it better characterized as a large, relatively closed, economy with short interest rates at near zero. Then consider which results apply.

The next paper, by Emi Nakamura, and Jon Steinsson, entitled "Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions", looked to intra-country data....

Aggregate military build-ups and draw-downs have differential effects across regions. We use this variation to estimate an open economy relative government spending multiplier of approximately 1.5.... The closed economy aggregate multiplier is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind." In contrast, our estimate "differences out" these effects because different regions in the union share a common monetary and tax policy. Our estimate provides evidence in favor of models in which demand shocks can have large effects on output....

Finally, in the last paper, Price Fishback, and Valentina Kachanovskaya go back in time, in "In Search of the Multiplier for Federal Spending in the States during the New Deal". From the abstract:

If there was any time to expect a large peace-time multiplier effect from federal spending in the states, it would have been during the period from 1930 through 1940.... The state per capita personal income multiplier with respect to per capita federal grants was around 1.1....

What I take from these papers' empirical results is that the proposition that multipliers are positive and (for government consumption and/or investments) in excess of unity, for conditions most applicable to the United States...

Let me note that I am not interested in state-level multipliers or in small open economy multipliers. If New York spends and Connecticut gets some of the benefit, that is absolutely fine with me. Leakages are not a big bug.

So the fact that leakage-ridden multipliers are above one is, I think, impressive evidence for the effectiveness of coordinated fiscal policy.

Department of "Huh?!"

Alex Massie:

The Blogging Rules?: As an exercise in provoking bloggers Jonathan Rauch's suggestion that the internet is, like, totally hopeless is splendid. So there's that. But as a plausible critique? Not so much.... A man as refined and sensible and intelligent as JR can't possibly mean this, can he? If nothing else the internet makes it easier for me to read Jonathan Rauch and we may all, I hope, agree this is a Good Thing. Most of the time, anyway. But let us take this seriously even if it's not quite designed to be so treated....

[T]he internet has made it possible for the casual reader to follow events overseas to a depth and level of detail previously only generally available to specialists. There are many other examples one might cite of this phenomenon but in each case the internet - and the writing done on it - enables huge dollops of thinking and reading.

Rauch's criticisms could equally be lobbed at newspapers. And to an extent they'd be reasonable. Much of what's in the paper each day is pap and a good deal of it is simply wrong too. But that hardly means we'd be better off without newspapers.... The online world is a noisy, busy, disputatious, crowded place. That means it must often be exasperating but is also what generates excitement and, yup, plenty of excellence too.

For that matter, the internet is now so vast that sweeping generalisations... are now meaningless.... [M]essage boards and blogs are also places where like-minded people come together to discuss their obsessions. This may not always be an edifying or especially elevated conversation but if that's your problem then your argument is with people, not the internet.... Could it all be better? Sure. But is it hopeless for reading and thinking? Hardly. Indeed it provokes these things even though that's only one measure of its interest or usefulness.  There's a lot of good stuff out there!

Jonathan Rauch:

Blogging, Cont'd: Reply to That Ninny Alex Massie : I'm disappointed in the ninny Alex Massie's imbecilic response to my rant about the blogosphere. Not one personal insult! Not one noun like "ninny" or one adjective like "imbecilic"! (Not even a "fucking.")... This is the blogosphere. I'm not getting paid to be here. I'm here to get incredibly famous (in my case, even more incredibly famous) so that I can get paid somewhere else. The way I get famous is by hurling insults at other people I disagree with, or by sneering and taking cheap shots and overreacting and whatnot, and—here's the really important part, Alex—BY BEING INSULTED BACK. That way I can be "provocative" and a subject of "controversy," which will bring me "eyeballs," and therefore "hits" and "clicks," which somehow will get me paid. (Tina Brown: Are you listening?) Instead, what do I get called? "Refined and sensible and intelligent." That and $2 will get me on the subway. Get with the program, Alex. It's the internet era, baby. Lay it on. (Need help? Go here.)...

[W]hen you find a medium in which 99 percent, or whatever, of what's produced is bad, there is a problem with the medium. It's as if someone replaced the ball-point pen with the spray-paint can and said, "Here, write a book!" What you'll get is a very short book scribbled on the side of a building.... Lack of a payment model militates against professionalism and rewards noisiness; links and onscreen clutter militate against holding a reader's attention; instantaneousness militates against impulse control; the desktop and laptop screen are physically uncomfortable for reading. Result: induced ADD.... In terms of the environment and the incentives it creates, the blogosphere, I submit, is the single worst medium for sustained, and therefore grown-up, reading and writing and argumentation ever invented.

By the way, I didn't do a second draft of this post. I'm doubt any of what I just said will pass the test of time. But did I make you want to call me names? Please?

Why oh why can't we have a better press corps?

Why Oh Why Can't We Have a Better Press Corps? Peevish in the Morning Edition

This is, I think, a relatively good case to focus on when one thinks about the deficiencies of the U.S. press corps. When William Galston's article hit their desk, a normal editor would have googled "balance sheet recession" and then asked: "Hey, Galston, you say that this is a theory from Amir Sufi. But Sufi's name is always paired with his coauthor Atif Mian on this. You say that this is a new theory. But there are 4.6 million hits. How can a new theory be so widely distributed already? You say that this is an alternative to the Keynesian story. But all these Keynesians are talking about it as a piece of their story. How come? And shouldn't Richard Koo's name be in this article somewhere?"

But this is modern American journalism. This is the New Republic.

Paul Krugman is especially peevish this morning:

This Morning In Peevishness: William Galston writes, “What if the Right and the Left Are Both Wrong About Why the Economic Recovery Is So Slow? A New Theory.” And the new theory is that it’s all about household balance sheets. Gosh, why didn’t I think of that?... [I]f you’re going to write a whole article about what those foolish liberal economists haven’t considered, maybe, maybe, you should check to see what they’ve actually written...

He has been peevish about Galston in the past:

Pre-refuting William Galston: when Galston writes, "Until someone refutes Reinhardt and Rogoff, our operating presumption must be that excessive debt accumulation will eventually reduce economic growth", I sort of wonder at the absence of a link to my blog post in which I, well, refuted Reinhart and Rogoff.... [I]f you’re going to cite me in the title of an article, and accuse me of not having an answer to what someone else wrote, shouldn’t you do a search to see whether I have, in fact, said anything about it?...

Indeed. William Galston:

What If The Right And The Left Are Both Wrong About Why The Economic Recovery Is So Slow? A New Theory: Movement conservatives argue that the weight of a government that “spends too much, taxes too much, and borrows too much” is suffocating the private sector.... Keynesian liberals... counter that the problem is the collapse of demand.... What if they’re both wrong? That’s the claim of Amir Sufi... [who] argues: “The main factor responsible for both the severity of the recession and the subsequent weakness of the economic recovery is the deplorable weakness of the U.S. household balance sheet,” which is, Sufi shows, “in worse condition than at any other point in history since the Great Depression.”

The top of a google search for "'balance sheet recession'" says that there are "about 4,630,000 results."

The first hit is Richard Koo's book, called Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications. The second hit is Paul Krugman talking about monetary policy in a balance sheet recession like the one that the U.S. is now in.

I find myself at the bottom of the first results page, quoting Mark Thoma on how the reason that the stimulus was insufficient was that we were in a bad balance sheet recession.

The balance sheet recession argument is a sub-class of the Keynesian liberal argument, not an alternative to it.

And the usual citation isn't "Amir Sufi", it is "Atif Mian and Amir Sufi (2010), 'Household Leverage and the Recession of 2007 to 2009', IMF Economic Review".

And the theory is not new. Among the predecessors that Atif Mian and Amir Sufi explicitly cite are Barry Eichengreen and Kris Mitchener (2003), Irving Fisher (1933), Mervyn King (1994), Ric Mishkin (1978) and Marty Olney (1999).

Galston continues:

THE DATA seem to support Professor Sufi’s thesis, and, if Robert Hall’s Presidential Address to the 2011 meeting of the American Economics Association—which focuses on the housing collapse and the impact of high household commitments to debt service, as well as rigidities in financial instruments and policies—is any indication, academic economists are beginning to pay attention. (Hall cites Sufi’s work.)...

Beginning to pay attention? AEA President Robert Hall is not just "beginning" to pay attention--I remember him making useful comments on Larry Summers's and my paper on this back in 1984. Irving Fisher wrote about this in 1933. Mervyn King, now Governor of the Bank of England, wrote about this in 1994. Ex Fed Governor Ric Mishkin wrote about it in 1978.

Wonkette Learns About the Balance Sheet Recession

Wonkette:

Study: Americans Poor Now Because They Don’t Have Any Money: A startling new study proves that America’s Middle Class has been utterly, completely wiped out.... Apparently, wages have been declining for thirty or forty years and pensions have vanished and the one asset 90% of middle class people owned is no longer worth anything. (That asset is “their house,” and many have also lost the actual house, in addition to its supposed value before the crash.)

Rex Nutting writes at Marketwatch: "On average, American homeowners lost 55% of the wealth in their home."... Whoa, why such a Negative Nancy? Didn’t we also have a recovery since then? Yes we did: “The rich recovered; the rest of us didn’t.”...

But how did we, uh, even manage to survive during the first decade of this awful century? Experts say it’s because the Middle Class took out home equity loans to make up for all the raises they weren’t getting. That’s how America kept spending money (and charging more on those high-limit credit cards everybody got the week after they signed a fraudulent mortgage document) from 9/11 onward....

Rex Nutting:

How the bubble destroyed the middle class: WASHINGTON (MarketWatch) — A lot of people say they are deeply puzzled by the slow recovery in the U.S. economy. They look at the 9+% unemployment rate and the mediocre growth in national output, and they scratch their heads and wonder: Where is the boom that inevitably follows a deep bust, such as we experienced in 2008 and 2009. But there is no mystery. What other result would you expect from the financial ruin of the once-great American middle class? And make no mistake, the middle class has been ruined: Its wealth has been decimated, its income isn’t even keeping pace with inflation, and its faith in the American economy has been shattered. Once, the middle class grew richer each year, grew more comfortable, enjoyed a higher living standard. It was real progress in material terms. But that progress has been halted and even reversed. In some respects, the middle class has made no progress in a generation, or two.

This isn’t just a sad story about a few losers. The prosperity of the middle class has been the chief engine of growth in the economy for a century or more. But now our mass market is no longer growing. How could it? The middle class doesn’t have any money. There are a hundred different ways of looking at the economy, and a million different statistics. But if you wanted to focus on just one number that explains why the economy can’t really recover, this is the one: $7.38 trillion. That’s the amount of wealth that’s been lost from the bursting of housing bubble.... Leverage is an amazing thing: When prices go up, the borrower gets all the gains. And when prices go down, the borrower takes all the losses. Some families lost everything when the bubble collapsed, others lost very little. But, on average, American homeowners lost 55% of the wealth in their home.

Most middle-class families didn’t have much wealth to begin with — about $100,000. For the 22 million families right in the middle of the income distribution (those making between $39,000 and $62,000 before taxes), about 90% of their assets was in the house. Now half of their wealth is gone and it will never come back as long as they live. Of course, rich folk lost lots of wealth during the panic as well. Their wealth is mostly in paper not bricks -– stocks, bonds, mutual funds, life insurance. The market value of those assets fell further than home prices did during the crash, but they’ve mostly recovered their value now. The S&P 500 SPX -1.81%  lost 56% of its value when it crashed, but it’s doubled since then. Stocks are down about 13% from peak.

The rich recovered; the rest of us didn’t.

If losing half your meager life savings weren’t bad enough, the middle class has also been falling behind in terms of income for decades. Families in the middle make most of their money the old-fashioned way: Working their fingers to the bone for 40 years for wages and a modest pension. The middle class has been getting a smaller and smaller share of the pie over the past 40 years. Their wages have been flat after adjusting for inflation. In the late 1960s, the 20% of families right in the middle were earning almost their full share of the pie: they had 17.5% of total income. Their share has been falling steadily ever since. Now, that 20% is earning just 14.6% of all income. Meanwhile, the top 5% captured a growing share, going from 17% in the late 1960s to 22% today...

Jeff Frankel on How the Republicans Have Forgotten Who They Work For

Jeff Frankel:

Advice to Investors, as the Federal Government Approaches the Cliff | Jeff Frankels Weblog | Views on the Economy and the World: There are other guys (and gals) in the car who are even more delusional.   They are dead set on a policy of immediately eliminating the budget deficit.... This is literally impossible arithmetically, but they honestly don’t know this.   It is as if they were insisting that the car can fly.... It seems likely that the man in the driver’s seat - House Speaker John Boehner - does realize that the other guys don’t have the facts quite right.   But there is also a game of chicken going on within the Republican car.... The guy who is riding shot-gun in the car - the one who believes the car can fly — is trying to put his foot on top of Boehner’s on the accelerator pedal.   

It seems to me that Boehner, too, is miscalculating.  Given that the car can’t fly, the crazy guy is probably going to oppose him in the primaries no matter what he does.   So I don’t see what his plan is....

As a result the Republican leadership is in the remarkable situation of refusing to agree to Obama’s offer to solve the problem so long as the solution includes raising tax revenue, even if it is via such measures as ending distortionary subsidies for ethanol, oil companies, and corporate jets.

If I had to guess:   The financial markets will wake up just before August 3. US bond prices will finally fall.  The market reaction will shock the Republican leadership into action.... But by then it might be too late.