Blog

Brookings issued a report yesterday, called Rethinking Central Banking, by a group of high-profile economists including Eichengreen, Rajan, Reinhart, Rogoff and Shin. The group – called the Committee on International Economic Policy and Reforms – argues that the conventional approach to central banking needs to be rethought. The neat separation between price stability and other objectives is no longer feasible. The group wants central banks to adopt an explicit financial stability objective, expand their macro-prudential toolkit, and use monetary policy if needed to support financial stability: “If, in the interest of financial stability the central bank sets policies that could result in deviations from its inflation target, then so be it.” (p. 30) They also support the use of capital controls to stem short-term speculative capital flows, and call for more cooperation and coordination between systemically significant central banks. These policy prescriptions are not radical or new. Much of the ongoing debate in Basel and Washington is focusing on just how to develop these new macro-prudential policies. What is noteworthy with the report, though, is their acknowledgment of weaknesses in the prevailing paradigm. They note that: Central banks have allowed credit growth to run free (p. 6) International capital markets are destabilizing (p. 21) Interest rates affect financial stability and hence real activity (p. 12) This is significant, since it… Read More

Since graphical information manages to fail less spectacularly at getting people to change their minds, here are three graphs; one addressing what we ought (not) to do, one addressing what we are doing, and the other what we can do. The first comes from the IMF, compiling 30 years of evidence showing that fiscal contraction reduces both employment and incomes: The second is a graph of changes in government purchases of goods and services in the US, showing dramatic fiscal contraction in a very crucial part of government spending: The third is a graph of the real rates on 5-year Treasuries, showing that the federal government can borrow at negative real rates to reverse the above fiscal contraction: I’d like to say more, but the research suggests that doing so in non-graphical form might be counterproductive.

Here is an excerpt from the most important article you will read this year, by George Lakoff: Here’s how public intimidation by framing works. The mechanism of intimidation is framing, not just the use of words or slogans, but rather the changing of what voters take as right as a matter of principle. Framing is much more than mere language or messaging. A frame is a conceptual structure used to think with. Frames come in hierarchies. At the top of the hierarchies are moral frames. All politics is moral. Politicians support policies because they are right, not wrong. The problem is that there is more than one conception of what is moral. Moreover, voters tend to vote their morality, since it is what defines their identity. Poor conservatives vote against their material interests, but for their moral identity. All language activates frames in the brain. Conservative language activates conservative frames, which activate conservative moral worldviews in the brains of those who hear the language. The more those frames are activated, the stronger the conservative moral views get in people’s brains. Please go to this link, read the article, and then we will discuss it.  (Continued at EconoMonitor…)

The final report from the Independent Banking Commission (IBC), otherwise known as “the Vickers report,” was published yesterday. There are no big surprises here, and the share prices of UK banks actually increased somewhat. The report supports and strengthens the Basel proposals already underway, and maintains its previous proposal to “ring-fence” the retail part of the larger UK banks. This will “narrow” the banks, although it remains to be seen how much narrower they will be (e.g. the banks can decide whether to keep banking services for large corporations inside or outside the ring-fence). According to the proposal, UK banks will have to put their retail operations in legally separate entities that are well capitalized and can run independently of the rest of the financial group. Investment banking will be conducted outside the fence and should—in principle—be allowed to fail without government intervention (not so likely, according to the Economist). As usual, however, “the devil is in the details,” as the US Treasury has discovered as it tries to implement its own ring-fence proposal—the “Volcker rule.” The WSJ reported yesterday that efforts to flesh out the Volcker rule, to define what is proprietary trading, have been delayed beyond the October deadline. Interestingly, the US approach is to give a positive definition to non-permissible trading activities, whereas the UK is trying… Read More

The AJA is DOA.  Via Politico:  “House Republicans may pass bits and pieces of President Barack Obama’s jobs plan, but behind the scenes, some Republicans are becoming worried about giving Obama any victories — even on issues the GOP has supported in the past.” For Thomas Masterson’s extensive treatment of the proposed American Jobs Act (“equal parts weak tea and bitter pill”), see here. Update: 50% DOA.  Or as Miracle Max put it:  “Whoo-hoo-hoo, look who knows so much. It just so happens that your friend here is only mostly dead.”

“Through several recessions and recoveries, inflation-adjusted GDP rose almost in tandem with a line of predicted growth expectations. But in November 2007, something changed. Real GDP dropped down from what was expected by more than 11 percent, and, as this summer’s data has shown, it hasn’t returned to its pre-recession trend. The unusual slump has provoked a stream of commentary that attempts to define the problem, but it hardly matters whether the downturn is identified as the second dip of a ‘double-dip’ recession, a continuation of the ‘Great Recession’, a fast-moving slowdown, a slow nosedive, a long-term stall-out, or a confirmation that the economy has entered a Japanese-style ‘lost decade’. Growth during the 21st century is following a different trend line than it did in the 20th, and employment is also responding in new, different ways from earlier post-World War II recessions.” Levy Institute President Dimitri Papadimitriou writes in Truthout about the uniquely disastrous employment picture that has emerged from this recession.  It is a reminder that, while there is no convincing argument as to why US government debt or deficits are causing any current economic problems, the employment situation represents a clear and present economic danger.  The proportion of political, legislative, and press attention paid the former, compared to the latter, is wildly unjustified by any compelling economic logic.

Well, I commented last night on President Obama’s speech to Congress on WGXC, my local radio station. I thought it worth putting down my thoughts on silicon, since I’ve already done all the thinking about it. First of all, I thought that the delivery was one of the better that I’ve heard from President Obama since he took office. It reminded me more of candidate Obama. Maybe that’s because this speech, more than the official announcement that he was running for re-election a while back, was the kick-off to his re-election campaign. He had that whole preacher cadence down, punctuating sections of the speech with the phrase “that’s why you should pass this bill now.” A nice touch, but one that was clearly not directed at the politicians in front of him, many of whom wouldn’t support kibble for kittens if it was an Obama proposal. Moving on to substance is a bit depressing. The American Jobs Act is equal parts weak tea and bitter pill. The weak tea is that as a job creation proposal it does too little, too ineffectively. Much of the proposal the President outlined in the speech sounds a lot like the American Recovery and Reinvestment Act, the stimulus passed early in 2009. I will talk about that bill’s effectiveness in a bit, because I… Read More

Expect one thing from President Obama’s speech on Thursday: a mini ARRA, a smaller version of essentially the same stimulus plan as that of 2009. He will probably call for putting the unemployed construction workers to work on infrastructure projects, he will propose tax incentives to firms to hire the unemployed, he will keep pushing for the weatherization of buildings and more funding to teachers and schools. He will keep advocating a free trade agenda, whatever form that might take. And if informed pundits are correct, he will ask for about a third of the ARRA funds, around $300 billion. In 2009 ARRA passed a total of $787 billion (which was extended to $840 billion). About a third was allocated to tax cuts, another third went to entitlements and the remaining third (about $275b of which $205b have been disbursed) went to finance various projects through grants, loans and contracts—yes, the same weatherization projects he was advocating at the beginning of his presidency, the same teacher retention programs, school renovations, the same subsidies to firms for (true, mostly green) energy production. It does not appear that we will see much that is new tomorrow, but the approach will be much more timid, given the deficit phobia that has gripped Washington.  To be clear, the Recovery Act worked, but had a… Read More

Leading up to today’s jobs speech the internal debates in the administration (or so the leaks tell us) have been over whether to propose something minimal that might have a chance of passing, or something bold, knowing that nothing has a chance of getting through Congress anyway. Randall Wray and Stephanie Kelton demonstrate what it would look like to “go big”: The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements. The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work… Read More

In a post on Ezra Klein’s blog entitled “The recession’s gender gap: from ‘man-cession’ to ‘he-covery’,” Suzie Khimm notes that the recovery is happening for men but not so much for women. She quotes an Institute for Women’s Policy Research paper that refers to our research, found in this policy brief. Early childhood education and home health care represent great opportunities for improving quality of life for the care recipients as well as for the people who would become employed under these proposals. I will be listening for some mention of them by President Obama tomorrow night.

“There’s a 60 percent probability that most advanced economies will fall into a recession, while authorities are running out of options to provide emergency support.” — Bloomberg News today, describing the views of Nouriel Roubini This forecast from a sometimes-prescient and widely quoted economist brings to mind a question that many people now find irrelevant. Which should we policymakers choose, option A or option B? How about doing whatever is necessary to balance the government’s budget? Increasingly, policymakers believe that is their only option. In some countries, these policymakers may be right. For them, options A through Z are to raise taxes or cut spending. This is what happens when (1) tax revenues are weak, (2) money is needed to make payments on government debt, and (3) the country in question does not or cannot print its own currency and cannot make reserves for its own banks. Here in the United States, point (3) above does not apply. Hence, the federal government can issue any amount of securities, with the Fed purchasing them if necessary, as long as Congress is willing to keep increasing the debt limit. Unfortunately, however, the stimulus package of 2009 is wearing off, and Congress and the President have not acted quickly enough to increase spending or reduce taxes. As a result, combined government employment at… Read More

Economist:  “The economists who studied this were quite surprised to find that fiscal policy in recessions was reasonably effective.  It is just that folks tried a first punch that was too light and that generally we didn’t get big measures until well into the recession.” Congressman:  “That is precisely my point.  That is why I like my porridge hot. I think we ought to have this income tax cut fast, deeper, retroactive to January 1st, to make sure we get a good punch into the economy, juice the economy to make sure that we can avoid a hard landing.” The identities of these tiresome Keynesians?  Kevin Hassett of the American Enterprise Institute and Congressman Paul Ryan of Wisconsin—speaking in 2001. From a purely predictive standpoint, it makes one wonder:  assuming that control of Congress doesn’t change much, are the odds of additional fiscal stimulus higher if there is a Democratic or a Republican President in 2013?