Steve Benen reminds us today on the occasion of our first decent overall jobs report that in fact private sector jobs have been gaining FOR AN ENTIRE YEAR. That's right, the private sector started adding jobs in January of 2010 and has added jobs every month since then.
What that means is that for the last year, the continued high rate of unemployment has been entirely a matter of public policy. The government has been firing people when it should be hiring them. A disgrace and a tragedy.
Those unworked hours can never be regained - they are squandered forever.
Friday, March 4, 2011
They Know It's Bad
Yglesias today throws some cold water on the idea that congressional leaders are failing to authorize additional stimulus measures because they don't realize how bad the economy is.
The argument is that since the legislators live in DC, they are insulated from a lot of the economic devastation that's happening across the country. That may be true in a visceral sense, but take a look at Calculated Risk today:
This isn't arcane or difficult to understand. The problem isn't that politicians don't understand that the economy is in bad shape, it's that they don't understand that reducing deficits and cutting public sector pay in the middle of the worst recession in modern history is terrible policy.
The answer is to keep telling them. Will it work? We don't know. But we have to keep at it.
The argument is that since the legislators live in DC, they are insulated from a lot of the economic devastation that's happening across the country. That may be true in a visceral sense, but take a look at Calculated Risk today:
The current employment recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early '80s recession with a peak of 10.8 percent was worse).
This isn't arcane or difficult to understand. The problem isn't that politicians don't understand that the economy is in bad shape, it's that they don't understand that reducing deficits and cutting public sector pay in the middle of the worst recession in modern history is terrible policy.
The answer is to keep telling them. Will it work? We don't know. But we have to keep at it.
Thursday, March 3, 2011
Pre-Machiavellian Politics
Nowadays Machiavelli's name is primarily associated with a crudely selfish set of ethics, and his book The Prince isn't read very much.
If people actually did read the book they might be surprised to find that what Machiavelli offered was an alternative to the prevailing political ideas of the time, which essentially called for rulers to adhere to certain classical values, in the hope that fortune would smile upon them for abstract and essentially superstitious reasons.
Machiavelli pointed out that the correct way to govern is to study the actual effects of policies and actions that the ruler undertakes, and make decisions based on the likely results of those policies. We style this as "the ends justify the means" but the phrase would probably be easier to grasp in a slightly less loaded form, like "consider the results to determine the policy."
Despite Machiavelli's blackened reputation, he won the argument. For the most part we no longer govern by trying to project classical values like steadfastness, honesty, or loyalty. Yet when the topic is macroeconomics all too often these old ideas seem to seep in.
Krugman today points out a recent case: economists' belief that Great Britain's "austerity" would inspire "confidence" in business leaders, leading to robust private sector investment and growth. It didn't work! Apparently business leaders aren't impressed by 14th-century European political superstitions masquerading as sound finance policy.
There is absolutely no operational reason to believe that decreasing the amount of money flowing from the public sector to the private sector should increase business confidence. The only explanation for this widespread misconception is the belief that "austerity" is a sign of "seriousness" and "prudence" and other wonderful classical values that, if our leaders can merely project them strongly enough, will cause fortune to smile upon our humble economy.
This is no way to run a country, be it on this side of the Atlantic or the other. Public deficits are contributing to increased savings rates, which are in turn improving the creditworthiness of potential borrowers and leading banks to lend to the public. Cutting those deficits will cut savings rates, and before long dissavings will cause people to exhaust their ability to borrow and we'll be right back where we started.
That sounds pretty austere, all right. But it doesn't sound like good policy.
If people actually did read the book they might be surprised to find that what Machiavelli offered was an alternative to the prevailing political ideas of the time, which essentially called for rulers to adhere to certain classical values, in the hope that fortune would smile upon them for abstract and essentially superstitious reasons.
Machiavelli pointed out that the correct way to govern is to study the actual effects of policies and actions that the ruler undertakes, and make decisions based on the likely results of those policies. We style this as "the ends justify the means" but the phrase would probably be easier to grasp in a slightly less loaded form, like "consider the results to determine the policy."
Despite Machiavelli's blackened reputation, he won the argument. For the most part we no longer govern by trying to project classical values like steadfastness, honesty, or loyalty. Yet when the topic is macroeconomics all too often these old ideas seem to seep in.
Krugman today points out a recent case: economists' belief that Great Britain's "austerity" would inspire "confidence" in business leaders, leading to robust private sector investment and growth. It didn't work! Apparently business leaders aren't impressed by 14th-century European political superstitions masquerading as sound finance policy.
There is absolutely no operational reason to believe that decreasing the amount of money flowing from the public sector to the private sector should increase business confidence. The only explanation for this widespread misconception is the belief that "austerity" is a sign of "seriousness" and "prudence" and other wonderful classical values that, if our leaders can merely project them strongly enough, will cause fortune to smile upon our humble economy.
This is no way to run a country, be it on this side of the Atlantic or the other. Public deficits are contributing to increased savings rates, which are in turn improving the creditworthiness of potential borrowers and leading banks to lend to the public. Cutting those deficits will cut savings rates, and before long dissavings will cause people to exhaust their ability to borrow and we'll be right back where we started.
That sounds pretty austere, all right. But it doesn't sound like good policy.
Sweden and Negative Interest Rates
Today Matthew Yglesias is hyping Sweden's recent rosy economic data in a post titled "Unorthodox Monetary Policy Worked Nicely In Sweden; Will Anyone Notice?"
He's referring to the fact that in 2009 there was a wave of articles claiming that Sweden's central bank, the Riksbank, would be charging a negative interest rate on reserves held as cash at the central bank in an attempt to get banks to lend more.
As I noted yesterday, this idea is hogwash - banks don't lend their reserves to the public and interest on reserves doesn't have any direct effect on banks lending behavior. Indeed, the New York Times corrected the record on Carter Dougherty's economics blog just a few weeks after the initial erroneous reports in an article called "Negative Interest Rates in Sweden?"
The truth is, Sweden never charged banks a negative interest rate on overnight deposits; that's the significant interest rate on bank reserves. They actually paid a positive interest rate on reserves, just as most central banks now do.
Sweden's monetary policy was aggressive for sure! Proponents of more aggressive central bank policy would do well to learn about what the Riksbank actually did, and how it worked. There's a document called The Lower Limit of the Riksbank's Repo Rateavailable online that allows anyone to do just that.
But no one is helped when we try to do analysis based on hype instead of facts. Press reports often get technical details wrong; it pays to follow up with people who know what they are talking about.
He's referring to the fact that in 2009 there was a wave of articles claiming that Sweden's central bank, the Riksbank, would be charging a negative interest rate on reserves held as cash at the central bank in an attempt to get banks to lend more.
As I noted yesterday, this idea is hogwash - banks don't lend their reserves to the public and interest on reserves doesn't have any direct effect on banks lending behavior. Indeed, the New York Times corrected the record on Carter Dougherty's economics blog just a few weeks after the initial erroneous reports in an article called "Negative Interest Rates in Sweden?"
The truth is, Sweden never charged banks a negative interest rate on overnight deposits; that's the significant interest rate on bank reserves. They actually paid a positive interest rate on reserves, just as most central banks now do.
Sweden's monetary policy was aggressive for sure! Proponents of more aggressive central bank policy would do well to learn about what the Riksbank actually did, and how it worked. There's a document called The Lower Limit of the Riksbank's Repo Rateavailable online that allows anyone to do just that.
But no one is helped when we try to do analysis based on hype instead of facts. Press reports often get technical details wrong; it pays to follow up with people who know what they are talking about.
Wednesday, March 2, 2011
Don't Take It From Me
Warren Mosler unearths a good quote from Vitor Constancio, a Vice President at the European Central Bank:
This is an extraordinarily important point that economists and journalists get wrong ALL THE TIME. Remember it the next time you read someone saying that we need to inject money into the banking system so that banks will make more loans to the public. It doesn't work that way. Banks ALWAYS loan when they have profitable lending opportunities at prevailing interest rates, and NEVER otherwise.
“The level of bank reserves hardly figures in banks lending decisions; the supply of credit outstanding is determined by banks’ perceptions of risk/reward trade-offs and demand for credit”.
This is an extraordinarily important point that economists and journalists get wrong ALL THE TIME. Remember it the next time you read someone saying that we need to inject money into the banking system so that banks will make more loans to the public. It doesn't work that way. Banks ALWAYS loan when they have profitable lending opportunities at prevailing interest rates, and NEVER otherwise.
Tuesday, March 1, 2011
Oil Prices and Foreign Policy
In part because of the centrality of street protests to the public image of the prewar opposition to the Iraq invasion, war supporters found it fairly easy to caricature leftist critiques of foreign policy as "No Blood for Oil" sanctimoniousness.
Today Matthew Yglesias (who was himself a war supporter who has since reformed) puts the argument much more subtly:
It is an operational fact of our foreign policy that US military support for Saudi Arabia and other autocratic Middle Eastern governments is motivated at least in part by a desire to control global oil prices. It is also an operational fact that US military spending in this region contributes not just to "anti-American sentiment" but to actual identifiable attacks on US personnel stationed abroad.
It's possible the tradeoff - increased economic security, decreased physical security - is worth it, but no one seems to be able to demonstrate this, and it runs counter to our stated goal to prioritize the physical security of Americans over other foreign policy concerns.
Today Matthew Yglesias (who was himself a war supporter who has since reformed) puts the argument much more subtly:
The goal of much of America’s terrorgenic policies is to secure our economic interests in the face of oil price shocks, but this holds up to very little cost-benefit scrutiny.
It is an operational fact of our foreign policy that US military support for Saudi Arabia and other autocratic Middle Eastern governments is motivated at least in part by a desire to control global oil prices. It is also an operational fact that US military spending in this region contributes not just to "anti-American sentiment" but to actual identifiable attacks on US personnel stationed abroad.
It's possible the tradeoff - increased economic security, decreased physical security - is worth it, but no one seems to be able to demonstrate this, and it runs counter to our stated goal to prioritize the physical security of Americans over other foreign policy concerns.
Obama and the State of Economic Policy
One of the really wonderful things about casting a vote for Barack Obama in 2008 was the belief that he would be a more curious, a more interested, and a more studious president than had been George W. Bush.
It was not a high bar to clear. Yet to look at the wasteland of economic policy over the course of Obama's first term in office, one wonders whether anyone on the Obama team has really read or understood anything about economics in the last 20 years.
It's not as if one has to go off the beaten path to find pertinent analysis that might address the economic malaise in which we find ourselves. One of the foremost students of Japan's long stagnation in the 1990's is Paul Krugman, who also happens to be one of the most famous economists alive.
What did Krugman recommend at the beginning of the Obama presidency? A bigger stimulus, gambling that reducing unemployment would prove to be more important to the economy than fighting inflation.
Today inflation stands at record lows while unemployment remains stubbornly stuck at its highest rate in over a generation. No one today could argue that Krugman was wrong in his diagnosis, yet very few of his critics have bothered to notice that he was right.
If it were only theory on which our leaders were ill-informed, we might forgive them. After all, it is the executive's job to run the government, not pontificate about it. Yet key members of the Obama team, including the President himself, sound vague and confused on the basic operational details of the economic institutions they control.
In 1998 L. Randall Wray, a brilliant young economist at the University of Missouri, published a book called Understanding Modern Money. It is not a work of theory; it is a textbook description of the operational details of the modern currency system, backed by economic, historical, and anthropological research.
Based on the administration's policies and public utterances, it would be surprising if a single member of the Obama economic team had ever read this book. Wray had a diagnosis and prescription in 2009 as well - bigger deficits and a laserlike focus on full employment of the entire work force, with price stability protected by structural changes in the government's participation in the labor economy rather than by union-busting and threatened shutdowns of vital services.
Unfortunately Obama and the Democrats can't go back in time and follow this prescription before losing the House, their Senate supermajority, and Obama's sky-high postelection approval ratings. Those advantages are already squandered.
But forgive me if I continue naively to hope that someone in the Obama White House might pick up a book and thumb through it to see if they can get some kind of clue about how to steer this ship. We've been a long time at sea, and we could use a course correction.
It was not a high bar to clear. Yet to look at the wasteland of economic policy over the course of Obama's first term in office, one wonders whether anyone on the Obama team has really read or understood anything about economics in the last 20 years.
It's not as if one has to go off the beaten path to find pertinent analysis that might address the economic malaise in which we find ourselves. One of the foremost students of Japan's long stagnation in the 1990's is Paul Krugman, who also happens to be one of the most famous economists alive.
What did Krugman recommend at the beginning of the Obama presidency? A bigger stimulus, gambling that reducing unemployment would prove to be more important to the economy than fighting inflation.
Today inflation stands at record lows while unemployment remains stubbornly stuck at its highest rate in over a generation. No one today could argue that Krugman was wrong in his diagnosis, yet very few of his critics have bothered to notice that he was right.
If it were only theory on which our leaders were ill-informed, we might forgive them. After all, it is the executive's job to run the government, not pontificate about it. Yet key members of the Obama team, including the President himself, sound vague and confused on the basic operational details of the economic institutions they control.
In 1998 L. Randall Wray, a brilliant young economist at the University of Missouri, published a book called Understanding Modern Money. It is not a work of theory; it is a textbook description of the operational details of the modern currency system, backed by economic, historical, and anthropological research.
Based on the administration's policies and public utterances, it would be surprising if a single member of the Obama economic team had ever read this book. Wray had a diagnosis and prescription in 2009 as well - bigger deficits and a laserlike focus on full employment of the entire work force, with price stability protected by structural changes in the government's participation in the labor economy rather than by union-busting and threatened shutdowns of vital services.
Unfortunately Obama and the Democrats can't go back in time and follow this prescription before losing the House, their Senate supermajority, and Obama's sky-high postelection approval ratings. Those advantages are already squandered.
But forgive me if I continue naively to hope that someone in the Obama White House might pick up a book and thumb through it to see if they can get some kind of clue about how to steer this ship. We've been a long time at sea, and we could use a course correction.
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