Eschaton: 16 Months Since The Pivot: It's been about 16 months since the White House geniuses started talking about deficits instead of stimulus or jobs, leading us into the insane conversation we're having now. Next job report comes out one week from today. Last one had unemployment at 9.0%.
As I understood it back at the start of 2009, the pivot from fighting the recession to restoring stability to U.S. long-run public finances was supposed to come when recovery was well-established and we could see 7.5% unemployment approaching--or when worry about the state of America's public finances was causing long-term real Treasury interest rates and inflation premia to spike.
But that was not the White House's plan. I don't know what the White House's plan was. I don't know what the White House's plan is. It doesn't seem to involve the most obvious and practical steps--recess-appointments to the Federal Reserve Board who will advocate QE III and Treasury communications to shape expectations of the value of the currency.
Paul Krugman reminds us that in Europe and in the international institutions--save, for the moment, the IMF--things are considerably worse:
Inflation and Debt: [T]he latest OECD Economic Outlook is a remarkable document.... I’ve already pointed to the report’s insistence that we must raise interest rates, because foofa grrzt bumble shazam — OK, that’s not quite what the report says, but it makes at least as much sense as the justification the report does offer.... [W]hat the report does is to encapsulate in a particularly pure form the can’t-do spirit.... [T]he OECD’s head admits that high unemployment is a terrible problem, which risks inflicting permanent damage; but he goes on to say that
The room for macroeconomic policies to address these complex challenges is largely exhausted; therefore, we have to “go structural”.
How do we know that the room for macroeconomic policies is exhausted? Why should we “go structural” if the problems are mostly not structural (and unemployment definitely isn’t structural to any large extent)? Well, it’s just that can’t-do spirit.... Chapter 1 (pdf) of the report has a box dismissing the possibility that a higher inflation target, which has been advocated among others by Olivier Blanchard and even Greg Mankiw, could do any good. The report does some arithmetic... finding that
a sustained increase in inflation by 2 percentage points would be required over a 10-year period to erode the average crisis-induced increase in the debt ratio in the OECD area
which the OECD takes as evidence that inflation can’t be a useful response. So, what’s wrong with this?... First, the report writes as if a period of 4 percent inflation rather than 2 percent inflation would be a terrible thing, highly disruptive.... Yes, it would be really horrible if we had inflation at the same rate as prevailed during Morning in America. Second... the OECD assumes that higher inflation would be reflected one-for-one in higher interest rates. This is a good assumption in normal times — but the whole reason we’re in such a mess is the fact that short-term rates are up against the zero lower bound... one of the main arguments for higher inflation when you’re facing a zero lower bound [is that] it would reduce real interest rates.... Third, public debt is not... the core problem. The key problem is, instead, the overhang of private debt.... And a period of modestly higher inflation would help reduce that private debt overhang, which would help promote economic recovery, which would in turn raise revenues and help the fiscal situation.
In sum, the case for higher inflation is vastly better than the OECD is willing to acknowledge. Again, it’s that can’t-do spirit.
Learned helplessness can be a terrible thing.