On the Possibility and Implications of an Economy Burdened by a Long-Lasting Negative Natural Nominal Rate of Interest, and Other Topics: Tuesday Focus
As John Podesta, the Fearless Over-Leader of the Washington Center for Equitable Growth, says: the hope is that the Center will coordinate and assemble the work to provide support for better equitable growth-advancing policies when the politics to support such policies once again becomes possible. For this to work, we need to have a dialogue--and not just a dialogue among the usual suspects who would show up at our sibling institution that is the Democratic administration either in exile or farm team that is the Center for American Progress. We need people who think differently and are willing to step up their game to be smart.
So I would like to direct your attention right now to this piece by James Pethokoukis of the American Enterprise Institute: his note on Larry Summers's November 8 IMF speech:
James Pethokoukis: The Slump That Never Ends: Does the US face “secular stagnation”?:
Summers said advanced economies, including the United States, risk falling into a Japanese-style, permanent malaise. The Great Slump That Never Ends.... The argument is based on two observations:
- Even before the Great Recession and Financial Crisis, US GDP output and job growth was mediocre despite the... housing bubble:... "omehow even a great bubble wasn’t enough to produce any excess in aggregate demand."
- Four years after the end of the panic, GDP remains far below its prerecession trend and the share of the US adult population with a job remains depressed... the Great Recession... "is not over until it is over." And based on how the vast majority of Americans are doing, it isn’t over....
What’s missing is the “why” and the “what next.” Summers doesn’t specify his answers to those questions, but... in the late 1930s, [Alvin] Hansen... [thought] boosting growth... might require large, permanent budget deficits. Summers might well see things the same way.... [Would] Summers... buy into Hansen’s solution... with a $17 trillion US national debt? He might. Economist and frequent Summers collaborator Brad DeLong has been writing on the same topic.... A few observations:
- Regarding the problems of the ZLB, Summers is too dismissive of unconventional monetary policy, especially in conjunction with an expectation- altering move by the Fed to begin targeting the level of total spending, or nominal GDP.... If... we need higher inflation to produce those negative interest rates and higher demand, there is good reason to believe the Fed and other central banks can provide it.
- Not only was Hansen proven wrong by the postwar boom, but it is particularly notable that at the exact time he was worried about an innovation slowdown, the economy was going through an innovation boom.... Stephen Oliner... writes... that slower productivity growth is largely explained by reduced contributions from IT, after the tech boom from the mid-1990s to about 2004. But he also points out that chip innovation is continuing at a rapid pace....
- If we are worried about slowing population growth and labor force supply--certainly a problem in Japan--then perhaps it is time to embrace higher immigration (with an emphasis on high skill), reduce the anti-child bias in tax policy, and reduce disincentives to work in our welfare policy, including Social Security.
- Japan is combating its Lost Decade(s) with “three arrows”: easier monetary policy, fiscal stimulus, and regulatory reform. Maybe America needs three arrows of its own: NGDP level targeting (including a period of higher inflation), pro-labor force reform (immigration, fertility rates, work incentives--especially for long-term unemployed), and pro-innovation reform (education, tax policy, regulation, public investment). Summers's diagnosis might be wrong, but we should assume it isn’t...
As to what the proper deficit and level of the national debt is in the current low interest-rate environment, I don't think Larry has a firm view. The authorial team of DeLong and Summers does not have a firm view. And I know that I do not have a firm view. But there is an important question: right now the U.S. government can borrow for 30 years at 3.85%/year. It is highly likely that nominal GDP growth over the next 30 years will be 5%/year--or more. That means that at the margin the U.S. government can borrow 1% of GDP today, and lock-in interest rates that mean it can rollover the interest for 30 years and then pay back 0.7% of GDP to extinguish the extra debt then. As long, then, as the U.S. government has things it can spend money on today that produce at least 70 cents of value for every $1 spent, it should borrow-and-spend to do them. Are there such things? Yes, many of them. Is this argument without holes? Maybe. There are two possible holes: that we need to reserve our debt capacity to deal with future emergencies (cough unexpected destructive side-effects from global warming cough), and that even minor additional borrowing will destabilize markets and cause interest rates to jump substantially. Are these in fact serious holes? That is something to think about, and think hard. I don't know where a technocratic discussion of this would lead--but we should have one.
With respect to Pethokoukis's four observations: (1) Larry Summers is pretty sure that "cheap talk" about regime change won't have much of an effect on the economy today, Christie Romer is pretty sure it will, and I find myself genuinely torn and thus in Rikki-Tikki-Tavi "let's run and find out" mode; (2) financial markets certainly don't expect an innovation boom to lift long-run Treasury rates above trend GDP growth; (3) "high skill" immigration is too-often a code for prioritizing princelings with grandparents high in the Chinese Communist Party and other such, and I would rather have people like the then-illiterate fourteen year old one ex-Federal Reserve Governor knows well who floated across the Rio Grande in an inner tube as much more likely to be a national asset; and (4) what policies will actually be pro-equitable growth is exactly what we should be talking about, but "reduce disincentives to work in our welfare policy" sounds a lot like the pursuit of inequitable growth we have been on for more than thirty years now, and has conspicuously failed to pay off for America as a whole.
I said that I would like to direct your attention right now to this piece by James Pethokoukis. I wish I could say that I would like to direct your attention to his work as a whole, as a solid, reliable, and trustworthy contributor to the dialogue that we so badly need to hold. But, alas! I cannot. For Pethokoukis also writes things like this:
James Pethokoukis (October 10, 2013): Turns out the left has its own Default Caucus:
Some Republicans and conservatives have been getting grief, rightfully so, for minimizing the economic impact of a US debt default.... Rep. Ted Yoho, a Florida Republican.... But fair’s fair, and more attention should be given to those left-of-center folks playing down the disastrous consequences of a default, technical or otherwise. For instance, left-wing economist Dean Baker of the Center for Economic and Policy Research...
Pethokoukis is saying that Democrats and Republicans are both to blame because while the Republican default caucus consists of... actual legislators, the Democratic default caucus consists of... Dean Baker! Who has zero votes on the floor of the House of Representatives!
Ted Yoho and company genuinely believed that default would be without consequences--a neutral and, in fact, a good thing. What did Dean Baker believe? Well, let's give the mike back to Pethokoukis:
Dean Baker... writes... that a default “is not the sort of thing that an economy still struggling to recover from the recession needs right now...”
Note: Pethokoukis says not just that, in counting-up the "Default Caucus", not just that a Democratic writer at a small DC thinktank is the equivalent of a Republican member of the House of Representatives but that a Democratic writer at a small DC thinktanks who believes that default would be a bad thing is the equivalent of a Republican member of the House of Representatives who believes that it would be a good thing.
Now that is just silly.
So what does Pethokoukis claim as justification for his assignment of Dean Baker to the "Default Caucus"? It is Dean's belief that the U.S. is actually paying a very heavy price for the dollar's possession of its exorbitant privilege at the center of the global monetary system:
We have been repeatedly warned that [with default] the dollar could lose its status as the world’s reserve currency.... This is a dubious claim... [but] it would actually be good news if it were true.... A lower-valued dollar will cause exports to soar and imports to plummet, creating millions of new manufacturing jobs. Millions more jobs would be created in other sectors due to the multiplier effect. This could well bring us back to full employment--a goal we may not otherwise achieve until the next decade...
And Pethokoukis turns this judgment of Baker's (one with which I disagree)--that we pay too heavy a price for the dollar's reserve-currency status and ought not to mind its loss--into what Baker says it is not: a belief that default would be on balance a good thing:
Let’s hope Washington doesn’t buy either the “default equals stability” or the “default would create millions of jobs” arguments, and ends this debt limit crisis ASAP.
What conclusion can I draw from this? Can I recommend that others trust what they read from James Pethokoukis? Can I recommend him to others as a worthy and reliable voice in the dialogue we need to have?