Relevant and even prescient commentary on news, politics and the economy.

Scott Sumner thinks Volcker recession was unintended… really?

 reagan kennedy

Yesterday I wrote that causing a recession to correct policy mistakes would reflect the medical wisdom of re-breaking a bone in order to set it correctly. Yes, there is pain in re-breaking a bone. Yes, the patient screams. But the patient is better off in the long-run. I said people would think I was crazy, and Scott Sumner thinks I am crazy.

“PS.  Marcus Nunes has a wonderful new post that directed me to a left wing blog that advocates intentionally driving the economy into a recession as a way to reduce inequality.  That’s a wonderful idea.  I strongly encourage all progressives to read this Angry Bear post, and adopt the “breaking bones to fix bones” model of the economy.  Voters will love it and that will finally convince them to adopt all your other socialist ideas.”

Scott Sumner praises the post by Marcus Nunes who basically said that the Volcker recession was unintended. He cites a book by William Barnett

“Following the inflationary 1970s, Paul Volcker, as chairman of the Federal Reserve Board, decided to bring inflation under control by decreasing the rate of growth of the money supply…The policy succeeded in ending the escalating inflation of the 1970s. but was followed by a recession. That recession, widely viewed as having been particularly deep, was not intended.”

“The chart reveals the cause of the unintended recession. The rates of growth of the Divisia monetary aggregate was much lower than the rate of growth of the official simple-sum aggregate which was the official target of policy. With the Divisia growth so much lower the result was an unintended negative shock of substantially greater magnitude than intended. A deep recession resulted.”

Was the Volcker recession really unintended? Was it an “oops” moment? Well, let’s listen to Milton Friedman and George Shultz talking about the Volcker recession…

First Milton Friedman…

“There is no other president in the postwar period who would have stood by without trying to interfere, to intervene with the Federal Reserve. The situation was this: The only way you could get the inflation down was by having monetary contraction. There was no way you could do that without having a temporary recession. The great error in the earlier period had been that whenever there was a little contraction there was a tendency to expand the money supply rapidly in order to avoid unemployment. That stop-and-go policy was really what bedeviled the Fed during the ’60s and ’70s. That was the situation in 1980, in ’81 in particular. After Reagan came into office, the Fed did step on the money supply, did hold down its growth, and that did lead to a recession. At that point every other president would have immediately come in and tried to get the Federal Reserve to expand. Reagan knew what was happening. He understood very well that the only way he could get inflation down was by accepting a temporary recession, and he supported Volcker and did not try to intervene.”

Reagan and Volcker did exactly what I called “re-breaking the bone” of the economy in order to set inflation straight.

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Polk County Arkansas 9th Street Ministries Medical Mission Clinic is Closing

Polk County, Arkansas 9th Street Ministries will be closing its medical clinic mission April 24, 2014. It has been in place since 1998 offering free medical services to those who did not have Medicare, Medicaid or commercial insurance. The reason for its closure has nothing to do with finances or lack of support although I imagine it was difficult during the Great Recession to raise funding.

“‘Because people are qualifying for insurance coverage through the Affordable Care Act, also known as Obamacare, our free medical clinic will not be needed anymore,’ Stacey Bowser RN, 9th Street Ministries Clinic Director, stated. ‘We’ve gone from seeing around 300 people a month on a regular basis, but as people were enrolling in Obamacare, the numbers we were seeing have dropped. We were down to 80 people that came through the medical clinic in February, all the way down to three people at the medical clinic in March. Our services won’t be needed anymore, and this will conclude our mission.’”

The clinic was offering medical assistance to first come first served the last Thursday of every month. You think it is difficult to get an appointment when you have insurance? Just imagine waiting a month at a time if you have a chronic illness?

But this closure of the 9th Street Ministries Medical Mission Clinic can not be true, the numbers as cited by the Rand study and Charles Gaba are highly inaccurate according to some at Angry Bear disputing the numbers of who have signed up through he state and federal exchanges or through commercial companies.

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References: Crooks and Liars; Here’s The Best Obamacare Story Yet; The Menastar; 9th Street Ministries to conclude Medical Clinic mission; and Charles Gaba’s Blog

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Christina Romer & Not fearing an economic correction of mistakes

fdr wage

A talk given by Christina Romer was very good. (Posted by Mark Thoma) She said many practical things about economic downturns. She loved to refer back to the Great Depression. The basic message was not to fear downturns, and to be careful of doing anything to prolong them. Economies will recover normally and fairly quickly with supportive policy.

She points to shocks that prolong recoveries, such as cutting back on government spending and raising interest rates too fast. But I must say that a certain shock has been left out of her presentation. That is the shock of a falling labor share which was not normal after a recession and which explains stubbornly high unemployment through weak demand. Yes, deleveraging will cut into consumer spending. Yet, a drop in labor share will also cut into consumption due to the  compounded constraint on labor’s liquidity.

Christina Romer wants us to learn from the Great Depression… So let’s remember that the minimum wage was made law in 1938. Unemployment fell after that.

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Key variable in model for Secular Stagnation is Labor Share

The search for a model to explain Secular Stagnation is happening behind the scenes at the moment. Larry Summers is presenting Secular Stagnation as an Inverse of Say’s Law… “Lack of demand over time creates lack of supply”. But getting the mathematical mechanisms of how lack of demand suppresses supply (output) seems to be missing.

I now refer to two models, first a new paper by Gauti Eggertsson and Neil Mehrotra, A Model of Secular Stagnation. Second my model that I presented here on Angry Bear on December 16, 2013, Fed Policy is Heading into Trouble.

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How Many of Obamacare’s New Enrollees Were Uninsured Last Year? Why It Doesn’t Matter

Maggie Mahar on the Uninsured:

As I explain in an earlier post, Charles Gaba, the enrollment guru who has been tracking Obamacare sign-ups since October, now estimates that by April 15, some 17 million Americans will have purchased their own insurance policies either in the Obamacare Exchanges (8 million) or off-Exchange (9 million)

But how many of them were uninsured and how many were simply replacing policies that the Affordable Care Act (ACA) had forced insurers to cancel?  This is the question conservatives ask.  After all they argue, if most of these folks already had coverage, we have just wasted a great deal of time and money moving them from a policy they chose to one that President Obama prefers.

There are two answers to their question. The first is that while we don’t have an exact number as to how many of the new enrollees were uninsured,we do know (thanks to Obamcare),  the percent of Americans who are “going naked” has declined.

Gaba offers a second, even better, answer: “It doesn’t really matter.”

I agree. As he explains:

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John Roberts Introduces a New Favorite Tactic This Term: Sleights-of-Hand Analogies

Roberts suggested that he believes Hobby Lobby and Conestoga Wood can bring forth claims of religious freedom, saying courts have held that “corporations can bring racial discrimination claims as corporations” and that “those cases involve construction of the term ‘person.’”

John Roberts Offers Conservatives A Way Out Of Birth Control Dilemma, Sahil Kapur, TPM, Mar. 26

About which I wrote a post here the next day titled: “Turns out Alito isn’t the only justice who conflates the Securities Exchange Act with state-law corporate-structure statutes.  Roberts does, too!  (Unless, that is, racial-minority-owned corporations are denied access to restaurants and hotels when traveling.  Or something.)

Yep. Unless, that is, racial-minority-owned corporations are denied access to restaurants and hotels when traveling.  Or something.

What I was referring to was this, from that post of  Kapur’s about the argument on Mar. 26 in Sebelius v. Hobby Lobby Stores and Conestoga Wood Specialties v. Sebelius, the two consolidated cases challenging as violative of the First Amendment’s free exercise clause the ACA’s employer contraceptive-coverage mandate, in which a threshold issue is whether corporations can exercise religion and therefore are “persons” within the meaning of the Religious Freedom Restoration Act:

After observing that “eight courts of appeals, every court of appeal to have looked at the situation have held that corporations can bring racial discrimination claims as corporations,” the Chief Justice asked:

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Obamacare Enrollment Heads for 17 million

by Maggie Mahar at The Health Beat Blog.

Charles Gaba, who has become the “Nate Silver” for Obamacare enrollment numbers; now predicts that by April 15, 17 million Americans will have purchased their own healthcare coverage.

His back-of-the-envelope estimate includes a nice round 8 million”  who buy policies in the government marketplaces. In parentheses, he suggests:  Perhaps a little higher (1M even?) and then strikes that thought;  “As always,” he notes, “I’ll be more than happy to be proven wrong, as long as I’ve undershot the mark.”

Gaba then adds roughly  9 million who, (according to a Rand Corp. survey), have bought their own policiesdirectly from insurers, instead of using the Exchanges. Nine million plus 8 million brings us to an astounding number: 17 million.

Rand shared its analysis  with the LA. Times, though it has not yet released its report. Obamcare’s  skeptics scoff at Rand’s number; but, Gaba points out the Blue Cross and Blue Shield Association alone have confirmed its member plans have enrolled at least 1.7 million people in plans that  meet the ACA’s requirements outside the exchange system.

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Larry Summers’ Inverse Say’s Law sheds light on lack of Effective Demand…


By way of Mark Thoma, there is a new video of Larry Summers talking about Inverse Say’s Law. It is a wonderful video and one that could wake up the economics profession about Effective Demand. His views will not only challenge Fresh Water economists, but also Salt Water economists. (His talk starts at 9-minute mark.)

His idea of Inverse Say’s Law is that “lack of demand creates overtime lack of supply”. He is describing the situation when weak Effective Demand leads to higher unemployment and lower utilization of capital capacity. He is describing the work that I have been doing for over a year. He is describing what Keynes wrote in Chapter 3 of General Theory about Effective Demand.

Update for statement made during talk: “This might have been a theoretical notion some years ago… it is an empirical fact today.”

Most economists know that weak demand is a problem, but Mr. Summers is opening the door to the theory behind it. Like he says at the beginning of his talk, he will present 3 ideas that were not part of the economics tool kit, so to speak, 7 years ago. And I have been writing for over a year that Effective Demand is now low enough that it is having a noticeable effect on the traditional calculation of potential output and the natural rate of unemployment.

He talks about the $800 billion lost in potential. I have written before here on Angry Bear that this money has gone from the hands of labor consumers to the hands of capital income.

He says that going forward, the US will “suffer a demand constraint and to have its level of output and employment constrained by demand, rather than supply”. He is saying what I have been saying that weak Effective Demand means that potential output has fallen and that the natural rate of unemployment has risen, beyond what most economists perceive.

There are still some issues that will come to light about effective demand. For example, Christine Lagarde at the IMF is warning about low inflation. My veiw is that inflation will stay low in the US as long as effective demand stays low in terms of low labor share. I hear everyday that inflation will perk up again. I do not think it will. I am watching labor share. I still do not see it rising. Even if labor share does rise, you have to watch consumption by capital income to see if labor income will rise faster than capital consumption falls.

He goes on to imply that monetary policy is constrained by demand. This is old news to me. I have a model to show this, but I wonder what model he is using.

He concludes his talk with these words…

“Let us hope, that the focus of our macroeconomic policy discussion over the next 5 years shifts to a dominant emphasis on the crucial priority of generating sufficient demand to restore rapid and reasonable growth.”

In the answer portion of the video, he mentions how current monetary policy can bring back the asset bubble environment before the crisis. He mentions how low interest rates with low inflation have an unstable impact on asset prices. He says that it is better to raise demand, which points at consumption by the general population.

“It seems to me that a strategy of focusing dominantly on reducing real interest rates is a strategy of bringing back 2005…. it seems to me that the safer strategy is one that goes directly at demand at a given level of real interest rates.”

He kind of says what I have been saying. Yet I frame it specifically in terms of labor share, even though Mr. Summers does refer later in the video to the “inclusiveness” of growth.  He is referring to the general population, who as I see it depend upon  a reasonable labor share of income to be considered “included”.

As long as the Fed rate stays low in an environment that prefers non-productive investment by the wealthy over productive investment in the face of weak effective demand by labor, I am not in favor of easy monetary policy. However, if the Fed was to direct their funds at productive community investment with a complementary policy to raise labor share, then I would be in favor of easy monetary policy. As it is, the current policy does more long-term damage to the economy than good. He might call that damage financial instability, but he must recognize that the damage could go much deeper than that… Social instability.

This is a great day in economics to hear Larry Summers forming a debate around effective demand.

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