Adair Turner understands better than Paul Krugman
After watching the new video with Adair Turner from a talk he gave at the Bristol Festival of Economics in November 2014, it is clear he understands the economic situation better than Paul Krugman.
While Krugman tries to understand if inequality even leads to more financial instability (link), Turner knows that it does and the mechanisms by which it does. Turner then gives recommendations on how to lean against the economic forces creating inequality. The mechanisms work around real estate financing. In the video, Turner explains how to control lending practices for real estate.
While Krugman pushes for more accommodative monetary policy and fiscal policy, Turner recommends less accommodative policy and much more fiscal type policies that enter the income stream directly, including some form of helicopter drop. Helicopter drop options, as Turner says, are tax cuts, more welfare expenditures or infrastructure spending. Turner does not like QE accommodation because the money did not enter the income stream directly.
While Krugman recommends strong accommodative monetary policy if there is fiscal austerity, Turner does not support such strong accommodative policy. He sees it as exacerbating the causes of our economic problems. Turner sees that accommodative monetary policy needs to be unraveled and replaced with policies that allow money to directly enter the income stream within the general population. In essence, Krugman puts too much faith in monetary policy, while Turner does not.
In all, Adair Turner is ahead of Krugman in understanding macroeconomic problems and their solutions.
An essential moment in the video is Turner’s answer after the 1:01:00 point, where he explains his view of appropriate monetary policy.
Sorry I am commenting without listening to the whole video, but it is over an hour.
Can the Fed impliment fiscal policy?
I am under the impression that we do not have fiscal policy solutions because Congress holds the purse strings. The Fed can increase the money supply, but if Congress balks, the money will not get into the hands of consumers. Am I wrong?
Turner explains the goal of QE to raise asset prices so that individuals with assets feel wealthy enough to increase consumption. Not all have assets. That is a problem with QE.
A central bank cannot really do helicopter drops, though it seems like monetary policy. So the reliance on monetary policy is a problem not a second best solution.
Governments have to provide fiscal stimulus, and such aggressive monetary policy can be seen as an excuse not to have fiscal stimulus. At some point policymakers have to bite the bullet and cut back on monetary, then be pressured to increase fiscal… I realize a recession might occur along the way, but the idea is to avoid an even bigger recession by correcting imbalances that are increasing.
I think you mischaracterize Krugman as discounting the importance of fiscal policy when he simply recognizes that from a political standpoint it’s simply a nonstarter. At this point it’s taken great effort to keep the Republicans and neoliberal Democrats from blowing things up with more austerity. Monetary policy is the only tool in the pouch and its limitations are clear.
Adair has much worthwhile to say but it isn’t an either or between him and Krugman, although I’d much rather Stiglitz had the spotlight that Krugman gets.
I spent the time to listen and was pleased I did.
Turner talks about how the current advances in productivity come with much lower capital expenditure than was true for Henry Ford. Facebook had very low investment for its return. Celebrities today are much richer (as I understood, they can reach more people).
From there, a second mechanism is the value of desirable land due to its high income elesticity of demand. More income leads to more participation in speculating in real estate. Therein is the financial instability and therein is the reason inequility increases instability.
As you say, I see no evidence that Krugman sees this. However, to say that he puts too much faith in monetary policy is a mischaracterization. He says that since we are not going to get fiscal stimulus, we should try monetary stimulus. Note that at 53:25 Turner says that increasing the interest rate will do terrible things to the economy before it slows down the asset price boom. Turner is NOT suggesting to increase rates; he is suggesting regulation and fiscal policy. His policy prescription are the same as Krugman’s.
I have to wonder if you just throw in “Krugman” just to get people like me (who put his blog ahead of Angry Bear on our daily list) to react.
“Turner explains the goal of QE to raise asset prices so that individuals with assets feel wealthy enough to increase consumption.”
Although there might be agreement about this as an impact, I have to wonder about stating it as a goal. Unless business investment is the same as comsumption.
i know nothing so my agreeing with you will not help you in anyway.
so let me try disagreeing a bit:
we don’t need tax cuts. tax cuts is what got us here.
and “helicopter drops” is not the way to provide fiscal stimulus. there is plenty of real work that needs to be done. and plenty of people who would do it. and i suspect there are plenty of real businesses that would use honest loans to build those businesses. if the private market won’t provide these jobs or these business loans the government must.
i don’t think it matters much whether that is paid for by “deficit” or by taxing those who have more money than they know what to do with… except buy congressmen and “invest” in gambling schemes that rely on defrauding the public.
as for “non starter” that’s exactly what we need: a philosophy of why bother? what’s the use?
The Australian Govt. at the time of the GFC did both; infrastructure spending and helicopter drops:
The Congress is controlled by the Republicans. They have sworn not to raise taxes and they are often seen wringing their hands over the size of the national debt. They will not fund helicopter drops. And they will never allow the FED to fund them either.
What is at the heart of our current economic problem? It is the cash flow of working class consumers, in the aggregate. Their incomes have been stagnate and at the end of the housing bubble they could no longer supplement their income with large amounts of new debt. And they had to make payments on their new debt. Defaults on debt increased and that adversely impacted the financial institutions which the federal government then bailed out.
If you don’t deal with the labor income/share issue then you haven’t corrected the problem.
The US Congress could abrogate trade treaties and raise tariffs on imports which would force production and jobs back into this country. But the Democrats and the Republicans are content with the current trade policies. Content because their campaign contributors are content.
It has been seven years.
Nothing will be done until at least the next recession. This is like a slow motion train wreck.
I like Stiglitz too and I wish he would get involved more. However, for me and I think for Turner, Krugman is going to push monetary too far. The time has come to back off of it.
There is no problem being behind the curve until you go off the cliff. It is better to slow down and back on the curve.
Do you not see that difference between Turner and Krugman?
I do not throw in Krugman for that reason… he is the most respected economist and he used to be my facorite economist until I began to see things differently. I really do think that I see problems with some of his views.
I do not think that Turner’s prescription is the same as Krugman’s. You don’t see the difference?
Turner says as much that the rich are feeding off of accommodative policy. That is part of the reason that we have to control monetary policy. Krugman is not sure that the rich truly are feeding off of monetary policy. Or at least he does not give that danger much weight.
Labor share is the key as you say. If we find someone who combines Turner, Heiner Flassbeck and J. Stiglitz, then we would have the great economist.
Krugman still does not recognize labor share. Even DeLong had to remind him of labor share in a post on corporate profits.
Yet what I like most of Turner is his view that you have to have policy that injects funds directly into the income stream where labor share flows.
I watched that part at 53:25 about raising rates. Then I watched the part at 1:14:00 about his problem with ultra low interest rates.
Turner is not saying that we should just raise rates, but that we have to inject money directly into the income stream. Then let rates normalize. This is what I have been thinking too.
His view is through overt money financing while I focus on labor share. I have more faith that eventually people will be able to demand better pay before governments give sufficient fiscal stimulus though. I am closer to Heiner Flessback in that regard.
Am I spelling Flessback right?
Sorry … it is between 1:03 and 1:05. He talks against ultra low rates and the fancy financial engineering they create. So as I read into his mind, he wants rates to normalize but the safe way to do that is with fiscal type injections of money directly into the income stream. That is how I see it too.
“I do not think that Turner’s prescription is the same as Krugman’s. You don’t see the difference?”
No. Krugman called for fiscal stimulus. He has said there should be more if only it were politically possible. He has said that QE will not be as effective, but given no other choice, it should be tried, because it might help.
Turner called for “overt money finance” and then described the same thing Krugman calls fiscal stimulus. This is my first introduction to Turner, but he said nothing here about what to do if fiscal stimulus is not possible. Perhaps he has done so elsewhere, but I guess based on the content of this video.
Turner says we have a stability problem now that we have austerity and QE, and I have never seen Krugman address this. I agree Turner would solve this stability issue with normalization if he can also can fiscal stimulus, but I doubt that he would prescribe normalization if fiscal policy is barred. He recognizes that raising rates would damage the economy before it resolved stability.
The Republicans have nothing against fiscal stimulus as long as nothing of lasting value is produced by it. If we have a Republican president in 2017, you’ll see the government borrowing trillions and spending the money on poorly thought out projects that produce extremely high profit margins but minimal results.
As a non economist, the thing about economists is they spend so little time dealing with political reality.
We got the idea that fiscal policy is sorely needed in the US. Every economist that does not make me nauseous has said the same thing for over 6 years.
Ain’t gonna happen in this environment. Geez, the last stimulus package was a gift given by a couple of Reps who soon became pariahs to their party.
Krugman is trying to address the inequality, financial instability, QE and austerity connections. Stiglitz and Turner are pointing toward the credit extended toward land and real estate for the mechanism. Krugman does not accept that mechanism, because he sees land as such still a small part of NIPA accounts. However, Stiglitz and Turner are looking at the % of credit extended toward real estate, which is 65%. As compared to 20% for consumer loans and 20% for business investment in productive capacity.
I agree with Stiglitz and Turner that the % of credit extended is the important factor.
Your words on a republican president may turn out to be very prophetic. My sense is that you are right.
I agree. The government is useless, but the time will have to come when they change. We could just let the free market decide everything from interest rates and wages to money supply and public investment. I think that is what many in the government want. The economy will get worse, and then eventually the government will have to wake up and generate a strong fiscal stimulus.
On that we agree. I just find it a waste of time(not to mention counterproductive) to talk about a government that does not exist, and to say that an economist that pays no attention to our current government “understands” better than an economist that pays attention to our current government.
Adair Turner is British and would not need to comment on the US govt, but he is aware of what the US govt is doing or not doing.
In my view, Krugman could be pushing more for policies that increase money into the income stream of labor and people, but he is putting more eggs in the accommodative monetary basket… which I do not agree with.
He undermined the living wage movement in the late 90’s saying that it was more a moral issue than an economic issue. He turned out to be wrong. He has never recognized that error. Even now, he is not seeing inequality for the disruptive things that it causes. If he did, he would have to back off some of his support for accommodation. Turner is backing off his support…
i am not sure i understand your reply to me.
to the extent that “the rich” are feeding off monetary policy it may be because the rich in question make their money from money and have no interest in or understanding of real work or real workers. when monetary policies lead to collapse, or fail to lead to recovery, the money-rich have to just wait around until some “natural event” or events lead to a recovery in real work. fortunately for them they can usually afford it.
unfortunately for us, it is the “money-rich” who now control american policy at all levels in all branches.