Brad DeLong Rejoins the Reality-Based Community; Mark Thoma tells us why it is so
Even if his inspiration for doing so comes from (of all places) the HuffPo, This is spot-on:
Unless something big and constructive in the way of global economic policy is done soon, we will have to change Stiglitz’s first name to ‘Cassandra’ — the Trojan prophet-princess who was always wise and always correct, yet cursed by the god Apollo to be always ignored. Future economic historians may not call the period that began in 2007 the ‘Greatest Depression.’ But as of now, it is highly and increasingly probable that they will call it the ‘Longest Depression.’
Sadly, his prescriptions–good prescriptions, I hasten to note*–address the sources of the Depression, not the most direct solution. For that, we turn (staying in the popular press) to Mark Thoma (via, er, Mark Thoma):
Private investment could be increased by lowering the interest rate with monetary policy, but since the interest rate is as low as it can go, this won’t be effective.
Another solution is to raise private investment through mechanisms such as tax incentives. But in a stagnating economy, business confidence is low, and it’s unlikely this will have much of an effect. It’s worth trying, but it’s unlikely to be enough.
Yet another solution is to raise public investment; infrastructure spending is a frequently mentioned candidate. This is attractive for two reasons. First, investment in U.S. infrastructure has been lagging, which needs to be addressed independent of the secular stagnation problem. Second, while tax incentives amount to leading a horse to water and hoping it will drink, government investment is determined by fiscal policy. It can be whatever value Congress and the president want it to be.
This is why those who are worried about secular stagnation have repeatedly called for substantial investment in infrastructure. [link from original]
Give Mark extra credit for being one of the few economists willing to say publicly that Excess Reserves are not “investment,”** even as he hedges whether “secular stagnation” is the current reality.
*”What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities.”
**He doesn’t take the next step and state that IOER is being paid because banks are insolvent and robbing the Fed is a victimless crime, but we shouldn’t expect everything.
Ken:
The lessons from educating the populace: “Stability begat complacency, complacency begat carelessness and hence fragility and fragility set the stage for crisis.”
“debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities. And if those prove inconsistent with full recovery, then we need massive government spending on infrastructure and other investments financed by money printing until full employment is reattained.”
“until politicians, finance ministry technocrats and central bankers feel under pressure to respond to and in fact internalize the diagnoses of Stiglitz, Eichengreen, Wolf and others, our problems will remain, as Stiglitz puts it, ‘not rooted in economics, but in politics and ideology.'”
I always thought infrastructure spending would go along way towards solving the issues even if it took putting bags of money in holes, burying them, and having workers dig them up. Wall Street and TBTF are not doing it.
Just a comment on something I am working on today: Just to be clear, this is not the only donation ever made by the Charles Koch Foundation to colleges and universities (http://www.smokymountainnews.com/archives/item/16824-wcu-community-grapples-with-academic-pursuits-in-the-face-of-politically-charged-outside-funding the “Koch brothers and their various funding arms) awarded $108 million to 366 colleges and universities from 2005 to 2014 — with $19.3 million across 210 college campuses in 2013 alone — according to political funding analysis by the Institute for Southern Studies and Center for Public Integrity.” More and more, we can see moneyed and political interests making large donations no longer tied to just a name on a building in memory of that person: but, the donations are tied to a particular and current interest with an active participation. This is not only happening at universities or colleges, you can see conservative or other groups showing interest in think tanks such as CAP and Brookings . . .
The Koch Bros as well as other interests are actively pushing in a Randian/Libertarian way in the opposite direction to what is being proposed . The Kochs, BT&T Bank, and other interests are also actively seeding the fields by giving colleges grants of money for Centers of Free Enterprise to spread Randian and Libertarian propaganda.
The last economist we had on site thought Stiglitz was a light weight.
Good post.
What is the core economic difference between Germany and it’s’ economic dynamism — and — the US and our (secular?) stagnation?
Union density. Anybody offer a more important — or even ANY another — core difference?
Leaving macro aside, wouldn’t leaving the vast majority of economic actors in any theoretical economy trapped in a black hole of monopsony (see the US labor market for an example) be expected to result in stagnation? Couple a log jam of demand at the top (actors who cannot spend it as fast as they make it) — with — debilitated personal lives (tens of millions) at the bottom (sub-par education, health, job networks, etc., etc. — paired with much economic drag on everybody else trying to partially remedy the symptoms) is what would be expected (in our imaginary economy).
The universal union busting that leaves our (the US’s) working majority in an inescapable monopsony hole is ipso facto against the law — state and federal. So when are we simply going to attach felony penalties instead of no penalties to breaking what should be the most important economic empowering and politically enabling laws on our books?
What other form of market muscling is left completely unsanctioned? What other form of market muscling is not treated as a felony? Every other form of illegal muscling except the most important one.
Almost forgot to mention — for those not in the know (I didn’t used to be) federal labor law preemption means individual states cannot subtract but they may add. In Maryland for just one instance Democrats have a 33-17 edge in the State Senate and a 91-50 edge in the House. WA, OR, CA, IL, NY, anybody listening?
Public investment under “secular stagnation” = Japan
Didn´t work! Still it is necessary due to lack of investments.
I don’t think the federal government is interested in investing in actual useful infrastructure improvements, in part because the infrastructure that could most use improvement is no longer publicly owned.
I think that our top infrastructure weaknesses are in network speed and reach and our power grid. Federal spending on the other hand seems to predominantly fall into the roads and bridges category.
Japan had little public investment.
I see no stagnation. This post is questionable in content.
“It can be whatever value Congress and the president want it to be.”
Ah, but therein lies the rub. With apologies to the Bard. What chance that those asses will do anything worthwhile?
Denis, I am intrigued by this “monopsony” idea. That idea is that employers hold the cards, as it were, so can hold down wages below what they would be in a competitive environment. Large employers, of course, have even more good cards in their hands and so keep their wages lower still.
Is that the idea?
Warren,
Has it ever been otherwise?
Hi Jack:
A little BLS data to back you up. Retail Sales Median is $10.42/hour at annual wages of ~$21,670. http://www.bls.gov/ooh/sales/retail-sales-workers.htm I use BLS when I go estimating Labor Costs as they are accurate and accurate by region which is helpful. I like this one http://www.bankrate.com/finance/jobs-careers/highest-paying-retail-sales-jobs-1.aspx by bankrate as it walks through the 7 highest paid retail jobs. Interesting stuff.
Warren — I should always state my complaint as against “unopposed” employer monopsony (one buyer) — as in unopposed by a labor union monopoly (one seller).
In the right labor market setup I see labor as actually trying to squeeze the ultimate consumer — not the employer. IOW, I see the ideal setup as the equivalent of a co-op where labor owns the firm.
W/o collective bargaining (possibly supplemented by centralized bargaining and no replacements allowed) labor is reduced to a state something like Karl Marx would complain about. I call it subsistence-plus. Subsistence (if that) for the lowest skill jobs — then a little more for each increment of skill that the employer wants — no relation to what the customer is willing to pay. Ownership may make a lot or a little — labor gets zilch-plus.
The (McDonald’s?) owner doesn’t actually get rich under this setup because his competitors are paying the same labor price. Labor just gets poorer — and current history, the top 1% gets what’s squeezed out of everyone else (squeeze a toothpaste tube at the bottom and it all comes out the top — pressure equalized somewhat in the middle and upper middle).
My perfectly competitive market (cab driver theory coming — watch out): employer monopsony balances off against employee monopoly and the check is provided by the ultimate consumers (what they are willing to fork over).
Jack, yes.
http://www.nber.org/digest/dec14/w20313.html