Debt and Summers II
Larry Summers has responded to his critics. My first thought is, yes he is still really smart.
Also Olivier Blanchard also thinks the Covid Relief bill is too generous, and, in particular objects to the $1400 for most Americans. Note that Blanchard is the author of the main citation in my critique of Summers (although I should also have cited Summers on secular stagnation, Delong and Summers on the Keynesian Laffer Curve and Blanchard and Summers on hysteresis).
Summers makes 4 arguments.
Don’t blame me for the fact that the ARRA was too small. Here I think it doesn’t really matter, and that he is mostly right. Certainly he argued frequently for higher deficits.
Fearing Secular stagnation does not imply that one prefers $1.9 Trillion in stimulus to $ 1 Trillion. Indeed, the debate over the right number is almost completely qualitative.
The Fed has trouble fighting inflation without causing recessions. ” Every past significant inflation acceleration has been quickly followed by recession. Tamping down inflation will require allowing unemployment to rise, and engineering a soft landing is difficult:Unemployment has never risen by half a percentage point without then rising by almost two points, or more.”
This argument seems to me to beg the question. Summers assumes that the Fed can’t prevent an increase in inflation or moderate an increase in unemployment. If the Fed has prevented an accelaration of inflation, the success would not show up in Summers’ survey of what happens after inflation accelerates. If the Fed keeps unemployment at the NAIRU then unemployment does not have to increase to fight inflation. I think his point is that, when the Fed loses control and misses its target, then the Fed loses control and misses its target. There is no argument that fiscal stimulus (of any amount ever) makes it more difficult for the Fed to avoid both accelerating inflation and recession. The only clearly demonstrated limit on the Fed’s ability to thread the needle is the zero lower bound. That problem can be avoided with fiscal stimulus.
Also I note that qualifiers “significant” and “quickly” are doing a whole lot of work. The steady increase in inflation from 1964 through 1970 was followed by a recession in 1970 — the longest post world war II expansion which occurred before Summers began working for the Federal Government was mostly a period of accelerating inflation. Also the period of increasing inflation which began in 1976 was followed by a recession in 1980. Here I think the point is that inflation drops during recessions, so one sees peaks when recessions start. That just means that there is a Phillips curve. Mostly, the argument is that the Fed used to mess up more than 40 years ago, so the past 40 years of preventing acceleration of inflation are irrelevant.
The fact that many economists argued that the economy was overheating in the late 90s and just before Covid hit and that inflation would accelerate and then it didn’t seems relevant. Finally, I have never understood why inflation is considered such a horrible thing — I didn’t understand all the fuss in the 1970s and I still don’t. I do know that people hate inflation *and* assume it means increased prices for given wages. Economists note that wages and prices both increase, but also accept the conclusion that inflation is horrible.
But mostly, there is no argument for why the Covid relief bill will make the Fed’s task more difficult.
Summers 4th argument comes in two steps. He responds to the argument that the bill provides “relied to those who need help”.
Much of his argument is based on the assumption that things were fine in 2019 consumer spending by low-income consumers is up“, “cash balances have risen“, “see their incomes rise“. But Summers does not believe that things were fine in 2019 — he believes that income inequality was a huge problem in 2019.
His concluding sentence specifically criticizes the $1400. This, I think, is his arguably valid point. He can think of better uses of the money. However, policy depends on politics, and that exceedingly popular provision will be part of any bill. I guess he contributes to the debate over the income level at which the benefit is to be phased out, but this becomes an argument about a moderate change to about one fourth of total spending mere tens of billions not real money.
I will discuss Blanchard after the jump.
My first thought is that Twitter is evil (but at least Blanchard writes concisely and clearly). I will comment on this thread Blanchard estimates the current output gap and counts up increased spending from wealth accumulated during 2020 and from the December bill and the proposed 1.9 trillion. I do not entirely agree.
He has a generous estimate of the output gap of $ 900 billion. It does seem generous. They key assumption is that back when the unemployment rare was 3.5% the output gap was zero. This seems reasonable.
He assumes people will spend in 2021 half of the wealth they accumulated in 2020 because spending was dangerous for their health. Half is far above any estimate of the marginal effect of increased wealth on spending. The argument must be that the recently accumulated wealth is liquid and people’s appetites to consume are unsatiated. I certainly wouldn’t count on that demand.
He treats the total $ 2.8 T as an increase in demand and then says he is being conservative to use a multiplier of 1. He has presented evidence that the multiplier on Government consumption and investment is 1.5. However, he assumes that a temporary tax cut (or cash transfer) has a similar multiplier — in effect that none of the $2000 will be saved. He also assumes that all paycheck protection loans will be forgiven, so they amount to transfers. Here I see no willingness of macroeconomists to compromise between Ricardian equivalence (the $2000 will have zero effect on aggregate demand) and assuming that the propensity to consume is 1. I think the multiplier is less than 1 (and I basically take my estimates of multipliers from Blanchard and Leigh and ignore everyone else).
There should also be a calculation of the change in spending without stimulus. Here I think the output gap would probably shrink just due to vaccination. This means the $900 billion guess is very generous. However, one important component of demand is spending by state and local governments. Here I think the large provision of the bill is needed to keep it from decreasing. They will have spent their rainy day funds. They do run unexpected deficits when revenue is surprisingly low (as it was in 2020) and spending automatically increases (as in 2020) but they are required to try to avoid deficits when budgeting for the upcoming year. The experience of the 20-teens was of a gradual decline in government employment. Much of the currently debated bill is designed to prevent that from happening again. It is not adding stimulus it is preventing austerity.
Blanchard’s conclusion “Why go there? Why force the Fed to in effect cancel some of the Biden package?” The answer (following Blanchard 2019) is that the Treasury is paying absurdly low interest rates — people are willing to pay the Treasury to keep their real wealth safe. This is a gigantic opportunity. It is a reason to seek a higher public debt. If there were no Covid crisis, I would advocate giving $2000 to every American citizen (better if directed at the non rich — way better but impossible to give it to non citizens). In fact, I did. Blanchard himself presented arguments that support that policy (and said he didn’t mean to propose it but didn’t say why).
Finally Blanchard (who self identified as a socialist back long ago when I assisted his research) argues that he is the really leftist one with his policy proposal
Why couldn’t we finance it partly by an increase in taxes, say an exceptional tax on capital gains, given that the stock market has done so well in the recent past? This would be fair, deliver protection and limit overheating. Wouldn’t this be a better way?
Fine by me, but not really on topic. I don’t think an exceptional tax on capital gains would do much to limit overheating. The question is what is the average marginal propensity to consume weighted by capital gains realized. My guess is that it is very small — people with large capital gains have more money than they have time to spend. The proposal would imply a much smaller budget deficit, but I don’t think it would do much at all to limit overheating.
Thank you for this analysis. There is a lot of just scoffing at Summers (not that I do not think that is deserved) but little actual analytics.
I just think that something is missing here. This is just unusual. There is I shifting of flows. Even if they still somehow are at similar levels. There are stores that are closed. Empty. Restaurants closed. Empty. Offices empty. Rent not be getting collected. People not employed. Commercial and residential. There is a false “subsidy” here that is not being quantified and which will become due. When that ends I am not sure that these “savings” are going to offset them. If I owe 6 months past due rent it does not matter if I saved one months rent. Once the gun goes off, I am behind along with a lot of other people. Getting back to “normal” may end up being a giant step back, not forward.
I may have misunderstood because I was doing breakfast dishes, but I thought Senator Cassidy of Louisiana suggested on Meet the Press this morning that at least California and New York states were enjoying record revenues during 2020. This seems counterintuitive, may be an artifact of growing revenues—hence “ record” even if way behind projections— may reflect high investment income even while wage income was falling, penalty taxes on drawing down retirement funds or simply a lie—Cassidy is a Republican. Nevertheless, I am sure rank and file and not crazy Republicans would look to it as supporting the GOP policy of not bailing out blue states—you know the ones whose taxpayers subsidize red states.
Honestly, Mrs Fred & I are in the large boomer group
of those with decent 401k resources such that we
don’t need further guvmint help than our hard-
earned, richly deserved soc-sec benefits.
We’ll be donating covid-aid they
send, as we have in the past.
Kind of the same with my wife and I who maxed out. We donate where we can and spread it around. Still leery. It always seems like when you get comfortable, the furnace breaks, the well pump needs replacing or something like that occurs. That stuff always happens here and for some reason it finds us.
We are not known for being cheap and will help.
Economics is nothing more that Astrology with math
I’m not sure of the economics, but the politics of the situation is that COVID is too good a crisis to waste. The usual political response to a crisis is to use it to ratchet down living standards. If the BLS is to be believed, in 2018 half of all US households spent more than they earned, so we know the economy is highly restrained by low wage income. This shows up in all sorts of places, for example, it easily explains the low rate of productivity growth.
Using COVID as an excuse to dump some money into the bottom half or bottom 90% or even the bottom 99% of the economy would be good politics and a chance to experiment with demand side management. The usual politics is to stimulate the upper 1% with big tax cut, but this has failed to do much for decades now.
You rightly point out how often policy seems to be determined by fear of inflation even though inflation is an expected marker of economic growth. Maybe it is time to ignore our fear of economic growth and just write the checks.
George NYC gets it – crass macro-economics misses the micro-economic point. Bankrupcies are a monetary contraction. Avoiding them is the issue. And it is why I think that increased taxes are a good idea as well. Those that are doing well are probably net creditors and probably are getting a part of the stimulus which will largely go to (perhaps more than even Robert is thinking) to paying down debt.
There is another aspect besides paying down debt/meeting debt obligations as well. What we have seen during the Covid is a substantial restructuring. Some business have an increase in business while some have seen the opposite. This will be reversed. Some businesses will contract post Covid. People leaving those contracting businesses will need to find new employment. Avoiding a contraction afterwards rather than overheating may actually be the issue.
people hate inflation: people who own bonds. people on fixed incomes. low wage workers whose wages never go up as fast as prices.
people hate government spending: the usual suspects. the people who believe the usual suspects. people who fear deficits. people who hate taxes (note an absolute inability to recognize that the last item fixes the previous item).
people who make elaborate scientific economic arguments based on situations different from the present, and assumptions hidden or contrary to fact: people who believe in their core the iportance of keeping the poor poor and the desperate desperate. better to forelose on a million homes than to risk inflation. (inflation: see above, in part.)
economics is a branch of psychology.
Economics is relatively practical social science with reasonable predictive capabilities, but economists OTOH….
Agreed in general.
There are some particulars of debt based welfare economics that absolutely depend upon future growth in NGCP that are easier to deal with if there is also future growth in RGDP. Inflation raises interest rates in response, both by the Fed and by private lenders, each for their own set of reasons. This means that liberal economics does not have any intention of reducing population growth in order to fit global carrying capacity. In time even the wisest and best of intentions may fall awry, but the dumbest get there much quicker.
Once one reaches the stage in life that one believes that they have seen it all, then one is no longer able to imagine the future.
An obvious problem of means testing is that it could not be based on 2021 income and probably not 2020 income either. Restrictions against checks to undocumented aliens is an even bigger problem. The long term debt management issues which matter relative to NDGP growth whether by population or inflation are still irrelevant in context to Covid-19 relief because “In the long run we are all dead.”
glad you are filling in what i left out. thing is, i know i have left stuff out. i see no sign that well-known economists are aware they might have left something out. like the fact that people need to eat and have decent shelter. even if they are undocumented immigrants.
it’s like covid: they are demanding that some undeserving people not get free vaccinations… because, obviously, no one can catch covid from an undocumented immigrant.
i suppose economics has some predictive value. but covid was hard to predict, while the Great Recession was not predicted by all the famous economists despite the fact that it was caused by the same things that caused the Great Depression. Meanwhile global warming seems to be something they have a hard time “predicting,” let alone imagining how an economy can work without “growth.”
I said Covid could not be predicted. Actually it could have been. Should have been. Laurie Garret wrote a book in 1995 “The Coming Plague” that should have warned our government if not us that something like it was very possible and should be planned for. I think Obama made some small steps in that direction…cancelled by Trump.
I believe the current received Economic Model, and, which is the same thing, the current Political Establishment has utterly failed. I believe in democracy, because I can’t think of anything else that wouldn’t be far worse. But we need to find a way where a conspiracy of liars won’t be able to stop us from making reasonable provisions for “the general welfare.”
Countries without the advantages that America has had have resorted
to harsher measures to attain or maintain a level of “order” satisfactory at least to “the strongest.” I hope we don’t fall into that. Though the Trumpian revolution appears to be continuing even as we speak.
Exclusive: U.S. slashed CDC staff inside China prior to coronavirus outbreak
By Marisa Taylor
11 MIN READ
WASHINGTON(Reuters) – The Trump administration cut staff by more than two-thirds at a key U.S. public health agency operating inside China, as part of a larger rollback of U.S.-funded health and science experts on the ground there leading up to the coronavirus outbreak, Reuters has learned….
This is old news. A reversal of Obama’s placing staff at various countries to counter the impacts of viral infections with having feet on the ground so as to lead an effort to counter invasive diseases. Trump envisioning black people being put in their places by wiping out any evidence of their efforts.
I think this is bigger news: Dr. Fauci Backed Controversial Wuhan Lab with U.S. Dollars for Risky Coronavirus Research and Under Political Pressure, NIH Blacklists Wuhan Virology Lab
WHO team: Coronavirus unlikely to have leaked from China lab
Actually that was really old news. The CDC staff was placed in China by George H. W. Bush, not Obama. Obama kept it though, just like every other POTUS after GHWB until Trump.
I have the documentation somewhere too.
I am sure that virology research labs take greater precautions to prevent transmission than pangolins or Chinese white-faced bats.
[More ancient history]
Global, Political and Scientific Leaders Confront Epidemic Threats at 6th George H.W. Bush China-U.S. Relations Conference, Hosted by Texas A&M
COLLEGE STATION, Texas, May 7, 2015 /PRNewswire/ — The outbreak of the Ebola virus in Africa, and the role China and the U.S. are playing in dealing with emerging global infectious diseases, epidemic threats and bioterrorism, form the backdrop for the 6th George H.W. Bush China-U.S. Relations Conference, which will be held Monday, May 11, through Wednesday, May 13, 2015, at Hotel ZaZa in Houston, Texas.
An elite group of 350 physicians, scientists, policymakers, government officials and business leaders will attend the unprecedented gathering, themed “Global Infectious Diseases: Prevention, Preparedness, and Response.” Plenary sessions and scientific and policy roundtables will bring together participant “think tanks” aimed at addressing how China and the U.S. can work together to develop a global strategy that deploys tangible new actions – including state-of-the-art technology and educational programs – to avert widespread human suffering and economic and social disruption that could result from epidemics involving the Ebola virus, MERS, influenza and other diseases.
A highlight will be Tuesday’s keynote address from Tom Frieden, M.D., MPH, Director, U.S. Centers for Disease Control and Prevention (CDC), on the topic of the global health security agenda and the critical role the U.S. and China are playing in responding to Ebola and preventing future health threats…
Coberly “people hate inflation: people who own bonds. people on fixed incomes. low wage workers whose wages never go up as fast as prices.”
People who own bonds and hate inflation should buy TIPS. There is no reason any more why bondholders have to fear inflation. By definition, people on fixed incomes suffer from inflation, but, who exactly are they ?
The lowest 10% of wages increased faster than prices for centuries. Most of the period of high inflation was not a period of increasing wage inequality. The period of disinflation was.
The original topic was should we fear inflation due to an overheated economy. A high pressure economy is especially good for people with low wages or for people who would get low wages if employed who are unemployed. This was true even when Donald Trump was president. If you care more than others do about low wage workers, you want more stimulus than they do.
PCE inflation over 5% 1973-82 . Inreasing inequality 1979-now — little overlap. 20th percentile of household real income rapidly increasing through 1979 then 92-2000 and 2013-19. To help low wage workers (and the currently unemployed) stimulate more than almost any macroeconomist advises
I agreed with your post in general. No credit to me. You know more than I do and are probably smarter as well. So what is it we are disagreing about? Not much.
You said you “have never understood…” essentially why people fer inflation. I mentioned three reasons I could think of that they might…all from my experience or what I hear not from economists. Note, I did not say they were right to fear it. Only that they did.
But your arguments that they shouldn’t fear it miss some points.
First, bond holders are more likely to have non-inflation adjusted bonds. The inflation adjusted have too low a return to excite them. They would rather gamble that a higher return bond will beat inflation. That does not mean they don’t fear inflation. Because higher infllation than they expected will mean they lose their bet.
People in low income jobs may get wage increases in times of inflation faster than people in higher income positions. But that doesn’t mean that their incomes will keep up with inflation. My experience is that they will not. And since their incomes are already low, any failure to keep up with inflation means privation. While those with higher incomes can loe a percent or two to inflation and never notice it. Moreover, when people get pay raises they think they are being rewarded for increased experience, efficiency, expertise, or just because the boss likes them. They think any inflation in cheating them of their well earned increases in pay.
You seem to recognize that people on fixed incomes, but then you cast doubt on whether they exist, and you don’t seem to really care about them. How fixed is my income? Well I have a pension that allows a cost of living increase up to 2%. You can see why I might be unhappy if inflation grows to more than 2%, espcially since the pension is not very generous in the first place.
And then you change the subject..back to your orignal subject to be sure…which is where I agreed with you. The “stimulus” I object to is the tax cuts for high earners which never seem to result in better conditions for ordinary workers… just finance better schemes for business to rob their customers and buy politicians.
I don’t really care that much about “inequality.” but I don’t llike to be robbed. I don’t like to be held down. and I dont like the rich running the government\: they are a predator species and everything they touch turns to gold… which we cant’ eat, and isn’t all that beautiful to look at or even think about.
Coberly and Waldmann,
Most people do not even get to inflation risk when they hear federal deficit and increased federal debt. They just think about taxes and people who do not look like them getting their money.
i am very sure i do not look like them. perhaps it’s the clothes.
on the other hand i don’t want their money.
i would like a fair wage for my work, or at least my time. fair being what it takes me to live reasonably comfortably, with time for my own life, including insurance against the evils that cash is heir to. i think in the division of wealth the rich ought to recognize that their wealth depends on the well being of the workers.
and the Left needs to recognize that the well being of the workers depends on the good will of the rich. i am sure their is a bargain point that should satisfy everyone except the terminally greedy.
For what it’s worth. All I’ve learned about economics the past decade I learned from Bill Mitchell. http://bilbo.economicoutlook.net/blog/?p=46849
i looked at your link. wish i could say i understood any of it. but i’ll offer my reactions in case you want to try to enlighten me.
i suspected last time i talked to a modern monetary advocate that we are already doing what he was advocating: the government prints money “at need” but still needs to worry about inflation.
i suspect inflation is “under control” because wages won’t rise… because we have ways to keep wages from rising.* meanwhile “inflation” is siphoned off into the stock market where prices rise with no increase in value until everyone realizes that, just a minute too late.. and the rich get richer. higher prices for original van gogh’s don’t count against inflation.
*or keeping the poor from putting pressure on prices by siphoning their money in houses they can’t afford, which the banks take back from them periodically. or keeping unemployment at a non accelerating inflation level, or re-pauperizing workers and small business owners with regular recessions…
or something like that.