There’s a commentary on this article by Stephen Roach at FT from Edward Harrison at Credit Writedowns that I’d like to commend to your attention:
Don’t be fooled by economists telling you the risks of a Japan disease are not real. They are. And when economists are honest like Janet Yellen has been, they will tell you that it is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage. Moreover, Larry Summers is quite direct in telling us that he views the purpose of fiscal policy is to promote aggregate demand via “borrowing and lending, and spendingâ€. How is that consistent with private sector deleveraging? Doesn’t this actively promote the preconditions for the Japan disease?
I don’t have a great deal to add to the two articles other than to comment on Mr. Harrison’s prescription:
Rather than adding stimulus with the aim of goosing demand by whatever means available to help the economy reach escape velocity, I would say that the central objective of economic policy is to help the economy reach full employment. Doing so will increase demand, increase output, and cut budget deficits tremendously. Policy makers should aid the economy in reallocating scarce resources to areas that will sustain longer-term productivity growth while doing this. In America, that means fewer resources in finance and housing and perhaps more in technology and infrastructure.
Two observations here. First, helping the economy reach full employment and reallocating assets away from finance and housing construction in the near term are, unfortunately, in conflict. The economic dislocation will, in the short term, result in more unemployment rather than less. That’s why the administration and the Federal Reserve have been so active in propping up the failing sectors rather than supporting sectors in which there are some prospects for future growth. Wishing for the status quo ante is an inherent quality of political institutions, not an accidental one.
Second, IMO we should be very careful about just what technology and infrastructure we invest in and how we do it. I believe that we’re enormously over-invested in biotechnololgy, for example. That may pay off enormously. Or it may be an utter waste.
If you define infrastructure as roads and bridges, do we have enough or far too much? I think the latter (building bridges to nowhere, anyone?) and that rather than diluting our resources by trying not only to maintain everything but even to expand it we should concentrate on what’s most important and most productive. Does that argue for the federal government doing these things? I’m not so sure.
Here in the Chicagoland area we have plenty of roads. Our problems are that many of our roads don’t go the right way and we have peak load problems. The reason for the former is political and I don’t think the solution to the latter is more roads.
To my mind we’ve gotten slightly better than we could have, when we were talking L-Shaped recoveries in 2008. There is noise on the graph, and some worrying tips, but the trend-line is slightly up.
At the same time though, the political momentum is to pull back, both on the monetary and fiscal side. I don’t expect QE2 or Stimulus X (however many we are really up to)
And so … a slow slog until such time as a natural recovery finds its feet.
Dave,
No, reaching full employment by shifting resources will simply take longer. You are correct that the initial phase would probably lead to cause an increase in unemployment. It is only a conflict if you are a politician with a very short planning horizon (2-3 maybe 4 years at best).
John,
I don’t know about Dave, but to me an L-shaped recession is one where the “L” is actually canted on its vertex. That is you have a trend up, then a drop, then a resumption of the positive trend (possibly with a different slope). So we aren’t really “better off” than the L-shaped recession, it is precisely what we’ve gotten.
Many who argued for fiscal stimulus argued we’d get a V-shape (Krugman and DeLong as two examples). We clearly have not. Now the common refrain is that, “No matter, what we really meant is that it would decrease the vertical aspect of the “L” in the recession.” It is a nice Jedi mind trick, but Krugman, et. al. are not Jedis.
You mean guys like Bernanke? He has come out and stated that the country absolutely needs a path back to fiscal stability. I know you like to call that austerity, but it really isn’t.
We are out of the recession. It is time to look at getting our fiscal house in order. Yet, the same people keep saying over and over, “Nothing to worry about.” It is like they have all transmogrified in Dick Cheney….”Deficits don’t matter anymore.”
Well, I’m sure you agree that 0% GDP growth would be the literal L. And the more real growth, the more V-ish it is than L-ish. Admittedly if GDP has been futz’d with via bad inflation data, it could be more L-ish than it appears on the surface. This could be a real factor.
Just the same, things like the unemployment curve look pretty smooth. Apply a reasonable moving average, and we are in a long, slow, upswing.
I do worry about jobless claims “ringing out” at too high a level, but we might get good news here.
On semi-austerity, I call it that because to the extent you call this a current recession (soft spot, L-shape), it makes reduction in spending that much more inopportune.
(I note that you end with the recession being over, a little at odds with belief in the true L-shape.)
Maybe I can call it semi-austerity on the unemployment data?
As I say, I see an upswing, but I don’t think anyone is happy with that upswing. It is weak.
No. To me the L is you are growing at say 2-3% annually, then you lose say 5% of GDP or a given time frame, then you return to an upward trend, 2-3% or maybe 1.5-2.5% or some such. The L is rotated so that the initial upwards trend, the downwards trend, and then the new upward trend are similar to a lightening bolt. In other words, the loses to GDP are permanent.
The V shape would look like the L, but when you got to the growth you’d have a period of “super growth” say 5% or more to replace the “lost” GDP. Then growth would return to its post recession levels.
Not at all. An L-shape merely means that the losses to the economy are permanent, not necessarily that there is zero growth. You are misunderstanding the term.
And it will continue to be weak given the policies we’ve put in place. The policies are to try and bolster the financial and housing industries…two industries we have over invested in.
Leaving aside the bent-L or bent-V borderland,
Austerity is about spending, isn’t it?
And most of the policies are to try and bolster the financial and housing industries are coming out of the Fed these days, right?
No austerity is a type of butterfly, I’ve just changed the definition of the word. So now we are talking about butterflies.
The key thing is to look for greatest meaning, using semantics as a guide, and not a prison.
Semi-austerity link of the day: