Desperately Seeking Coherence

The Washington Post summarizes President Obama’s acceptance speech:

The president offered an appealing, even a stirring, vision of a shared citizenship and commitment to democracy. “We don’t think government can solve all our problems,” he said. “But we don’t think government is the source of all our problems — any more than are welfare recipients, or corporations, or unions, or immigrants, or gays, or any other group we’re told to blame for our troubles.”

But the attractiveness of that vision made all the more frustrating Mr. Obama’s refusal to fill in any substance, his once again promising hard truths that he did not deliver. “They want your vote, but they don’t want you to know their plan,” he said of the Republicans. If Mr. Obama has a plan, Americans who listened Thursday don’t know how he would achieve it.

That brings to mind a concern I’ve had about the Obama Administration’s approach to the economy practically from the outset: the lack of a coherent approach to solving the problems at hand. As I see things there are three different theories competing for attention on the source of our problems: the Keynesian view that our problems are caused by a shortfall in demand, the idea first put forward by Richard Koo but occasionally advanced by the Obama Administration that it’s a “balance sheet recession” brought on by excessive household debt, or that the problems of the American economy are primarily structural.

In 2009 then-director of the White House National Economic Council for the Obama Administration Lawrence Summers said:

To address the deep and severe crisis he inherited, President Obama started from two main premises. First, the most immediate priority was to rescue the economy by restoring confidence and breaking the vicious cycle of economic contraction and financial failure. Second, the recovery from this crisis would be built not on the flimsy foundation of asset bubbles but on the firm foundation of productive investment and long-term growth.

The President was clear from the beginning that these two tasks needed to be dovetailed—that confidence in our ability to rescue the economy depended on a sense of our commitment to reform and a vision for rebuilding.

The economic problems confronting the United States as President Obama took office were of a unique character. This was not the standard post-World War II recession in which rising inflation had led to monetary contraction which led to economic contraction. Nor was it a crisis of the kind frequently experienced in emerging markets in which the country had experienced a sudden loss of external confidence. Indeed, the dollar strengthened over the second half of 2008.

Rather, the crisis was qualitatively similar to the crisis in Japan after its asset bubble collapse, the early stages of the Great Depression, or other major domestic financial crises in which asset bubbles burst, credit flow contracted and de-leveraging reduced spending.

We were very much aware that there were few, if any, examples of success in rapidly restoring economic growth and stability after broad-based financial crises. We concluded that this was a reflection of insufficiently aggressive action taken too slowly and decided that our policy response would be neither too little nor too late. The Administration decided to pursue a policy approach of seeking to reverse the vicious cycle connecting income declines and financial instability by directly supporting incomes and restoring stability to the financial system.

[…]

The rebuilt American economy must be more export-oriented and less consumption-oriented, more environmentally oriented and less fossil-energy-oriented, more bio- and software-engineering-oriented and less financial-engineering-oriented, more middle-class-oriented and less oriented to income growth that disproportionately favors a very small share of the population.

That statement combines all three of the theories and, indeed, suggests a fourth: that the problems of the American economy are caused by maldistribution of income.

If the intent of the ARRA, the “stimulus package”, was Keynesian pump-priming, it was not a coherent approach for two important reasons. The theory calls for counter-cyclical spending increases to make up for inadequate demand and pro-cyclical spending cuts. According to the NBER the longest post-war economic contraction prior to that of the Great Recession was 16 months (that of the Great Recession was 18 months). With the recession having begun in December 2007 it could reasonably have been expected to end by the middle of 2009.

Without utterly unrealistic assumptions about the Keynesian multiplier that would be realized by a stimulus, the amount that would have needed to have been spent was around $400 billion. Both the ARRA’s size and timing were inadequate.

It’s not that there were no available ways of spending the required amount of money in the time necessary. There were any number of ways of accomplishing that, all based on tax cuts. For example, suspending FICA both for workers and employers for six months would have resulted in leaving more money in the economy in 2009 than was actually spent in 2009 under the ARRA.

Why wasn’t such a plan adopted? Because Republicans wouldn’t have supported it? Because Democrats wouldn’t have supported it?

There have been a few half-hearted attempts at speeding up the reduction in household debt, HAMP, the Home Affordable Modification Program begun in 2009, is the most significant. By most accounts it hasn’t succeeded in its goals. According to a report from the McKinsey Global Institute household debt has declined by about a half trillion dollars since 2007 and two-thirds of that has been in the form of foreclosures and defaults. That’s significantly different from paying off the debt in its economic effects due to the difference in the wealth effect.

Assuming that the recession was a balance sheet recession due to excessive household debt how much farther would that debt need to decline before the economy could return to robust health? According to the St. Louis Federal Reserve household debt is now roughly where it was in 2007. For it to return to what it was in, say, 1999 it would need to decline ten times as much as it has so far. Over the last six months household debt has hardly declined at all, only about $20 billion. That’s another way of saying “Never”.

An additional problem with concluding that the reason for the phlegmatic recovery is that recoveries from financial crises are slow is that, at least according to a recent paper from the Cleveland Fed, that does not appear to have been true historically in the United States.

I wish I had the time, inclination, and resources to produce an empirical measure of the administration’s actual beliefs based on how often President Obama mentions something when speaking. I have no way of verifying it but my impression is that the president believes that the primary reasons for high unemployment are structural. For example, back in June 2011 on the Today Show the president said:

&133;a couple of things happened. look, we went through the worse crisis since the great depression. we are now in a process where the economy is growing again and we created 2 million jobs over the last 15 months. but it’s not as fast as it needs to be to make up for all the jobs that were lost. the other thing that happened, though, and this goes to the point you were just making, is there are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. you see it when you go to a bank and you use an atm, you don’t go to a bank teller , or you go to the airport and you’re using a kiosk instead of checking in at the gate. so all these things have creakrecreated changes in the economy and this counsel is identifying where the jobs of the future are going to be, how do we make sure there’s a match between what people are getting trained for and the jobs that exist, how do we make sure that capital is flowing into those places with the greatest opportunity. we are on the right track. the key is figuring out how do we accelerate it.

That’s clearly a structural argument. Emphasizing the impact of offshore outsourcing:

We should start with our tax code. Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it.

So let’s change it. First, if you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it.

That money should be used to cover moving expenses for companies like Master Lock that decide to bring jobs home.

Second, no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas.

From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here in America.

Third, if you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making your products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers.

and education:

I also hear from many business leaders who want to hire in the United States but can’t find workers with the right skills. Growing industries in science and technology have twice as many openings as we have workers who can do the job. Think about that: openings at a time when millions of Americans are looking for work.

It’s inexcusable. And we know how to fix it.

Jackie Bray is a single mom from North Carolina who was laid off from her job as a mechanic. Then Siemens opened a gas turbine factory in Charlotte and formed a partnership with Central Piedmont Community College. The company helped the college design courses in laser and robotics training. It paid Jackie’s tuition, then hired her to help operate their plant.

I want every American looking for work to have the same opportunity as Jackie did. Join me in a national commitment to train 2 million Americans with skills that will lead directly to a job.

as President Obama did in his 2012 State of the Union address, are structural arguments, too. These themes were repeated in his recent acceptance speech during the Democratic National Convention. I found little or no mention of the argument that our economic woes are caused either by a shortfall in demand or too much household debt in that speech.

The problem with this theory of our economic problems is that it doesn’t comport with what has actually happened and it doesn’t comport with the Obama Administration’s consistent laying of the blame for those problems on the previous administration. Technological progress didn’t suddenly start eliminating jobs in 2001, culminating in 2007, and offshoring did not reach some sort of tipping point then. Indeed, there’s been as much offshoring of jobs during President Obama’s first term as there was during President Bush’s first term. President Clinton lobbied hard to grant China Most Favored Nation trading status and for China’s admission to the WTO, both of which gave impetus to the problems about which President Obama is complaining. There’s plenty of blame to spread around and the factors go back at least 20 years.

It might be argued that the scattershot approach to economic policy is an appropriate strategy for dealing with uncertainty or with complex conditions. I don’t think that excuse holds water when none of the solutions being proposed are adequate to address any of the explanations that have been proffered. Additionally, the approach assumes an infinite amount of time, money, and political will in which to execute it. I don’t believe that we have any of those.

A coherent approach to our problems would consist in enunciating a theory of those problems that comports at least in part with what’s actually occurring, proposing solutions that would address those problems effectively, advocating those solutions tirelessly until they’re implemented, and following those solutions until they’re successful or proven inadequate. Our problems are already at hand. We need a coherent approach to solving them.

For the last five years we’ve had incoherence. Enough. I’m not letting Mitt Romney off the hook in these remarks. Unless you believe that our problems are that the highest marginal tax rate is too high which does not comport with the facts since we’ve had higher marginal tax rates for most of the last century and faster growth for most of the last century or that some unspecified regulations are restraining a gigantic surge of economic activity that’s straining at the bit to be released, something I think is unlikely, his proposals are as incoherent as those of the man he seeks to replace.

25 comments… add one
  • Well you see, when you’re just automatically right, you don’t need to be coherent. It comes with being right.

  • TastyBits Link

    @Dave Schuler

    It is the incoherence of the arguments, of both sides, that I find the most frustrating, but I think this is a feature n0t a bug. The rebuttal will be to only a portion of the argument, and it will require untangling the incoherence first.

    This post is an example. For a proper discussion, each of your paragraphs could be expanded into its own post. The Larry Summers link requires a more in depth discussion.

    The backers of either candidate seem to ignore this incoherence, or they downplay it for convenience.

    RE: Decreased Demand

    The supply/demand dynamic does not work in a vacuum, but this is rarely taken into account. Artificially increasing one will not necessarily increase the other, and artificially increasing both is not necessarily sustainable. Alternative energy initiatives are an example. Science is not included in the economic plan.

    RE: Balance Sheet

    There is a lot of bad debt being kept on the books to keep many entities solvent. Until a larger portion of this debt is paid or written down/off, new debt cannot be created. New debt funds economic expansion.

    RE: Structural

    This is a large part of the problem, but the above two have a large impact on this. I am philosophically more aligned with the Republicans, but this is only when compared to the Democrats. That said, I agree with the regulations arguments of the Republicans, but I disagree about there effects in the present environment. The supply/demand distortions and debt issues are far larger than the regulation problem.

  • Why wasn’t such a plan adopted? Because Republicans wouldn’t have supported it? Because Democrats wouldn’t have supported it?

    Because the ARRA wasn’t about fixing the economy. It was about claiming credit when things got better. (“Because of our Stimulus we defeated the recession!”) And also about funneling some money here and there with the intent of doing favors for people they liked or who had given them money. Anything else thrown in (certain tax credits, for example) was merely for show.

  • TastyBits:

    This post is an example. For a proper discussion, each of your paragraphs could be expanded into its own post.

    A limitation of the form. It’s a blog post not a doctoral thesis or book.

    When I started this blog approaching ten years ago I frequently wrote multi-part posts. That involved a lot of work and produced practically no effect. Relatively few readers will read anything that’s more than about 500 words long and developing an idea over three, four, or more posts doesn’t improve the situation.

    In a sense much of this blog is about a very few ideas, e.g. relating ends to means, that the traditional wisdom still has relevance, that there is more to understanding than affiliation.

    Icepick:

    Because the ARRA wasn’t about fixing the economy. It was about claiming credit when things got better.

    Very insightful. I think that the ARRA makes most sense when understood in the context of a common belief among the president, his advisors, and the Democratic Congressional leadership that the economy would right itself in the natural course of events and would do so relatively soon. It didn’t work out that way and we’ve experienced the consequences ever since, you more than most.

    Add interest group politics into the mix and you’ve pretty much got it.

  • TastyBits Link

    @Dave Schuler

    I was not suggesting you actually expand the post. It is just an example of the roadblocks intentionally, or not, that impedes “relating ends to means”.

    I appreciate the time and effort you put into keeping this blog going. I value opposing opinions more, and this is one of the few places to have a rational discussion. Some partisanship is not a problem as long as there is a coherent argument included.

    Some of the tech wars are even worse than the political ones. If you want to increase your hit counter, write an article about M1cro5oft being better than A99le. (intentionally misspelled)

  • Some of the tech wars are even worse than the political ones. If you want to increase your hit counter, write an article about M1cro5oft being better than A99le. (intentionally misspelled)

    That might be difficult since I don’t believe that except, possibly, in the same way that, say, the Mafia is better than vampires. Indeed, my considered opinion is that industry dominance is practically proof positive of technical inferiority. The really superior companies fell by the wayside or were acquired by the big guys to squelch them.

    I don’t spread it around a lot but I’ve actually had articles published on the implications of the loss of technological diversity.

  • steve Link

    1) The Bordo and Haubrich paper sucks. Read it when it came out.

    2) I think cyclical or structural is a false binary choice. It is some of each. As cyclical persists, it becomes structural. Our long term employment problems, the kind you cite Obama discussing, are structural. They are the kind that, maybe, govt might be able to help with.

    3) 4th quarter 2008 was the worst since the Great Depression. What stopped the slide? I think the stimulus gets part of the credit. Should it have been larger? Maybe, but there was no way politically to do that. In the end, I think is probably ok. A prolonged Keynesian stimulus of some sort might make sense if you start with low levels of public debt. YThose have been rising since 1980, so I dont think that was really an option.

    4) I still like the balance sheet explanation as a major part of our problem. If you remember Blodget’s charts, private and corporate debt took off starting the late 70s. I suspect it has to go back to below 2007 levels. Why would you want to carry debt at record levels when the economy is not booming? Anyway, I dont think that there is a govt generated answer to this problem. Hence, no viable plan from either side for our current problems. No one has grown our economy without credit since the 70s.

    http://www.businessinsider.com/politics-economics-facts-charts-2012-6?op=1

    ” I think that the ARRA makes most sense when understood in the context of a common belief among the president, his advisors, and the Democratic Congressional leadership that the economy would right itself in the natural course of events and would do so relatively soon.”

    Directly contradicts the Summers quote. Romer supposedly wanted a much bigger stimulus believing it to be a deeper crisis.

    Steve

  • Anyway, I dont think that there is a govt generated answer to this problem

    There are plenty of them. A big chunk of the money used in the ARRA could have been used to buy debt. It could still happen. When you’re running as far in the red as we are right now arguing that we can’t do it because if we did we’d run in the red sounds a bit odd to me. Measures could have been introduced to facilitate and expedite foreclosure.

    I think the key point is that none of the Powers-That-Be really believe it.

  • Ben Wolf Link

    Japan is still in a balance sheet recession twenty years later.

    Whatever the President may say, his actions have clearly been aimed at keeping as many people on the hook for their debts as possible, because banks would lose a greant deal of money if large chunks of it get paid off. I think this is also why no efforts have been made to deal with declining middle and lower class incomes. Ther poorer people are the more interest they pay as they default to minimum payments and the more likely the bank can reposess their homes and sell them at a higher price later.

    The President is actively supporting industries where profits are extracted from peoples’ misery, and I can’t forgive or look past that.

  • I’m not letting Mitt Romney off the hook in these remarks. Unless you believe that our problems are that the highest marginal tax rate is too high which does not comport with the facts since we’ve had higher marginal tax rates for most of the last century and faster growth for most of the last century or that some unspecified regulations are restraining a gigantic surge of economic activity that’s straining at the bit to be released, something I think is unlikely, his proposals are as incoherent as those of the man he seeks to replace.

    A bitch slap from a pimp hand that is fast and strong!

  • steve Link

    “There are plenty of them. A big chunk of the money used in the ARRA could have been used to buy debt. It could still happen.”

    Dont buy it. We are talking household balance sheets, not just mortgage debt. I am thinking it looks like we would need to buy off $4-5 trillion of private debt, and a couple of trillion of corporate debt, at least. I think there is zero chance that this is politically possible. Getting an $800 billion stimulus with 1/3 of that as tax cuts was barely possible. Economically, I think this is interesting. If your aim was to get back to a normalized output quickly, this would require bond sales at a rate I dont remember seeing before (maybe WWII?). I have no idea what that does to interest rates. If you stretch it out to avoid a huge sudden increase in public debt, you get what we currently have. My uncertainty about this leaves me ok with a modest stimulus to abort the steep slide, but not optimistic that it could return things to any kind of normal.

    Steve

  • Ben Wolf Link

    @steve

    Government spending drives interest rates down.

  • steve Link

    @Ben- And borrowing?

    Steve

  • Very insightful. I think that the ARRA makes most sense when understood in the context of a common belief among the president, his advisors, and the Democratic Congressional leadership that the economy would right itself in the natural course of events and would do so relatively soon.

    To be fair (or more accurately, to damn everyone equally) I’m guessing the Republicans probably felt the same thing.

    It didn’t work out that way and we’ve experienced the consequences ever since, you more than most.

    What’s really distressing is that I know many that have experienced worse. My wife keeping her job (and a couple of other lucky breaks along the way) and a marriage that was stronger than most really kept it all together. It sucks and its depressing, but it could be soooooo much worse.

    Add interest group politics into the mix and you’ve pretty much got it.

    Yep.

  • To be fair (or more accurately, to damn everyone equally) I’m guessing the Republicans probably felt the same thing.

    I think they think that now. IMO that’s one of the reasons Gov. Romney is being so cagey about his plans. He thinks the economy will recover in the natural course of events and he’ll get credit for it.

  • I think they think that now. IMO that’s one of the reasons Gov. Romney is being so cagey about his plans. He thinks the economy will recover in the natural course of events and he’ll get credit for it.

    wow, do you think they’re really that clueless?

  • Seriously, does you really think he thinks that millions and millions of jobs are just going to appear? That things will stabilize for guys like Bobo? I have to admit it hadn’t even occurred to me that someone with half a brain and some knowledge of the situation would think that.

  • Ben Wolf Link

    @steve

    The government basically “borrows” money into existence.

    Before we had all these excess reserves in the system the Fed would do a funny thing before a Treasury auction. It would buy Treasurys from the market and pump reserves into the system. This would always leave sufficient cash for the market to then buy the new Treasurys and achieve a successful auction. Those reserves then went to the Department of Treasury’s cash operating accounts so it could spend.

    The Fed then states that it will purchase any Treasurys offered to it at a set price. This is how it ends up with all those government bonds on its balance sheet. Basically the Fed supplies the money with which the market buys the bonds, and in doing so indirectly funds the Treasury Department’s spending. When Treasury spends the cash those reserves which came from the Fed end up on bank balance sheets, exceeding anything those banks actually need for their daily operations. They then compete with each other to loan those excess reserves to banks which are short of them, in the process bidding the overnight interest rate down toward zero. So the more government “borrows” the more excess reserves accumulate.

    The Fed has kept the overnight rate from dropping below 0.25% by establishing a “support rate” which pays banks that amount for holding onto their reserves. This creates a floor: if banks can’t loan their reserves for higher than that 0.25% they’ll just hang on to them and earn a little interest. There’s little else that can be done with them.

  • I’m really struggling with the idea that Romney might believe the economy will just recover naturally on its own. The idea is so cynical that I’m frankly a bit stunned. Schuler, do you have any evidence for this? Like I said I’m a bit stunned by the idea so I’m having trouble processing it.

    Also, I’m thinking your last comment may be in the wrong thread, although the point stands.

    Update

    You’re right; it was. I moved it.

  • Schuler, do you have any evidence for this?

    Well, economic recoveries have taken place eventually in the past even in the bad old days before a Fed and activist government. It’s not unreasonable to believe that a real economic recovery will eventually take place this time as well. I think the conviction that the economy would right itself underpinned Bush 41’s phlegmatic reaction to the recession late in his term. You know, the “It’s the economy, stupid” one.

    When a reasonably intelligent and well-informed guy as I believe Romney is presents what is pretty obviously a fatuous proposal I’m left wondering “Why?” At this point I think the Occam’s Razor sort of conclusion is that he recognizes that he needs to have some kind of proposal on the table and pretty much anything will do since the economy will, ultimately, improve. Maybe that’s a bad hypothesis on my part but I think it fits the facts.

    His promising 12 million jobs is extremely far-fetched IMO. To accomplish that the economy would need to be producing 250,000 jobs a month over a protracted period, something we haven’t seen in decades, if ever. Economic growth has slowed for a number of reasons and, frankly, tax cuts alone won’t change that. Point to a regulation or group of regulations the elimination of which will start producing 250,000 jobs a month, regular as clockwork. There ain’t no such animule.

  • I knew what he was proposing wouldn’t work, but I assumed he just didn’t have a decent idea about what needed to be done. It never occurred to me he didn’t think anything DID need to be done.

    I’m not sure if I’m more shocked by the cynicism of such an idea or that I didn’t think of it on my own.

  • TastyBits Link

    @Icepick

    I’m not sure if I’m more shocked by the cynicism of such an idea or that I didn’t think of it on my own.

    Maybe you really are a slacker.

  • TastyBits Link

    @Ben Wolf

    The President is actively supporting industries where profits are extracted from peoples’ misery, and I can’t forgive or look past that.

    I’m not sure if I’m more shocked by the cynicism of such an idea or that I didn’t think of it on my own.
    – @Icepick

    Maybe I am a slacker.

  • The President is actively supporting industries where profits are extracted from peoples’ misery, and I can’t forgive or look past that.

    “Government, reducing incomes and redistributing misery…..”–Arnold Kling

  • Maybe you really are a slacker.

    Screw that. I work HARD at my cynicism. But I’m just a small independent contractor – I can’t keep up with the deep pockets of Leviathan’s research laboratories.

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