When I first saw the headline of Ezra Klein’s interview with Lawrence Summers, “Larry Summers on why the economy is broken — and how to fix it”, I was prepared to disagree with whatever he had to say pretty vehemently. Somewhat to my surprise most of my disagreements were quibbles and I found myself in broad agreement with what he had to say if not in detail.
The remark of Dr. Summers with which I was in greatest agreement was this:
Imagine the economy between 2003 and 2007 without the consequences of housing bubbles and overly easy credit. Housing investment would have been two to three percent of GDP lower, and consumption expenditure would have been considerably lower, as well, resulting in very inadequate performance.
Said another way, our economic problems predate 2007 considerably. He puts them in the mid 1990s to early Aughts. I don’t think he quite has the courage to point out that our actual problems go back to the early 1990s and while not due to globalization per se are largely due to the form that globalization took, with large trading partners maintaining more or less permanent trade surpluses with us. That had the effect of working much as a syphon does and degrading the U. S.’s productive base.
I also agree with this:
But if you believe that demand is constrained by the lower bound on interest rates, there is, as a matter of logic, three ways of proceeding. One is to do nothing and wait for supply to fall back to demand through hysteresis effects. We have tragically done this in the United States.
The general policy position of the United States has been a rather desperate attempt at restoring the status quo ante. We have attempted to prop up industries that have made catastrophically bad decisions and thereby incentivized their continuing to make bad decisions. There were alternatives. We could have let them fail and devoted the energies used in propping them up to helping those injured by their failure. We could have seen to it that they collapsed in a controlled manner, figuratively along the lines of building implosion. The strategy that was chosen exacerbates income inequality, seen by some as an unfortunate and unintended side effect, by some as the object of the game.
And I wish the Obama Administration would heed this advice:
There are ample opportunities, particularly in the energy sector, to improve the efficiency of regulation in ways that would stimulate demand. Allowing the export of fossil fuels is one example. And a concerted effort to promote net exports would also raise demand in the United States without the need to reduce interest rates.
But this is just foolishness:
Finally, if we fix Kennedy airport today, we don’t need to fix it tomorrow.
illustrating neatly why economists shouldn’t give construction advice. Fixing a pothole today does not mean you won’t have to fix it tomorrow. Sadly, a very high proportion of the infrastructure spending that was part of the ARRA was just such minor maintenance which merely moved money from one pocket (the federal government’s) to another (those of “approved vendors”) rather than from those of state government to the same approved vendors. Much too little was accomplished and the investment value of such minor maintenance was practically nil.
We are a developed country. The opportunities for genuine investment via infrastructure spending are very few and the existence of approved vendors who’ve already invested in all of the equipment they need and already employ all of the people they’ll require greatly limits infrastructure spending as a means of producing demand.
That’s further aggravated by modern developments in retailing and our importing so much in the way of consumer goods. Unlike the 1930s, boosting consumer demand today has a very low multiplier.
There are ways and means of boosting demand. Sadly, we’re not seizing on them because they fly in the face of other policy goals. That’s why policy makers have latched onto hoping for the best (“do nothing and wait for supply to fall back to demand through hysteresis effects”) as their primary policy response.
What’s the deal with the Kennedy airport? The complaint a few years ago was that the stimulus essentially gave the Kennedy the same amount of money for repairs as smaller airports across the country in places like North Dakota or Alaska. The Kennedy is located in the third wealthiest state in the union, serving a region with about 25% of U.S. GDP, and quite capable of raising fees for its own improvements. While its quite possible I will never personally use an airport that provides access to an American Indian Reservation, its quite possible that the need exists there for safe air transportation in excess of the abilities of the local tax base. If New Yorkers don’t like it, they should resume to their Nineteenth Century politics and vote for a smaller federal government, so they can spend more of their wealth on themselves.
Who has the time and motivation to comprehend the mess we’re in — almost nobody.
This whole piece is less intellectual than it is guttural in it’s descriptive delivery, assessing what’s going on through a listing of four generalized points. However, I think it more accurately expresses much of the ‘average Joe’s’ frustration with the state of our country than the erudite words of an elite economist. After all, if you’re a ‘worker,’ an active taxpayer, juggling all the responsibilities of daily life, inside the beltway numbers, punitive remedies, expansion of central powers make far less sense to the outside the beltway realities of coping with ideology trumping common sense, over and over again — in attempting to make an honest go of it.
Offhand I suspect that Lawrence Summers flies in and out of Kennedy more frequently than he does Bismarck Municipal Airport.
In Which I Agree With Lawrence Summers
Ouch! I fell off my chair! Summers must have said something about the Sun rising in the East tomorrow or something….
@Dave Schuler
You have been onto the pre 2007 problems for quite some time, and yet, Larry Summers has just caught up. People wonder why I am so dismissive of the experts.
Offhand I suspect that Lawrence Summers flies in and out of Kennedy more frequently than he does Bismarck Municipal Airport.
I’m not sure who’s better at understated wit, you or PD.
Or maybe I just have a peculiar sense of humor.
We are a developed country. The opportunities for genuine investment via infrastructure spending are very few….
You’re just not thinking screwily enough.
Redo the entire road system of America, every last mile of paved surface. But this time, make them giant slot-car racing tracks! Put in mile after mile of slot-car racing tracks, and then have the automakers build giant slot-cars! This greatly reduces the need for all those pesky batteries in electric cars, lowering their weight and environmental impact. (Batteries would still be needed for the cars to go in and out of driveways and probably parking spots. Also for switching lanes, and I imagine that would require a little engineering legerdemain. But hey, it’ll give the engineers something to do.) It greatly reduces the need for building all the damn plug sites for all those stupid Tesla vehicles. To meet the demand we’d have to build a shitload of new coal-fired power plants all over the country. Build ’em relatively clean, but speed up the approval process.
And viola, I’ve got yer gigantonormous infrastructure spending right there, a demand built in for domestically produced energy and something for the US automakers to do domestically to beat the damnable CAFE standards. Throw up regulatory blocks to having giant slot-cars get imported from elsewhere, and it is a win all the way around. (I don’t care if Toyota builds such cars, as long as they do it here.)
Hell, this economy fixing shit is easy.
I agree that the US economic problems go back to the early 1990’s or earlier. During the 1970’s and 80’s the countries destroyed during WW2 were coming back online and were catching up, had caught up, or had passed US manufacturing.
With the exception of the USSR, none of these countries had any substantial military, and with the collapse of the Soviet Union, Russia’s military expenses were significantly diminished.
The US economy has been supporting the military expenditures for a large part of the world, and by the early 1990’s, it was becoming too large a drag to overcome.
I’ve been thinking along the same lines, wondering just what we’re trying to get back to? The tech bubble or the housing bubble? Because otherwise we’re talking about what is practically ancient history. If there’s no “good old days” then trying to get there isn’t probably a great idea.
Plastics.
A few days ago Dave linked to a report on county-by-county economic recovery that appeared to attribute a lot of the economic recovery to real estate. I think the claim was made that real estate had recovered in all states, except FL & NV, but I suspect these two states still had a lot of economic output attributed to real estate. I’m not sure I understand what that means? Are we entering into another bubble as a result of super-low interest rates. Is the real estate output misleading?
@michael reynolds
Why not a naturally balanced economy? Or, as much so as possible.
If you want to stop bubbles, you need to stop the harmonic resonance that creates the credit that fuels them, but I have beat that dead horse enough.
Are we entering into another bubble as a result of super-low interest rates.
Real estate is really flying in Central Florida again, at least in some neighborhoods. Prices are (or were, at least) going up like they did during the bubble years. But the interesting thing is that so many of the houses are being bought with cash by the 1% and foreign investors. I have no idea what a popped bubble would look like in those circumstances. I mean, if there is no mortgage to service, is a popped real estate bubble really a popped real estate bubble?
Alternately, someone has figured out a new way to launder money. It would be nice to see Florida return to the money laundering forefront, like back in the cocaine cowboy heyday. Man, those were the days. Modern Miami was built on cocaine money.
@PD Shaw
I think that the quality of the loans is an indicator of a problem. When speculators are speculating amongst themselves it is not a problem, it becomes a problem when the average joe gets put into a loan he cannot afford.
It is my understanding that the GSE’s are chomping at the bit to get back into the game, but I am sure that it will be fine this time. We have Dodd-Frank to save the day.
This morning I read an LAT opinion piece by Michael Hitzlik on the phlegmatic recovery of the housing market approvingly quoting Brad DeLong, Kevin Drum, and Felix Salmon that was so incompetent as to defy description.
For one thing it failed to distinguish among consumers, investors, and speculators, three distinct classes of buyers in housing. The present housing market leans very heavily to bargain-hunting investors with cash. It will be a generation before the speculators return to the market.
And it failed to note the almost complete unavailability of jumbos. That’s why the housing market is spotty. Investors with cash are buying in markets where that makes sense. Nobody’s buying in Chicago.
This is the data I was looking at: County Tracker You can click on each county for a specific report. The Cook County, Illinois report shows that the number one industry in Cook County, contributing to economic output is Real Estate, worth $45.9 billion of economic output in 2013, or 14.3 percent.
Is that just reflecting the increased value of the single family housing stock over the past year, as calculated by projecting improved sales data from the previous year on the entire housing stock? Dave’s house contributes significantly to economic output by not being destroyed in 2013? Or is real estate simply a bigger industry than I appreciate, and even foreclosures generate economic activity from bankers, lawyers and realtors? To the extent its the former, I think the economic output is the measure of a dead cat bounding.
I wonder how you’d go about measuring the economic output of local government which the site to which you linked gave as 18.8% of total output for Cook County. I can see how you’d measure the input but not the output.
@PD Shaw
It looks like wages in Real Estate, but if so, I am not sure who is counted.
The wages on these sheets are odd. For instance, looking at counties with state capitols:
STATE GOVERNMENT “INDUSTRY”
Illinois: average wage $124,000
Louisiana: average wage $48,100
Pennsylvania: average wage $48,300
California: average wage $44,300
Florida: average wage $41,000
Either they asked Dave for his back-of-the-envelope calculation of how much Illinois’ pension commitments were going to cost, or they are drawing wage information from different sources just to give an idea of the nature of the sector.
But if you believe that demand is constrained by the lower bound on interest rates. . .
I find this rather more damning of the man. Suggesting real interest rates can explain where we are is pig-ignorant when we’ve been fiddling with rates for thirty years.
@Dave, to be clear, that site was given as the source behind the “county-by-county” analysis you recently linked to. I obsessed about it over lunch that day because I think the concept is interesting.
It looks like an attempt to replicate a GDP at the county level, so I assume its all about spending. If the State of Illinois takes money from DuPage County and gives it to the Cook County schools, then the amount appears to be recorded as economic output for Cook County, but I don’t know that the tax is counted against DuPage anywhere. They don’t do that with GDP, do they?
GDP is generally reckoned as personal consumption plus business investment plus government spending plus net exports. However, it seems to me that characterizing the government spending component of GDP as “output” is an error.
@Dave
Depends on whether one looks at the GDP as expenditure or GDP as production. Generally when people refer to GDP and growth they’re referring solely to expenditure, which I think is correct in application to governments. Regarding production, however, I think if we used a more realistic definition we’d find a big chunk of both government and the private sector are wasted space and GDP is smaller than we acknowledge.
So what if the government spending is sending money elsewhere, as in the example PD Shaw mentions above? Or of the federal government paying off debt by sending newly acquired (ie, borrowed) money to overseas holders of US debt?
@Ben Wolf
I do not mean to threadjack, but if I am not mistaken, MMT was the first to note the Fed is actually “pushing on a string” regarding interest rates. In 2008, the experts assured us that only a madman would speak such nonsense. In 2014, this is conventional wisdom. Being an expert means never having to admit you were wrong.
Okay, so no one seems to really like GDP as a measuring stick. What would be a good measuring stick? It wouldn’t be straight employment, as then the old Soviet Union would have always been ahead of the United States, which doesn’t jibe with the fact that their economy crashed while ours didn’t (at that time, anyway).
Measuring income doesn’t seem like a good measure either. A country could have a lot of income without doing much otherwise if it just printed up money for all its people. Or if all the income went to a few.
So what would a good measure of the health of an economy look like?
I would insert the word “empirical” between “good” and “measure”.
That’s a really good question. I don’t know. My hipshot reaction is right track/wrong track polling numbers.
@Icepick
I would suggest looking at the country as a company. GDP is like revenue, and the HR and accounting departments are like the government. They are necessary, but they do not contribute to revenue. Salesmen and the assembly line contribute to revenue.
A functional economy needs consumers and producers. Consumers must consume what the producers produce, and the producers must produce what the consumers consume.
Additional consumers should create additional producers, and additional producers should create additional consumers. This is not occurring, and until it does, the long term problems cannot be resolved.
Housing is one of the few products that must be produced locally, and therefore, it is emphasized.
That takes me back. I actually fought this battle for years. R&D contributes to revenue, too. The engineering department that I managed developed the product (I did a lot of the design) and did the manufacturing engineering. Then we were treated as overhead. I had to fight to keep our budget.
I would insert the word “empirical†between “good†and “measureâ€.
A priori, a good measure would be empirical, at least to my way of thinking.
My hipshot reaction is right track/wrong track polling numbers.
Hehehehe [rubs hands together with glee]. I’m now a regular polling member of the Gallup organization. For the first time in years I can actually claim to have some sort of influence.
Doesn’t the HR department supply the workers that create the end product? How is that not contributing to production? Would you say the same of the parts department at a car repair shop? No parts = no production. No workers = no production.
How about quality control, which would be the free market analog of government regulation? Poor quality control = likely market failure, so doesn’t it follow that good quality control does contribute to production? Seems awfully arbitrary to draw lines like that.
I like right track/wrong track as long as you look at it over time, not a snapshot after a high profile school shooting, for example. But even this rests on the mentality of those polled. If you assume that people are empathetic then they can look beyond their own group, but if people are not, then you could theoretically get a 90% right-track even while 10% of people are starving in the streets.
The distinction you’re making is between “direct production”, e.g. the assembly line, and indirect production. Although I think that we need more people involved in direct production and that much of what’s holding that back is policy, a huge proportion of the job gains of the last forty years has been in indirect production. That trend is likely to continue and it’s one of the reasons I think that your predictions of widespread technological unemployment are premature.
Among my own nieces and nephews all are employed, two are what I would characterize as “under-employed”, none has a job that existed a century ago and, and several have jobs that didn’t exist five years ago.
I honestly don’t think that if 10% of the people were starving in the streets 90% would say “right-track”. I might add that our major problem isn’t desperation in that sense but fear of the future.
@michael reynolds
Inventory is part of overhead, and this is why many companies have tried to get as close to a just-in-time process as possible.
Understanding what contributes to revenue production is important when making capital investments. Upgrading the HR department may be nice to do, but it does not generate any additional revenue. Upgrading the assembly line should generate additional revenue.
I use “should” because not all investments generate a positive return on investment.
Getting better machines does improve production but getting better people to operate the machines does not?
Back in the day when I was hiring fry cooks I’d occasionally find that one guy, that guy who could keep 10 tickets in his head and keep a 6 foot grill going edge-to-edge, and I would rather have him than an 8 foot grill being worked by the guy who could only do two tickets at a time.
In other words, this looks like a prejudice in favor of easily quantifiable objects – 8 foot grills – over hard-to-quantify things – great fry cooks.
@michael, one doesn’t make a great widget in the manner one makes a great meal. The widget is great when it is uniform and predictable. If a meal was prepared in the same way, it would be a frozen dinner. Or Budweiser.
PD:
Or a Sambo’s pancake, which is the situation I describe. Uniformity is actually pretty important given customer expectations and food costs. A really good fry cook will crank out 100 meals and all the pancakes will be within a half centimeter of each other, the over-mediums will all be over-medium, the crispy bacon will be crisp and the toast will all come popping up just in time to be buttered. Waste: nearly zero.
The mediocre fry cook gets out 80 covers, screws up 10, and costs the store both in customer satisfaction and in food cost. Which is why you want that first cook and pay him a dollar extra, because he’s not costing you as much as the cheaper and less capable cook.
We have a metric for the grill, so we buy grills and believe them to be more important than the cook. No one who has ever faced a 7 AM breakfast rush believes that, but the numbers people always do. The best fry cooks can do more with a hot plate and a hibachi than I (to name one mediocre cook) could do with the full station. You end up with a 20,000 dollar kitchen remodel and a dwindling customer base because you don’t want to pay a guy an extra fifty bucks a week and let him have a day off to be with his kids. Why? Because grills come in easily-measured square feet and cooks don’t.
Ideally you have great equipment manned by great people. But if I had to chose? Great fry cook any day. Reminds me of the endless offers of
“productivity software” for writers. Shakespeare wrote with a sharpened feather. I write with all the latest Apple paraphernalia. Pretty sure he produced more value.
@Tasty
MMT states that investors are largely insensitive to interest rate changes. Hence fiddling with interest rates is a waste of time.
@michael reynolds
I included a salesman and an assembly line. The assembly line workers contribute to revenue generation.
Increasing the quality/productivity of the salesman, assembly line, or line worker will increase the amount of work in the same number of hours, and this does increase revenue.
Increasing the number of salesmen will substantially increase the number of orders, and this will require an expanded assembly line. The expanded assembly line will require additional line workers.
Depending upon the size of the expansion, the support personnel – HR, payroll, security, maintenance, etc. – may need to be expanded also.
In your restaurant scenario, the waitress and the cook are generating revenue. The busboy and the dishwasher are overhead. The prep cook could go either way, and the manager is going to be part of revenue.
For a new stove you would do a cost/benefit analysis. You would put together a formal Return on Investment (ROI) Evaluation report with pretty graphs and charts justifying a new stove. A new stove is not necessarily a good investment.
Let me rephrase my last comment because I did a terrible job: MMT states businesses are insensitive to interest rate changes when making investment decisions, which is why monetary policy is largely ineffective.
@Ben Wolf
We might disagree, but I do not want these asswipes getting one iota of credit for your or MMT ideas. These “experts” would not know an original idea if it whacked them upside the head.