Summary: Among the many goals for the FM website, two are perhaps the most important. First, we are too often lost in the now. Buried in the daily multimedia tide we lose sight of our track — the trend of events, which we see only by frequently looking backward along the path. I believe the FM website does that well. Second, the posts here show that we live in an age of wonders. Things that the news presents as mundane — like QE3 — are in fact experiments of a kind and scale seldom attempted in history (that is important to conceal about QE3, since the priors are mostly failures, often disastrously so). The comments show no success at this. Here’s another attempt.
This is a the third in a series about the Fed’s decision not to taper, an event highlighting the extraordinary nature of current economic policy. Other chapters in this story:
- Government economic stimulus is powerful medicine. Just as heroin was once used as a powerful medicine
- Different answers to your questions about the momentous Fed decision to delay tapering
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Wind the tape back back to January 2011. Twenty-one months after the trough of the crash, months of slow recovery. Most economists were still looking for the “V” shaped recovery, including those at the Fed. The Fed Forecast of January 2011 (when they started posting their forecasts) was for 2013 GDP growth of roughly 4.1%, — a rate last seen in the glory year of 2000 (the Fed annual forecasts are Q4 YoY, not the usual calendar year YoY).
Fast forward to the Fed Forecast of September 2013: During those elapsed ten quarters real GDP has grown at a rate of 1.95% (slightly below the 2.0% stall speed), hence the repeated rounds of fiscal and stimulus during this time. The current forecast for 2013 GDP has fallen to 2.1%. This is a marvel, deserving your contemplation:
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But these disappointed hopes and failed predictions are not the interesting aspect of our situation (few mainstream economics have been much more accurate). Hope is cheap and errors are common. Consider what has been expended in this so-far failed attempt to get economic liftoff. What has the government done to get that stable but slow growth of 1.95%:
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- the Federal borrowed and spent $2.6 trillion, an increase of 22% — at an annual rate of 10.2%,
- the Fed boosted the monetary base by $642 billion, an increase of 24% — at an annual rate of 11.7%
Strong medicine, indeed. With small results. Now we see why the Fed responded to the stalling of growth in 2012 Q4 (near-zero GDP) with the extraordinary QE3; the conventional tools were failing as we slid towards a recession.
Do not interpret this poor result to mean that US economic stimulus was in vain, as conservatives often do. Imagine if your daughter lies in a hospital bed with a serious illness, and the doctor reports that the treatment resulted in a slow improvement. Do you fly into a rage and demand that the treatment end — since there should be no treatment unless its provides a fast cure? Of course not.
But this modest result despite intense medicine shows the seriousness of the “illness” that infects our economy. Our leaders hide this from us because they see their job as building “confidence”. It’s a strategy used by adults to manage children, an aspect of our increasingly dysfunctional political apparatus.
- It must inevitably fail as we (eventually) learn to regard our leaders as compulsive liars — a process well developed today among both conservatives and liberals. See the widespread skepticism about the government’s economic data, and the increasingly contemptuous attitude towards our supreme economic manager: the Fed Chairman (appointed, and hence inherently a low-legitimacy figure despite his vast powers).
- This behavior fundamentally corrupts the relationship of citizen and representative. Leaders will have contempt for people they manipulate. Citizens cannot participate in governing when the information they rely upon is false.
Another important detail
In January 2011 the Fed believed long-run growth of 2.4% – 3.0%. Now they have smaller expectations of 2.1% – 2.5%. Only 1/8 slower. But such small differences add up over time, and point to a disturbing question. What if the long-run trend continues to darken? Are we becoming Japan, with one lost decade following another?
(4) For More Information
(a) Reference page about the Financial crisis – what’s happening? how will this end? – esp section 8, about solutions
(b) About the great experiment
- Bernanke leads us down the hole to wonderland! (more about QE2), 5 November 2010
- The World of Wonders: Monetary Magic applied to cure America’s economic ills, 20 February 2013
- The World of Wonders: Everybody Goes Nuts Together, 21 February 2013
- The greatest monetary experiment, ever, 20 June 2013
(c) Other posts about monetary stimulus:
- A solution to our financial crisis, 25 September 2008 — Among other things, large monetary action
- Important things to know about QE2 (forewarned is forearmed), 21 October 2010
(d) State of the US economy:
- A look at the state of the US economy. Join me in confusion!, 13 July 2013
- The US economy is slowing. Things might get exciting if this continues., 17 July 2013
- About today’s jobs report: mixed news. No prize in this box., 6 September 2013
- Look at the economy to see why today’s jobs report is so important!, 6 September 2013
- Warnings about the economy from people you should listen to, 13 September 2013
- Let’s reflect on the course of the course of the US economy. Not a pretty picture., 8 September 2013
Perhaps we need to change our approach. Perhaps a great leader will not save us.
The next Fed Chairman:
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Pingback: Do you look at our economy and see a world of wonders? If not, look here for a clearer picture… - Global Dissident
Pretend Americans.
Enjoy your delusions.
Watch haphazardly as your fellow citizens sink or worse.
Rejoice as the bubbles seem to be arising for you; ah relief.
I got mine; too bad about you!
But did you…..?
A true Ship of Fools.
Your “Government” is simply taking and or facilitating the taking thereof, everything its Managers tell them to take and will do so until that facility is pried from their cold hands.
Adolescents all around.
The naivete and narcissism in this culture is almost breathtaking.
Breton
Am I getting the gist of this correctly?
Experience suggests that while central banks can create recessions, they can’t do much to reverse recessions (other than those they created).
Central banks can (at least for a time) protect significant wealth holders from the fallout of recessions. In effect, that’s what quantitative easing does—and it accomplishes nothing else.
When Wall Street is nervous, everyone agrees we have a crisis. When Wall Street is happy but Main Street is falling apart, the general consensus is that we just have to adjust to new economic realities.
Even Wall Street must realize that fantasies don’t last forever: eventually, if there are no “fundamentals,” real profits collapse. But three decades of “Greed is good!” have left us with a financial and political elite that have no idea how to consider long term outcomes. They’ve been so busy one-upping each other round by round that they literally have no experience thinking beyond the next big score.
“Experience suggests that while central banks can create recessions, they can’t do much to reverse recessions (other than those they created).”
I don’t believe many economists agree with that.
Economists Right and Left agree that monetary policy can be quite effective (fiscal policy is more controversial, odd given its history of proven success). Under normal circumstances conventional monetary easing has great effect. At the zero bound unconventional monetary easing has effect, although perhaps not as much as conventional easing in normal times.
A link in that post refers to an older post:
A “Fed-generated slump like 1981-82” seems to describe a recession that is a consequence of the interest rate targeted by the central bank being higher than the economy can sustain without slowing down. So we know the Fed can cause recessions; and whether intentional (like 1981-82) or not, a recession that is caused by conventional monetary policy set to one target can be reversed through conventional monetary policy, by changing the target. In these cases, unsurprisingly, conventional monetary policy works—it would be very strange if it did not. (Thus my parenthetical “other than those they created.”)
What about slumps that are not caused by monetary policy—our “postmodern” recessions of 1990, 2001 and 2007, or Japan’s lost decades? Here the track record is lousy. Conventional monetary policy can fail to accomplish anything, but unconventional policy hasn’t worked well except to shore up financial institutions and wealthy players. Technically, it’s no longer a recession, because the financial sector measures well; everyone else gets “prolonged ‘jobless recoveries’ that felt like continuing recessions.”
Of course, Paul Krugman is not “many economists,” but he usually doesn’t stray too far from some strand of mainstream thought. I’m using somewhat different words, to emphasize:
1. The Fed can create a recession, either by accident or for policy reasons (such as Paul Volcker’s determination to end the stagflation of the 1970s.) Conventional monetary policy can relieve those recessions, since it caused them. As for the others…
2. For recessions with causes independent of central bank policy, it does not appear that conventional or unconventional policy can do anything for Main Street; quantitative easing eases things only for Wall Street, with no trickle-down effect in sight. Calling this a recovery and saying the recession has ended is a misleading way to use those words, whether it’s technically correct or not.
No, Coises is not getting it right. In normal economic conditions, central banks create recessions by increasing the interest rate. This results in a recession. Central banks and then generate V-shaped sharp economic recoveries by reducing interest rates.
In the aftermath of epochal financial bubbles (1929, 2007) or under abnormal economic conditions, this no longer works because the central bank hits the zero lower bound. After reducing interest rates effectively to zero (the real interest rate that is, which is the actual interest rate subtracted from the inflation rate), the central bank can no longer do much to stimulate the economy. At that point extraordinary techniques like quarterly easing must be tried, or, alternatively, FDR-style CCC-type public works programs to inject money directly into the economy and artificially stimulate aggregate demand.
At present we languish in unusual economic conditions. With effectively zero interest rates, aggregate demand nevertheless refuses to pick up. The proximate reason is most likely that in the aftermath of a gigantic orgy of fraud (dot-com bubble, subprime real estate bubble), everyone in the U.S. financial system is hoarding every dollar of cash that comes into their hands and as a result the velocity of circulation of money has dropped to epochally low rates. Injecting money into the economy will not stimulate aggregate demand if everyone is either hoarding cash or using it to pay down debts, rather than spending it on goods and services. Thus, QE3 is having little effect.
The paper “Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence” by livier Coibion, Yuriy Gorodnichenko and Dmitri Koustas (Fall 2013) deals with this issue.
The authors note that all U.S. recessions since 2000 have produced much lower post-recession employment and have taken much longer than typical post-WW II American recessions. After analyzing for factors such as the financial nature of the recent (2008) shock or sticky wages, the authors find that the prolonged persistence of unemployment in the post-2000 recessions is still not adequately explained by the usual reasons given by economists and pundits. As a result, the authors propose that discovering the root cause of this prolonged unemployment should be a central job for current economists, and they also prescribe an extensive round of FDR-style infrastructure spending programs to jump-start aggregate demand.
Full pdf of the paper here.
Unfortunately the authors appear to be unaware that the house of representatives is full of lunatics actively trying to prevent the American economy from restarting, so FDR-style spending programs are completely off the table as long as Tea Party Republicans remain in control of the House.
FDR style spending program didn’t work in a vacuum. Europe was down, Japan was down, EA was not up. US had no competition then. Also, US was an oil producer then. It was not dealing with demographic headwinds, either.
US needs to invest in human capital today to really juice the economy for any significant period f time. otherwise, FDR spending programs will only work like a sugar fix. This is especially true in an age when technology, automation is killing jobs. Heck, when even engineers are getting replaced by gtechinology, there is going to be greater need for people to be able to be self employed or be part of cooperates, so they do not get kicked to curb as an expense easily dispensed with.
I think this is wrong. Paying down debts is transferring money to someone else; and if the problem were just that everyone was hoarding cash, injecting money until their desire to hoard was satisfied would resolve the matter.
Spending money on goods and services isn’t the only thing people do with money; people also use it to seek returns: investment, lending, speculation. Those two “circulatory systems” for money are interdependent, yet largely distinct.
The velocity of money may have dropped precipitously for the majority of folks (e.g., most wage-earners) who spend most of their money on goods and services; but there appears to be no shortfall in the velocity of money going into corporate profits and CEO’s pockets. Some wealth and return to wealth enters the produce/consume cycle as consumer purchases, but most will continue to seek returns. Wealth seeking returns can only enter the produce/consume cycle as loans or investment.
With not “everybody”—rather, an abnormally large number of households whose economic activities are primarily those of the produce/consume cycle—either hoarding cash or using it to pay down debts… or un- or under-employed… aggregate demand can’t recover. Wealthy folks are buying stuff, but not enough to make up for everyone else. Businesses have no reason to hire or expand when sales are down; and you can’t lend to or invest in businesses, or people, who don’t want your money or have no good prospects.
So wealth seeking returns is hard up for lending and investment opportunities; but there is still speculation. Hence, the financial sector recovered, continuing to make book for wealth that can’t find any productive use… because there is not enough cash moving through the produce/consume cycle to support returns to the money already captured by the returns-to-wealth cycle.
Injecting money has failed because it is being injected into the wrong cycle. There is already too much money in the returns-to-wealth cycle; it’s the wage-earner/consumer cycle that’s starved.
Here’s one explanation:
Coises,
See “the paradox of thrift”, one of the more thoroughly proven theories in economics. The post-crash deleveraging by both business and households was contractionary, fortunately offset by government borrowing and spending.
Now all three sectors are borrowing again.
Coises and Thomas could be right, both. It doesn’t have to be either or.
And in grand scheme of things, both of you describe same things, only terminology is different. Both explanations are correct on why economy can not pick up, but to know why it came to the crash is another matter, Coises is close to answer it.
But Coises, you are wrong in explaining that paying down debt is transfering money to someone else.
Debts are incurred by creation of new money and paying it down means destroying that money while only interest amount stays in broker pockets. This fact makes private bankrupcy possible without hurting banks. It allows for inflation without state printing money. It allows for boom and bust even under Gold Standard or fixed exchange rate. It is the explanation behind deflation. It comes from Fractional Reserve banking. If we had 100% reserve ratio then savings would have to be loaned, not newly created money.
Printing money by creating loans is a solution to capital accumulation while preserving demand. Without money printing, capital accumulation would cause diminishing demand and reduced profits of other businesses or sectors in economy. Saving is taking money out of circulation (reducing demand) and public debt is putting it back into circulation.
“See ‘the paradox of thrift’, one of the more thoroughly proven theories in economics.”
“Coises, you are wrong in explaining that paying down debt is transfering money to someone else.”
Valid chastisements. My only excuse is that I felt very long-winded already, and I tried to finesse the details about paying down debt. There is near-universal agreement that paying down debt faster than new debt is accumulated shrinks the money supply. The details seem to be the source of endless arguments, particularly between MMT, post-MMT and more orthodox schools. “Because of the money multiplier”—“There is no money multiplier!”—“When banks lend their depositors’ money…”—“No, loans create deposits…” Then someone will come along to explain that everything that is wrong with our economy is due to fiat money and fractional reserve banking. Ugh.
The point I tried to make remains the same: If this were just a matter of insufficient money supply (due to saving, deleveraging, or whatever), then it’s a puzzle why increasing the money supply doesn’t fix it. I’m suggesting that the very notion of the money supply buries a crucial observation: that who holds that money and how they use it matters. Monetary policy has succeeded in propping up the financial sector and restoring the health of the .1%; if anything, there is too much money in circulation in the land of make-believe already.
“Injecting money into the economy” suggests that there is just one big pool of money from which we all draw. As a practical matter, that’s not what I see. We injected money into the high-end financial side of the economy, and it has recovered (in the sense of being able to return to its fantasy football version of wealth management). We did much less for the real economy, and now we have even more of a disconnect between the two than we did when we started.
Coises,
Speaking generally, my impression from reading the thousand or so comments about economics here is that — like climate science — educated Americans read so much by amateurs and fringe sources that they no longer understand the basics.
The resulting questions drive reading more confused amateurs, leading to a state where understanding the past becomes impossible, and visions of the future become fantasy.
I have found no cure for this (despite hundreds of futile attempts), except to recommend reading boring experts (even more boring intro textbooks would be even better). Which is of course the equivalent of talking to the rain.
Hence my increasing belief that reforming America requires a change in our epistemology — who we rely on for advice. In the Medieval centuries we relied on priests, which was the best available source at that time. In the Renaissance and thereafter on the few educated people, which worked OK. Somewhere during the past generation or so this function seems to have broken down.
Quite puzzling, IMO. Probably over my pay grade.
Coises,
Another suggestion — try Wikipedia. It handles these Econ 101 issues quite well, in my experience. And gives links for further explanation.
The reason for the difference is that job creation engines have been weakened or disappeared. You should read Race Against the machine. Automation, technology Including software) is eating up jobs.
http://www.oregonlive.com/opinion/index.ssf/2013/07/is_high-tech_to_blame_for_the.html
Is high-tech to blame for the long road to ‘full employment’?: Robert J. Samuelson
http://raceagainstthemachine.com/
http://www.cbsnews.com/video/watch/?id=50138761n
http://www.businessinsider. com/how-the-internet-is- making-us-poor-2013-3
The Internet Is Making Us Poor
http://qz.com/53710/robots- are-eating-manufacturing-jobs/
How robots are eating the last of America’s—and the world’s—traditional manufacturing jobs
Forget blue collar and low skilled jobs being replaced, high skilled jobs also going, with increased technology/automation/robots…
“Two weeks ago, Infosys entered a partnership with IPsoft Inc., which uses software robots to replace engineers at top outsourcing customers including Comcast Corp., the largest cable operator in the US, according to three people aware of the development, who declined to be named because the deal that will see Infosys share revenue with the US firm is yet to be made public.”
http://www.livemint.com/Companies/H4Brhc71dvaB6w9AXuxRjK/Infosys-gets-more-flexible-on-pricing-strategy.html
Infosys gets more flexible on pricing strategy
There is a fundamental change in economy that has accelerated during this period. Also,
incentives in companies are wrong.
http://www.forbes.com/sites/stevedenning/2013/07/29/how-the-worlds-dumbest-idea-killed-the-us-economic-recovery/
How The ‘World’s Dumbest Idea’ Killed The US Economic Recovery
http://www.deseretnews.com/article/765617333/The-new-church-of-finance.html?pg=all
Clayton M. Christensen: The New Church of Finance: Deeply held belief systems and complex codes must be changed
http://www.forbes.com/sites/stevedenning/2011/11/18/clayton-christensen-how-pursuit-of-profits-kills-innovation-and-the-us-economy/
Clayton Christensen: How Pursuit of Profits Kills Innovation and the U.S. Economy
Winston,
I’ve seen little evidence that the robot revolution — the next phase of automation — has had much effect yet. But it is coming, and will have as much effect as it had on farming and manufacturing. It’s been an important theme on the FM website.
(3) For More Information about the robot revolution
(a) Dynamics of the robot revolution
22 September 2010
(b) First signs of the robot revolution appear
I think the key issue in the current slow recovery is the emphasis on the part of the companies and their shareholders on financial engineering (stock buybacks, dividend manipulation, CEO pay) instead of improving the customer experience or improving/reducing the price of the goods/services purchased.
This attitude says, “there is no way to add value to our company by improving/changing our product/service mix so we can only add value to the company with cheap accounting gimmicks and one-time financial tricks.”
I find this statement to be ridiculous and self-destructive. Look at Apple under Steve Jobs, they added value to the company by continually changing the product mix and improving services. They upended entire industries, invented new markets, and became one of the most powerful companies in the world. Google is on a similar path for similar reasons. So are Tesla and SpaceX.
Financial engineering is about rigging the system to ensure that you and your buddies get and stay wealthy. Such narrow-focus pursuit of short-term wealth is not good for anybody, particularly those pursuing it. Successful entrepreneurs become wealthy by creating and improving the goods and service consumed everybody in society, not by doing cheap financial card tricks that redistribute wealth instead of creating new wealth.
This country will continue to suffer from economic illness until we do two things:
1. Build barriers in our financial system to reduce the value of wealth earned by financial card tricks. We had something like this from the 1930’s to the 1990’s and generally profited from it and then dismantled it.
2. Reduce the entire country’s obsession on keeping up with the lifestyles of the super-rich by borrowing more money and instead, invest more money into improving the lives and fortunes of everybody.
Unfortunately, I do not have a practical suggestion on how to achieve these two goals from our current state without another financial meltdown and I am not confident that we would achieve these goals if another meltdown occurred.
FM remarks:
True as far as it goes. If we include automation in general, broadened to encompass such non-robotic machines as numerically controlled machine tools and databases + algorithms to replace human workers, and add in offshoring and outsourcing, we find a very consistent downward trend in post-recession U.S. job creation since 1948.
Consider this chart of percentage growth in non-farm payroll employment from the 1940s to the 2000s.
Each decade since 1940 (except for the 1950s) has showed significant lower job growth post-recession, and in particular, when we hit the year 2000, the job growth numbers fall off a cliff.
For a portrait of job creation since 2000, take a look at this chart of public and quasi-public job growth vs everything else between 2001 and 2013. As the chart clearly shows, essentially all the net new jobs created since 2001 (“net” means sum total of new jobs created minus jobs lost) have come from state and federal government work, with the “quasi-public” category including private jobs created directly by government, like census poll workers. The Tea Party rails against the size of government, but the chart clearly shows that without government jobs, there would be no net new jobs since 2001.
It’s very hard to argue with a chart like this.
Although databases + algorithms are not technically robots, these kinds of applications of software automation are now rapidly destroying skilled high-wage white collar jobs. As an example, consider the NY Times article “Essay grading software offers professors a break,” 4 April 2013.
Source: 30 May 2010 Newsweek international edition article “Europe:
The Big Squeeze.”
So I think we have to consider FM’s statement “I’ve seen little evidence that the robot revolution…has had much effect yet” conclusively disproven.
Winston asserts:
These issues have all been dealt with by economists and the facts discount them as significant causal factors. For example, Europe is down economically much worse than the U.S. right now, due to Europe’s insane austerity policies. Japan is trapped in an ongoing slow-motion decline, and has been since roughly 1990, since if anything, Europe and Japan are worse off economically relative to the U.S. today than they were in 1930. As for oil, this cannot explain the lack of jobs, since studying the net new jobs we find that only 9 states have created net new jobs since 2001, and only a few of those can trace that job creation to oil (North Dakota most prominently, due to fracking). Chart here. The biggest source of new jobs is actually government programs, which explains why Washington D.C. figures prominently among the net “winners” in job creation states since 2001.
Winston goes on claim:
This is the failed and futile nostrum beloved of today’s economists, and ceaselessly parroted by president Obama — namely, the solution to the current economic downturn is [1] more education, and [2] retraining.
More education has been debunked as an economic solution. We have two sources of data converging on this conclusion. First:
Source: “The Global Hollowing Out of the Middle Class (No, It’s Not Just the U.S.),” The Atlantic magazine, 20 September 2011.
In short, the erosion of the middle class has been going on longer than the current manias for improving education, and has been going on despite massive amounts of retraining (which started in the 1980s when rust belt workers got dumped out of their manufacturing jobs — retraining has done absolutely nothing for these displaced workers in the 30 years since they lost their manufacturing jobs, so it’s reasonable to conclude that further retraining is futile).
The second data point comes from statistical analysis of jobs filled since the year 2000:
Source: “The Great college degree scam,” 9 December 2010, The Chronicle of Higher Education.
The original article cited above, “Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence” by Olivier Coibion, Yuriy Gorodnichenko and Dmitri Koustas, deals with and debunks all the objections raised by Winston and Coises, if anyone would bother to actually read the paper.
FM remarks:
I would go farther and note that the American system of education simply does not teach Econ 101, period. It is, as far as I know, not taught at all in the K-12 level, and in college basic Economics remains an elective course — one which, to my knowledge, most people do not elect to take. As a result, essentially no one in the general American population can even state the basic equation for aggregate demand in macroeconomics, which is
AD = C + I + G + (X-M)
Can anyone reading this blog other than FM even explain what terms like “C” and “X” mean in the above equation? I doubt it.
Given this level of ignorance about basic economics among the American population, it’s no wonder that discussion of economic issues in America fumbles and stumbles and bumbles and bungles through so many elementary freshman-level errors and follies and fallacies. Small wonder that the typical commenter on an article like this spews out crazy stuff like “The solution to America’s economic problems is to eliminate fractional reserve banking!” or nonsense like “We need to eliminate fiat currency in favor of gold coinage in order to revive the economy!” Anyone who has studied a semester of Econ 101 in college understands that these nostrums are crackpot stuff. Sadly, just as a perpetual motion machine seems plausible to someone who has never studied basic science, these crank nostrums sound plausible to people with no familiarity with basic macroeconomics.
Thomas,
I do not believe you can look at the trend in a high macro number like job growth and just declare the cause. Economic growth, demographic change, and a host of other factors are at work.
Nor is it clear to me that automation has had a substantial effect on other sectors than automation until recently.