March 25, 2015
Robert Samuelson (sorry, he’s not going to take advantage of my vacation) gets it badly wrong about the economy again. He began his Monday column by telling readers:
“The Federal Reserve is at a crossroads, and it doesn’t know where it’s going.”
Really? The Fed doesn’t know where it’s going? How about Robert Samuelson doesn’t know where it’s going?
It gets worse:
“There was a time when we were more confident. We didn’t pay attention to details, because the experts had matters in hand. During the Alan Greenspan era (1987-2006), the Fed was routinely seen as an economic superman. Its surgical shifts in the federal funds rate seemed to stabilize the economy: Expansions were long, recessions rare and mild.”
Umm, no. “We” did pay attention to details. We yelled as loudly as we possibly could that there was a huge housing bubble that would sink the economy when it burst. Of course papers like the Washington Post did not pay attention to us because it did not fit their story that the Fed was an economic superman. Such nonsense was the conventional wisdom at the time and the paper did not want to give those who challenged the claim a voice. Now, it wants to pretend that people who understood the basic economics of the housing bubble, and the stock bubble before it, did not exist.
And Samuelson gives us more error:
“It’s true that during the 2008-2009 financial crisis, the Fed arguably averted another Great Depression. It supplied credit when frightened private lenders wouldn’t. Since then, it has been less successful. To revive the economy, it unleashed massive amounts of financial stimulus. The federal funds rate has stayed near zero since late 2008, and the Fed bought more than $3 trillion of government and mortgage bonds to reduce long-term rates. For this energetic exercise in money creation, all it got was a sluggish and frustrating recovery.”
Nope, it is not arguable that the Fed averted another Great Depression. If the Fed had let the market work its magic on Citigroup, Goldman Sachs and the rest, what is the argument as to why a massive stimulus program would not have boosted the economy back to health? Is there something that would have prevented spending on infrastructure, education, and research from creating jobs and spurring growth in the same way that spending on World War II created jobs and spurred the economy seven decades ago?
If Samuelson has such an argument he could probably earn himself a Nobel prize for it. Even if he can just produce a remotely plausible story to this effect he can probably get a good script for a new Twilight Zone.
The economics is pretty simple: spending creates jobs. The economy doesn’t care if it comes from the private sector or the public sector. There is a possible political argument. We have so many ignorant people in positions of authority that it is possible they would have prevented the necessary spending and thereby forced the economy to endure another Great Depression. But that is a political argument, not an economic argument.
In the real world, the bailout saved the biggest banks in the country and ensured that the same arrogant bastards who brought us the stock and housing bubbles would continue to be hugely rich. It also ensured that they would continue to be major actors in national politics (yes, we’re thinking of Robert Rubin types). The more liberal members of this Wall Street gang get to engage in serious handwringing over the causes of inequality.
Now to get to matters at hand:
“Policy has been neither a glorious success nor an abject failure. It’s been a pragmatic muddle. The plodding recovery has reduced the unemployment rate from 10 percent in October 2009 to 5.5?percent now. Extravagantly easy money seems less defensible. The Fed has ended its program of bond buying. Yellen is saying that — assuming the recovery continues — the Fed should wean the economy of near-free money.
“This seems a good idea, but how it can be done is an open question.”
Well, for fans of economics data, it does not seem like a good idea to raise interest rates and slow the economy. While the unemployment rate has fallen back to 5.5 percent, the percentage of the population that is working is still close to 3.0 percentage points below its trend level. This is even after adjusting for the aging of the population. That translates into a gap of more than 4 million jobs.
The lost jobs don’t just mean millions of people not working. It means that tens of millions of workers lack the bargaining power to push up their wages. Would Samuelson think it was a good idea to raise interest rates and slow the economy if the people going unemployed and losing out on pay hikes were Robert Samuelson and his friends and family? Somehow, we doubt it. (Hey, if he gets to use “we” so do I.)
Anyhow, the question here is pretty simple in spite of Samuelson’s efforts to sow confusion. There is very little plausible benefit from raising interest rates and slowing the economy at a point where the economy is far below its potential by almost any measure and there is no evidence of inflation anywhere. There are enormous costs from such pre-mature rate hikes. (Deficit hawks would join in the anti-rate hike yelling if they really cared about the budget deficit, but apparently “honest deficit hawk” is an oxymoron.)
If we want to fight inequality, poverty, single-parent families and reduce the budget deficit, then the Fed should keep interest rates low and do everything possible to spur growth. But, if we want to ensure that workers have no bargaining power and there will be a big market for thoughtful tomes on the origins of inequality, then we should want the Fed to raise interest rates and throw people out of work.
Note: Typos corrected.
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