It would have been useful to include this fact in an article on how Germans are losing patience with Greece. Germany has been anxious to build up and preserve its export market in southern Europe. However if Germany wants to have an export surplus with these countries, as it does, then it must lend them money. There is no logical way around this.
For this reason, it is absurd that Germans are both upset about the borrowing by Greece and other peripheral countries, but yet refuse to take the steps (most importantly higher domestic inflation) that would allow these countries to regain competitiveness. The Germans are acting like little children who both want to have their cake and eat it too, and then get mad at everyone else because they won’t make it possible.
If Germany wants to keep the euro zone intact, with its current low inflation obsession, then Germans will have to give money to the peripheral countries to buy their stuff. There is no way around this. The Germans’ complaints are against logic, not their southern neighbors.
It would have been useful to include this fact in an article on how Germans are losing patience with Greece. Germany has been anxious to build up and preserve its export market in southern Europe. However if Germany wants to have an export surplus with these countries, as it does, then it must lend them money. There is no logical way around this.
For this reason, it is absurd that Germans are both upset about the borrowing by Greece and other peripheral countries, but yet refuse to take the steps (most importantly higher domestic inflation) that would allow these countries to regain competitiveness. The Germans are acting like little children who both want to have their cake and eat it too, and then get mad at everyone else because they won’t make it possible.
If Germany wants to keep the euro zone intact, with its current low inflation obsession, then Germans will have to give money to the peripheral countries to buy their stuff. There is no way around this. The Germans’ complaints are against logic, not their southern neighbors.
Read More Leer más Join the discussion Participa en la discusión
A Washington Post article on the likely composition of France’s new socialist government mentioned Martine Aubrey, a former minister, who it identified as the main proponent of “the much-criticized 35-hour workweek in the 1990s.” There is probably no major policy change that could not be described as “much criticized,” however they generally do not appear with this characterization in the Washington Post and other major news outlets.
In fact, the 35-hour workweek has proven to be hugely popular in France. Nicolas Sarkozy, the current president, had attempted to roll back the law, but he was forced to back down in the face of overwhelming public opposition. The result was that he only made relatively minor changes in the law.
A Washington Post article on the likely composition of France’s new socialist government mentioned Martine Aubrey, a former minister, who it identified as the main proponent of “the much-criticized 35-hour workweek in the 1990s.” There is probably no major policy change that could not be described as “much criticized,” however they generally do not appear with this characterization in the Washington Post and other major news outlets.
In fact, the 35-hour workweek has proven to be hugely popular in France. Nicolas Sarkozy, the current president, had attempted to roll back the law, but he was forced to back down in the face of overwhelming public opposition. The result was that he only made relatively minor changes in the law.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
If the Washington Post doesn’t like it. That would explain the lead sentence of its lead front page story on the elections in France and Greece on Sunday:
“The shrill anti-incumbent message that has emerged from a pair of European elections carries a threat to the U.S. economic recovery and a political warning for President Obama, whose reelection prospects could hinge on whether the economy can improve.”
Other newspapers might leave such editorializing for the opinion pages, but not Fox on 15th Street.
The substance in this statement is also not especially accurate. U.S. exports to Europe are only about 2 percent of U.S. GDP. This means that even a sharp drop in exports (e.g. 10 percent) would only imply a reduction in growth of around 0.2 percentage points. That is unlikely to make much of a difference in U.S. growth.
If Europe’s turmoil leads to more uncertainty in financial markets (short of a full-fledged meltdown), it could actually benefit the United States. Interest rates in the United States plummeted following the spike in interest rates on Spanish and Italian debt last summer. The same would likely happen again. This would make it cheaper for people to refinance mortgages and engage in other types of borrowing.
The piece also includes the bizarre assertion:
“A new round of political paralysis that delays Europe’s recovery or calls into question the austerity agreement reached this year to help bail out Greece would probably lead to an immediate slowdown of U.S. economic growth and job creation while confusing bond and equity markets.”
Actually, Europe is not on a path to recovery. It is on a path to recession because of the austerity being imposed by the European Central Bank and the IMF. If this austerity is reversed and Europe starts growing again that would help the U.S. economy.
If the Washington Post doesn’t like it. That would explain the lead sentence of its lead front page story on the elections in France and Greece on Sunday:
“The shrill anti-incumbent message that has emerged from a pair of European elections carries a threat to the U.S. economic recovery and a political warning for President Obama, whose reelection prospects could hinge on whether the economy can improve.”
Other newspapers might leave such editorializing for the opinion pages, but not Fox on 15th Street.
The substance in this statement is also not especially accurate. U.S. exports to Europe are only about 2 percent of U.S. GDP. This means that even a sharp drop in exports (e.g. 10 percent) would only imply a reduction in growth of around 0.2 percentage points. That is unlikely to make much of a difference in U.S. growth.
If Europe’s turmoil leads to more uncertainty in financial markets (short of a full-fledged meltdown), it could actually benefit the United States. Interest rates in the United States plummeted following the spike in interest rates on Spanish and Italian debt last summer. The same would likely happen again. This would make it cheaper for people to refinance mortgages and engage in other types of borrowing.
The piece also includes the bizarre assertion:
“A new round of political paralysis that delays Europe’s recovery or calls into question the austerity agreement reached this year to help bail out Greece would probably lead to an immediate slowdown of U.S. economic growth and job creation while confusing bond and equity markets.”
Actually, Europe is not on a path to recovery. It is on a path to recession because of the austerity being imposed by the European Central Bank and the IMF. If this austerity is reversed and Europe starts growing again that would help the U.S. economy.
Read More Leer más Join the discussion Participa en la discusión
Washington Post readers must be wondering after reading an article on a settlement by Abbott labs in a case brought by the Justice Department over promoting its drugs for off-label uses, in which Abbott agreed to pay $1.6 billion. The issue is that the Food and Drug Administration determines the acceptable uses for a drug. While doctors are allowed to prescribe drugs for other uses, the manufacturers are not allowed to promote their own drugs for “off-label” uses.
The Justice Department apparently had compelling evidence that Abbott had promoted off-label uses of its drug Depakote, a drug that was being improperly promoted as a sedative for elderly patients in nursing homes, according to the article. Such off-label promotions are a common, even if illegal, practice as the article notes.
The reason that drug companies violate the law and promote their drugs for unapproved uses is the huge patent rents that they are able to earn as a result of the patent monopolies granted by the government. Generic drug companies do not engage in the same sort of practices because they don’t have the incentive.
It would have been worth mentioning patent monopolies since they are central to the story. This sort of abuse is one reason that people are interested in promoting more efficient alternatives to patents for financing drug development.
Washington Post readers must be wondering after reading an article on a settlement by Abbott labs in a case brought by the Justice Department over promoting its drugs for off-label uses, in which Abbott agreed to pay $1.6 billion. The issue is that the Food and Drug Administration determines the acceptable uses for a drug. While doctors are allowed to prescribe drugs for other uses, the manufacturers are not allowed to promote their own drugs for “off-label” uses.
The Justice Department apparently had compelling evidence that Abbott had promoted off-label uses of its drug Depakote, a drug that was being improperly promoted as a sedative for elderly patients in nursing homes, according to the article. Such off-label promotions are a common, even if illegal, practice as the article notes.
The reason that drug companies violate the law and promote their drugs for unapproved uses is the huge patent rents that they are able to earn as a result of the patent monopolies granted by the government. Generic drug companies do not engage in the same sort of practices because they don’t have the incentive.
It would have been worth mentioning patent monopolies since they are central to the story. This sort of abuse is one reason that people are interested in promoting more efficient alternatives to patents for financing drug development.
Read More Leer más Join the discussion Participa en la discusión
Robert Samuelson had a serious discussion of Paul Krugman’s idea (and in his professor days, Ben Bernanke‘s) that the Fed could boost demand by deliberately targeting a higher rate of inflation. The idea is that this would lead to a lower real interest rate.
If businesses expected inflation to be 4.0 percent over the next five years, rather than 2.0 percent, it would give them more incentive to invest. They would be able to sell everything for 20 percent more money in five years. Higher inflation would also erode the debt burden of homeowners and others with large debts. This could free up additional money for consumption.
While Samuelson acknowledges the potential benefits from higher inflation in boosting growth he still opposes the policy. He cites Bernanke’s own objection as Fed chair, that it could undermine the inflation-fighting credibility of the Fed in the future. He also adds his own objections:
1) wages might not keep pace with inflation, dampening purchasing power;
2) higher inflation may lead consumers to become fearful and therefore save rather than consume;
3) financial markets might over-react and demand higher real interest rates.
There is some validity to each of these, but it is likely that the negative effects would be dwarfed by the potential gains in a context of continued high unemployment. In the case of the Fed’s inflation fighting credibility, that might be nice, but we are losing over $1 trillion in output a year because of the continuing downturn. Millions of unemployed workers and their families are seeing their lives ruined. It is hard to imagine a loss of Fed credibility that can be remotely equal in cost.
As far as wages keeping up with inflation, we have a long history on this. In general they do, there is not a negative relationship between real wages and inflation. Of course, everyone’s wages will not keep pace with inflation. They will be losers in this story. But anyone who thinks they have a policy that will lead to large gains without hurting anyone has not studied their policy closely enough. (Many of the workers who would see real wage cuts with higher inflation would have lost their jobs if inflation had remained lower.)
Samuelson’s argument that consumers will become fearful seems unlikely in an environment of 4-5 percent inflation. This could happen if we see the sort of double-digit inflation that we saw in the 70s. Although even then consumers were not that fearful — economists like Martin Feldstein were still complaining about insufficient savings.
The same argument applies to the point about the interest rates demanded by investors, with the additional provision that the Fed can insure a supply of low interest loans to potential investors through its zero interest federal funds rate and its quantitative easing policies. While this may imply some greater risk premium associated with loans at some point in the future, that would again seem a minor concern in the current context.
Anyhow, it is refreshing to see Samuelson trying to engage seriously on this topic and to put his concerns on the table. I think he is mistaken, but this is the debate that we should be having.
Robert Samuelson had a serious discussion of Paul Krugman’s idea (and in his professor days, Ben Bernanke‘s) that the Fed could boost demand by deliberately targeting a higher rate of inflation. The idea is that this would lead to a lower real interest rate.
If businesses expected inflation to be 4.0 percent over the next five years, rather than 2.0 percent, it would give them more incentive to invest. They would be able to sell everything for 20 percent more money in five years. Higher inflation would also erode the debt burden of homeowners and others with large debts. This could free up additional money for consumption.
While Samuelson acknowledges the potential benefits from higher inflation in boosting growth he still opposes the policy. He cites Bernanke’s own objection as Fed chair, that it could undermine the inflation-fighting credibility of the Fed in the future. He also adds his own objections:
1) wages might not keep pace with inflation, dampening purchasing power;
2) higher inflation may lead consumers to become fearful and therefore save rather than consume;
3) financial markets might over-react and demand higher real interest rates.
There is some validity to each of these, but it is likely that the negative effects would be dwarfed by the potential gains in a context of continued high unemployment. In the case of the Fed’s inflation fighting credibility, that might be nice, but we are losing over $1 trillion in output a year because of the continuing downturn. Millions of unemployed workers and their families are seeing their lives ruined. It is hard to imagine a loss of Fed credibility that can be remotely equal in cost.
As far as wages keeping up with inflation, we have a long history on this. In general they do, there is not a negative relationship between real wages and inflation. Of course, everyone’s wages will not keep pace with inflation. They will be losers in this story. But anyone who thinks they have a policy that will lead to large gains without hurting anyone has not studied their policy closely enough. (Many of the workers who would see real wage cuts with higher inflation would have lost their jobs if inflation had remained lower.)
Samuelson’s argument that consumers will become fearful seems unlikely in an environment of 4-5 percent inflation. This could happen if we see the sort of double-digit inflation that we saw in the 70s. Although even then consumers were not that fearful — economists like Martin Feldstein were still complaining about insufficient savings.
The same argument applies to the point about the interest rates demanded by investors, with the additional provision that the Fed can insure a supply of low interest loans to potential investors through its zero interest federal funds rate and its quantitative easing policies. While this may imply some greater risk premium associated with loans at some point in the future, that would again seem a minor concern in the current context.
Anyhow, it is refreshing to see Samuelson trying to engage seriously on this topic and to put his concerns on the table. I think he is mistaken, but this is the debate that we should be having.
Read More Leer más Join the discussion Participa en la discusión
Just when you thought that the Washington Post could not go any further in bringing its readers off-the-wall statements from self-imagined great thinkers, it rises to the occasion. Today we have Ian Bremmer, the president of the Eurasia Group, giving us “five myths about America’s decline.”
This short piece contains heaping doses of silliness. For example, Bremmer thinks China will be suffering because:
“the ratio of Chinese workers to retirees is around 6 to 1 today, but by 2040, that number is expected to shrink to 2 to 1.” Fans of arithmetic know that this is not likely to pose a problem. Even with a substantial slowdown in the rate of productivity growth in China, the average worker is likely to be close to 4 times as productive in 2040 as they are today. This means that China will easily be able to accommodate substantial increases in living standards for both workers and retirees. In fact, the slowing of China’s population growth will provide enormous environmental benefits to China and the world long into the future.
There are other quirky comments and confused assertions which I’ll skip, but here’s the money quote:
“Finally, imagine a world in which a poorer country such as China becomes the world’s largest economy. The Chinese government’s willingness to lead on issues such as climate change and nuclear non-proliferation would probably pale in comparison with the leadership America provides today — yet one more reason Beijing will not supplant Washington anytime soon.”
Yes, that is an accurate quote. Bremmer thinks the world needs the United States’ leadership in dealing with global warming.
Just in case you have not been able to get news for the last 15 years (stranded in Antarctica or on some Pacific island without Internet access), the United States has been the most important force blocking any action to restrict greenhouse gas emissions. The most progress the world has ever made in this area was when George W. Bush explicitly said that the United States was not interested in taking part in the Kyoto Agreement. This allowed the other wealthy countries to move forward with a plan involving binding caps on emissions. The world would do much better without the sort of “leadership” that the United States has been showing in this area.
Just when you thought that the Washington Post could not go any further in bringing its readers off-the-wall statements from self-imagined great thinkers, it rises to the occasion. Today we have Ian Bremmer, the president of the Eurasia Group, giving us “five myths about America’s decline.”
This short piece contains heaping doses of silliness. For example, Bremmer thinks China will be suffering because:
“the ratio of Chinese workers to retirees is around 6 to 1 today, but by 2040, that number is expected to shrink to 2 to 1.” Fans of arithmetic know that this is not likely to pose a problem. Even with a substantial slowdown in the rate of productivity growth in China, the average worker is likely to be close to 4 times as productive in 2040 as they are today. This means that China will easily be able to accommodate substantial increases in living standards for both workers and retirees. In fact, the slowing of China’s population growth will provide enormous environmental benefits to China and the world long into the future.
There are other quirky comments and confused assertions which I’ll skip, but here’s the money quote:
“Finally, imagine a world in which a poorer country such as China becomes the world’s largest economy. The Chinese government’s willingness to lead on issues such as climate change and nuclear non-proliferation would probably pale in comparison with the leadership America provides today — yet one more reason Beijing will not supplant Washington anytime soon.”
Yes, that is an accurate quote. Bremmer thinks the world needs the United States’ leadership in dealing with global warming.
Just in case you have not been able to get news for the last 15 years (stranded in Antarctica or on some Pacific island without Internet access), the United States has been the most important force blocking any action to restrict greenhouse gas emissions. The most progress the world has ever made in this area was when George W. Bush explicitly said that the United States was not interested in taking part in the Kyoto Agreement. This allowed the other wealthy countries to move forward with a plan involving binding caps on emissions. The world would do much better without the sort of “leadership” that the United States has been showing in this area.
Read More Leer más Join the discussion Participa en la discusión
Peter Coy is ordinarily a pretty good reporter, but he really misses the boat with this chart, with the comment, “this jobs recovery is weak, all right, but right in line with the past two recoveries.”
When you evaluate the strength of a recovery, you also have to consider the depth of the downturn that preceded it. In the 1990-91 recession we lost 1.5 million jobs, in the 2001 recession we lost 1.6 million jobs. In the 2007-2009 recession we lost 7.5 million jobs.
The job loss in the downturn provides the room for job growth in the upturn. That is why the economy was able to generate 10.4 million jobs from June of 1975 to June of 1978 and 9.8 million jobs from December of 1982 to December of 1985. (Remember the labor force was less than 2/3rds the size of the current labor force.) In both cases, severe recessions left enormous room for job growth in the expansion. This is also true with the current downturn.
Several Obama supporters have picked up Coy’s graph and tried to make a political statement with it. They have. They don’t believe that Obama can make a serious economic case to support his re-election.
[Addendum: Apparently, this is not the first time they have tried this trick, as my colleague John Schmitt informs me.]
Peter Coy is ordinarily a pretty good reporter, but he really misses the boat with this chart, with the comment, “this jobs recovery is weak, all right, but right in line with the past two recoveries.”
When you evaluate the strength of a recovery, you also have to consider the depth of the downturn that preceded it. In the 1990-91 recession we lost 1.5 million jobs, in the 2001 recession we lost 1.6 million jobs. In the 2007-2009 recession we lost 7.5 million jobs.
The job loss in the downturn provides the room for job growth in the upturn. That is why the economy was able to generate 10.4 million jobs from June of 1975 to June of 1978 and 9.8 million jobs from December of 1982 to December of 1985. (Remember the labor force was less than 2/3rds the size of the current labor force.) In both cases, severe recessions left enormous room for job growth in the expansion. This is also true with the current downturn.
Several Obama supporters have picked up Coy’s graph and tried to make a political statement with it. They have. They don’t believe that Obama can make a serious economic case to support his re-election.
[Addendum: Apparently, this is not the first time they have tried this trick, as my colleague John Schmitt informs me.]
Read More Leer más Join the discussion Participa en la discusión
Morning Edition gave a Spanish economist, Pedro Videla, an opportunity to mislead listeners when he dismissed the idea of more public spending as a way out of the crisis by saying “overspending is what got Spaniards into this mess in the first place.”
This is wrong. Spain’s public sector was not overspending. In fact, Spain’s government was running large budget surpluses. NPR should try to find Spanish economists who are more familiar with Spain’s economy.
Morning Edition gave a Spanish economist, Pedro Videla, an opportunity to mislead listeners when he dismissed the idea of more public spending as a way out of the crisis by saying “overspending is what got Spaniards into this mess in the first place.”
This is wrong. Spain’s public sector was not overspending. In fact, Spain’s government was running large budget surpluses. NPR should try to find Spanish economists who are more familiar with Spain’s economy.
Read More Leer más Join the discussion Participa en la discusión
I really don’t like to beat up on Ben Bernanke. I don’t know him personally, but everyone I know who does says that he’s a really nice guy. And, there is no doubt he is a very smart economist. But he shares the blame for the downturn with his former boss, Alan Greenspan. Even worse, he still seems resistant to getting the story right.
He gave a speech last month in which he forgives himself and others in policy positions for being surprised by the dangers posed by the collapse of the housing bubble. He noted that we lost $10 trillion in wealth when the stock bubble collapsed and that was no big deal. Why should we have expected it to be a big deal when we lost $10 trillion in wealth when the housing bubble collapsed? He then goes on to comment on the wonders of bank leverage and financial crises.
Bernanke should know that both sides of his assertion are seriously misleading. First, the wealth lost in the stock crash was stock wealth. The wealth effect from consumer spending on stock wealth is generally estimated to be much lower than the wealth effect from housing wealth. The range from the former is typically estimated at 3-4 cents on the dollar, as opposed to 5-7 cents on the dollar from housing wealth.
Also, housing wealth has a much more direct effect on stimulating demand through construction than stock wealth has in boosting investment. Residential construction was more than 2.0-3.0 percentage points of GDP ($300-$450 billion a year in today’s economy) above its trend level at the peak of the bubble. By contrast, the investment generated by the stock bubble was no more than 1-2 percentage points of GDP.
More importantly, the loss of wealth from the stock bubble was temporary. If Bernanke consulted the data (Table L.213) that his organization publishes, he would notice that by March of 2004, the stock market had already recovered more than half of the value it had lost. Its valuation at that point was only a bit more than $4 trillion off its 2000 peak and was actually above the 1998 year-end level. Since no one spends based on daily movements in the stock market (i.e. there is a lag between when stock prices rise and when people adjust their spending), the negative wealth effect at that point would have been limited.
By contrast, housing wealth has continued to decline. We have now lost close to $8 trillion in real housing wealth compared to the bubble peak in 2006. And, there is no plausible story whereby housing wealth will come back quickly.
The other part of Bernanke’s story that is wrong is that the collapse of the stock bubble was no big deal for the economy. While the official recession was short and mild, lasting from March of 2001 to November of 2001, the economy continued to lose jobs through 2002 and didn’t start to create jobs again until September of 2003. This is shown clearly in the employment to population rate; data that I recall Bernanke citing in a talk in January of 2004 when he was explaining why it was necessary for the Fed to still keep the federal funds rate at the extraordinarily low level of 1.0 percent.
Employment-to-Population Ratio
Source: Bureau of Labor Statistics.
The reason why this argument is important is that financial crisis can be complicated and mysterious. They are hidden in complex financial assets on balance sheets that almost no one sees.
By contrast, bubbles are simple. They sit there expanding in broad daylight. Could any sentient being miss the stock bubble or the housing bubble?
And, the demand gap created by their collapse is really straightforward. Residential construction is off by 4.0 percentage points of GDP as we deal with a badly overbuilt housing market. That’s $600 billion a year in lost demand. Consumption has also plunged, with the saving rate going from near zero at the peak of the bubble to 4-5 percent at present. That implies a loss in annual consumption demand of $400-500 billion. Add in another $200-$300 billion in lost demand due to the collapse of the bubble in non-residential real estate and the contraction of the state and local government sector in response to lost tax revenue and you have a gap in annual demand of $1.2-$1.4 trillion.
This is all very simple. The arithmetic we learn in third grade should cut it.
By contrast, what are the financial crisis promulgators talking about? I enjoyed the crisis as much as anyone, but what demand should we be seeing right now that we are not seeing because we had the financial crisis?
That is a real simple question that I would like to hear answered. Consumption is actually still unusually high relative to disposable income. The financial crisis cult thinks it should be higher, why?
Investment in equipment and software is almost back to its pre-recession share of GDP. That is very impressive given the large amounts of excess capacity in most sectors. Even non-residential construction has bounced back, in spite of the overbuilding in many sector due to the bubble.
In short, if the crisis cult has a story let’s hear it. If they don’t have a story, then Bernanke and his followers should look for another line of work.
I really don’t like to beat up on Ben Bernanke. I don’t know him personally, but everyone I know who does says that he’s a really nice guy. And, there is no doubt he is a very smart economist. But he shares the blame for the downturn with his former boss, Alan Greenspan. Even worse, he still seems resistant to getting the story right.
He gave a speech last month in which he forgives himself and others in policy positions for being surprised by the dangers posed by the collapse of the housing bubble. He noted that we lost $10 trillion in wealth when the stock bubble collapsed and that was no big deal. Why should we have expected it to be a big deal when we lost $10 trillion in wealth when the housing bubble collapsed? He then goes on to comment on the wonders of bank leverage and financial crises.
Bernanke should know that both sides of his assertion are seriously misleading. First, the wealth lost in the stock crash was stock wealth. The wealth effect from consumer spending on stock wealth is generally estimated to be much lower than the wealth effect from housing wealth. The range from the former is typically estimated at 3-4 cents on the dollar, as opposed to 5-7 cents on the dollar from housing wealth.
Also, housing wealth has a much more direct effect on stimulating demand through construction than stock wealth has in boosting investment. Residential construction was more than 2.0-3.0 percentage points of GDP ($300-$450 billion a year in today’s economy) above its trend level at the peak of the bubble. By contrast, the investment generated by the stock bubble was no more than 1-2 percentage points of GDP.
More importantly, the loss of wealth from the stock bubble was temporary. If Bernanke consulted the data (Table L.213) that his organization publishes, he would notice that by March of 2004, the stock market had already recovered more than half of the value it had lost. Its valuation at that point was only a bit more than $4 trillion off its 2000 peak and was actually above the 1998 year-end level. Since no one spends based on daily movements in the stock market (i.e. there is a lag between when stock prices rise and when people adjust their spending), the negative wealth effect at that point would have been limited.
By contrast, housing wealth has continued to decline. We have now lost close to $8 trillion in real housing wealth compared to the bubble peak in 2006. And, there is no plausible story whereby housing wealth will come back quickly.
The other part of Bernanke’s story that is wrong is that the collapse of the stock bubble was no big deal for the economy. While the official recession was short and mild, lasting from March of 2001 to November of 2001, the economy continued to lose jobs through 2002 and didn’t start to create jobs again until September of 2003. This is shown clearly in the employment to population rate; data that I recall Bernanke citing in a talk in January of 2004 when he was explaining why it was necessary for the Fed to still keep the federal funds rate at the extraordinarily low level of 1.0 percent.
Employment-to-Population Ratio
Source: Bureau of Labor Statistics.
The reason why this argument is important is that financial crisis can be complicated and mysterious. They are hidden in complex financial assets on balance sheets that almost no one sees.
By contrast, bubbles are simple. They sit there expanding in broad daylight. Could any sentient being miss the stock bubble or the housing bubble?
And, the demand gap created by their collapse is really straightforward. Residential construction is off by 4.0 percentage points of GDP as we deal with a badly overbuilt housing market. That’s $600 billion a year in lost demand. Consumption has also plunged, with the saving rate going from near zero at the peak of the bubble to 4-5 percent at present. That implies a loss in annual consumption demand of $400-500 billion. Add in another $200-$300 billion in lost demand due to the collapse of the bubble in non-residential real estate and the contraction of the state and local government sector in response to lost tax revenue and you have a gap in annual demand of $1.2-$1.4 trillion.
This is all very simple. The arithmetic we learn in third grade should cut it.
By contrast, what are the financial crisis promulgators talking about? I enjoyed the crisis as much as anyone, but what demand should we be seeing right now that we are not seeing because we had the financial crisis?
That is a real simple question that I would like to hear answered. Consumption is actually still unusually high relative to disposable income. The financial crisis cult thinks it should be higher, why?
Investment in equipment and software is almost back to its pre-recession share of GDP. That is very impressive given the large amounts of excess capacity in most sectors. Even non-residential construction has bounced back, in spite of the overbuilding in many sector due to the bubble.
In short, if the crisis cult has a story let’s hear it. If they don’t have a story, then Bernanke and his followers should look for another line of work.
Read More Leer más Join the discussion Participa en la discusión
