May 06, 2015
Dean Baker
The Huffington Post, May 6, 2015
View article at original source.
Jared Bernstein, long-time D.C. policy wonk and formerly Vice President Joe Biden’s chief economist, has a new book, The Reconnection Agenda: Reuniting Growth and Prosperity, which lays out his agenda for ensuring that the gains from growth are broadly shared. Unfortunately, you are not likely to see this book reviewed many places. Bernstein has decided to self-publish and make the book available as a free e-book. (Hard copies are also available.)
Most outlets that publish book reviews have an implicit boycott of self-published books. This is effectively an effort to support a cartel in the form of the publishing industry. Authors like Bernstein (I have also gone the self-publishing route) who choose to get their work to the public quickly and without charge, will find it largely ignored by reviewers. This is a crude form of protectionism that most of the people in the book industry would probably denounce if the beneficiaries were textile workers or autoworkers.
It could be argued that publishers provide a screen, excluding poorly written or researched books, but this is a pretty weak case. Getting a book accepted by a publisher essentially means that you have a friend in the publishing industry. Furthermore, as an economist of some prominence, Bernstein would have little difficulty finding a publisher for this book, as he has done for several others. So accounts of Bernstein’s book will have to spread primarily through the blogosphere, social media, and other backdoor channels.
I should also point out that Bernstein is a friend with whom I have worked for more than two decades and co-authored two books. If you are concerned about reading a review written by a friend, you should know that probably half of all reviews are written by friends of the author(s). And most of the other half is written by people with personal or professional jealousies.
But enough of the long preliminaries, this is a book that people with no background in economics and little patience for technical jargon should find useful and interesting. Bernstein carefully avoids getting into the weeds as he lays out the problem of growing inequality and his proposed solutions.
Bernstein emphasizes the importance of getting the basic macroeconomics right. If we can get back to the sort of low unemployment rates we had in the late 1990s we could create a situation in which not only more workers have jobs, but also where workers at the middle and bottom of the income ladder have the bargaining power needed to secure their share of economic growth.
He then lays out the policies that would allow us to get back to full employment or something like it: a Federal Reserve Board that is prepared to keep interest rates low to allow growth, government spending to boost the economy when it is below full employment, and currency policies to address our chronic trade deficit. Bernstein views the trade deficit as an enormous drain on demand that cannot be easily offset from domestic sources, especially in a political environment where large budget deficits are viewed as unacceptable.
Going beyond the macro picture, Bernstein argues that even in a full employment context there will still be many people left behind. He advocates a variety of policies to bring these people into the labor force at decent paying jobs, with perhaps the most controversial being direct government employment. Bernstein notes the success of experiments with direct employment through the Temporary Assistance to Needy Families (TANF) program during the recession. He argues that this could be a model for an expanded system of public employment.
Bernstein also includes the list of other good things that we should all want to see to provide more opportunity and better lives: free pre-K for the young, cheaper college education, work-sharing as an alternative to unemployment insurance, paid sick days and family leave, a higher minimum wage, better infrastructure, and a major green initiative to reduce greenhouse gas emissions.
Since I agree with the vast majority of what Bernstein has to say, let me pick on three areas where I have some disagreement. The first is the discussion of the initial financial crisis that Bernstein stepped into at the start of the 2009 as one of Obama’s advisers. Bernstein gives the often told story that the actions of the administration and the Fed saved us from experiencing a second Great Depression. He cites a famous study by Mark Zandi and Alan Blinder in support of this position. The Zandi-Blinder study shows unemployment surging to over 16 percent and staying in double digits far into the current decade.
But it is important to be clear what this study is posing as a counter-factual. It is asking what happens if we let the Wall Street banks collapse and never did anything to pick up the pieces. In other words, the government just sat there and did nothing as the unemployment reached 70-year highs. This is like measuring the importance of the first fire truck to reach a major fire under the assumption that no other fire trucks would be coming.
This is hardly a plausible scenario. We have never seen a president and Congress sit on their hands in a period of high and rising unemployment. Remember, President George W. Bush signed the first stimulus package in February of 2008 when the unemployment rate was just 4.7 percent.
The serious policy question is what would have happened if we let the magic of the market destroy the Wall Street behemoths and then picked up the pieces with aggressive fiscal and monetary policy. The advantage of going this route is that we would have quickly eliminated the big banks that continue to pose a drain on the economy and exercise inordinate political power. Undoubtedly the initial downturn would have been more severe, but it is certainly plausible that the recovery would be quicker and the economy would on much stronger footing today if we had followed this path.
Of course the route of inflicting short-term pain for longer-term gain is always problematic. But economists are ill-positioned to make this sort of objection. Austerity is routinely praised as painful, but necessary. Former Federal Reserve Board Chair Paul Volcker is widely revered for causing a recession that pushed the unemployment rate to almost 11 percent, but succeeded in quickly bringing down the rate of inflation.
Whether the longer term benefits from allowing the Wall Street banks to collapse would have outweighed the near-term costs to the economy is not an easy call, but a world without Citigroup, Goldman Sachs, and Bank of America does look pretty attractive. In any case, by design the Zandi-Blinder study provides no useful insights on this issue.
The second point is somewhat of a sidebar, but an important one. Bernstein recognizes the importance of the trade deficit as a drain on demand. Furthermore, he notes the over-valuation of the dollar as the main factor causing the trade deficit. This in turn is due to the actions of central banks that buy and hold dollar assets, thereby raising the value of the dollar against their own currencies.
Bernstein argues that the United States should be looking for ways to force these countries to end this practice and allow the dollar to fall to a level where U.S. goods and services are more competitive.
All of this is perfectly reasonable, but there is an important point to add. It is not just other countries that favor an over-valued dollar. There are important domestic interests that have little desire to see the dollar fall in value against other currencies. For example, Walmart has spent the last quarter century setting up low cost supply chains in the developing world. They are not anxious to see all the goods they import rise in price by 20 percent due to a fall in the value of dollar. Similarly, major manufacturers like GE now produce much of their output in the developing world. They also are not anxious to see the price of their foreign produced goods rise due to a reduction in the value of the dollar. And Congressional staffers who take vacations overseas also don’t want to see their trips become more expensive. (I’m serious, this is how policy works.)
As a practical matter, lowering the value of the dollar would be a topic of negotiation between the United States and its trading partners. If we make a lower valued dollar a top priority with China and other countries, it means pushing less hard on respecting Microsoft’s copyrights or Pfizer’s patents. It might also mean pushing less hard on access for our financial or telecommunications industry.
These industries are not anxious to have their concerns take the back seat at the negotiating table.
The point is that the battle over the currency is less a battle of us against them than a battle of us against us. Given the right terms, China and other countries would surely agree to make concessions on the value of their currency. But powerful domestic interests do not want to see the U.S. government offer the right terms.
The third area where I take issue with Bernstein is his view of the need for macro-prudential policy, or bubble patrol. It is not that I disagree on the need to prevent the growth of dangerous asset bubbles. I spent a lot of time yelling about the risks posed by both the 1990s stock and 2000s housing bubbles (before they burst). My point of disagreement is more over what is involved.
Bernstein’s discussion implies that we need super-sleuths combing through the data constantly searching for evidence that some prices might be out of line with the fundamentals. To my view this is 180 degrees at odds with what is required to detect dangerous bubbles.
The reason that the stock bubble and housing bubbles posed major risks to the economy is that they were actually moving the economy. The wealth effect from both bubbles caused consumption to surge, and saving rates to hit new lows (that is the same thing). The stock bubble spurred an investment boom concentrated in the tech sector. The housing bubble caused residential construction to rise to 50 percent above its normal share in GDP, even as vacancy rates were already at record highs. These were not difficult trends to detect. In fact it would have been difficult for any serious analyst of the economy not to notice these trends.
The fact that nothing was done as these bubbles grew to ever more dangerous levels spoke more to the sociology of the profession and economic policy making than any difficulty in detecting bubbles. The leading lights of the profession (e.g. Alan Greenspan, Larry Summers, Martin Feldstein) did not take bubbles seriously as macroeconomic problems. Therefore the evidence that the bubbles could cause problems was largely ignored by the lesser lights.
The implication, that we need highly refined tools to detect dangerous bubbles, not only supports the “who could have known” amnesty that top economists have granted themselves, but it deters the sort of challenge to the sociology of the profession that would be needed to actually ensure that problems like dangerous bubbles get attention in policy circles.
We continue to see blatant nonsense repeated as truth in macroeconomic debates. For example, endless articles have been written about the threat of deflation, implying that something really awful happens if the inflation rate goes from a very small positive number to a very small negative number. In reality, the only problem is that the inflation rate is lower, as even the I.M.F. now says.
As another example, we often hear that the economy is suffering from a debt overhang depressing consumption. There’s a simple way to check this, we can look at the saving rate to see if consumption is unusually low relative to disposable income. In fact, the saving rate has been hovering near 5.0 percent for the last three years. This puts it lower than at any point except the peaks of the stock and housing bubbles, meaning that consumption is actually higher relative to income than it has been through almost all of the post-war period. It seems more than a bit bizarre to imagine a saving rate at bubble levels in the absence of a bubble, as the debt overhang story would imply.
Finally, we have no serious discussion of the demand implications of currency values as the country is debating new trade agreements. The seriousness of this concern should be straightforward in a world where we are likely to be below full employment levels of output for the indefinite future. Yet, most of the debate over the trade agreements ignores this issue even though the impact of a persistent shortfall in aggregate demand swamps any potential gains from lower trade barrier.
I’ll suspend my tirade, but the point is that it was not a problem with economic theory or lack of data that prevented economists from recognizing the dangers posed by the bubbles. The problem was and is that we have a profession that cares much more about authority than arguments. If that doesn’t change, we will continue to be surprised by bad economic news for some time to come.
Anyhow, back to the book. Those who are long time readers of Bernstein’s work will not find much new here. But he does a good job laying out his view of the economy and the direction of policy in language that will be understandable to those with no background in economics and who are allergic to technical language. It is a great book to give your Fox News watching uncle for the holidays.
