Home > financial crisis, jobs, The Economics Profession, unemployment > Bits and pieces from the front line

Bits and pieces from the front line

from Peter Radford

Historians will surely love to reflect on these days. Each seems to bring some violent twist. Each adds to the amounting confusion. Each makes the story that much more difficult to tell.

Yesterday we learned that last week’s apparent uptick in the U.S.  labor market was an illusion. At least until next week. New claims for unemployment assistance rose once more above the 400,000 level – to 408,000. Last week they had managed to slide slightly below, although only by a hair to 399,000. Somewhere along the way we have altered our view of what a “good” new claims number is.  At the beginning of this crisis I was saying that we needed to get down to the very low 300,000 range. Below 325,000 at any rate. That level would be more consistent with healthy turnover and sufficient job creation that we were not adding to our longer term problem. We haven’t been that low for what seems like an age now, and so we have steadily changed and adopted 400,000 as being the watershed figure. The U.S. media and the stock market now greet a number below 400,000 as a sign of better times. It is not. It is terrible for an economy this far along from the last peak of employment.

We should not recalibrate. We should demand action

But our generals are now engaged in trench warfare. Their have fallen to a lowest common denominator of incompetence. Only now – how many months into the disaster – does Obama get on the road and start to talk up various jobs programs. Who knew we had a jobs problem? No one paying attention to Washington and the issues being addressed there.

Meanwhile the troops – those of us outside of the magic circle – are reporting ever lower levels of confidence. Both consumer confidence and now business confidence are declining at alarming rates. This plunging confidence has two origins. One is that the economy is self-evidently not improving. Jobs are hard to come by, wages are stalled and actually falling in inflation adjusted terms, home prices are stuck deep in depression, banks are refusing to lend, and prices are lurching about, although there the trend is in the right direction. The second is the utter collapse of our political system. It has failed us totally. People are not so divorced from current events that they cannot see the insanity that is Congress. Never have we been so poorly led. And now the political class seems content to punt problem solving into the election cycle. As if that will make decision making easier.

In that regard I have to point out the Republican Rick Perry’s extraordinary activity. Never has a candidate entered the ring in so blustering a fashion. His statement that were the Fed to take action to pump up money supply in order to lift the economy such action should be considered treasonous is inexplicably stupid. Apparently the Republicans now think that any action between now and the election – about 14 months hence – is an act of political interference. It is a biased act. It is therefore undemocratic, and – in Perry speak – treasonous. This is beyond bizarre. No wonder the Wall Street Journal is floundering about trying to encourage more candidates to enter the field. The current batch is dangerous.

Another point on Perry: he is making a big deal of his pro-business one market credentials. This, he says, accounts for the supposed resilience of the Texas job market during the recession. Well, not so much. According to recent research what job growth there was in Texas over the past three years comes from an expansion of government, not private sector, employment. The private sector in Texas shrank. But that shrinkage was offset by a large number of new government jobs. So the Texas story is one of Keynesian success. Nice. And, in any case, we should all note that Texas has a rapidly growing population – it needs to add jobs at a faster furiously in order to keep up with population growth. It didn’t. It’s employment record falls short of Massachusetts and New York amongst others. Perry’s record is dismal.

My real problem with this is that we need Obama to be challenged and attacked on his record. Which is grim to say the least. The last thing we need is a Republican party so far to the right that it scares the electorate into unthinking support of Obama, who, frankly, deserves to lose.

Meanwhile we have to suffer through nonsense such as Warren Buffet asking to be taxed more highly. While the gesture is worthy, I must note that his much discussed article in the New York Times failed to mention that his solutions would not actually raise his tax rate by much. Perhaps we need to remedy that. At the every least we need to abolish the specious notion that income from capital and income from labor should be taxed at different rates. As the very wise English judge once said: “income tax is a tax on income”, we need to tax all income, whatever its source, at the same rate. And that includes inheritances, since an inheritance is a form of income to the generation receiving it.

Another thought: the rise in risk within the global economy has been associated with a decline in rates on US government bonds. I am still waiting for the deficit hawks to concede that inflation is not about to surge and thus undermine bond rates. This wait, I think may take a while. Instead we have to suffer listening to Plosser, a Fed governor, and one of the dissenting three who opposed the recent announcement that the Fed would keep rates low at least through 2013, repeat his argument – wrong policy at the wrong time – at every opportunity. People like Plosser are the reason we have so incoherent a leadership. They are pulling against the rest of us.

At any rate with rates this low we should be borrowing every dollar we can. And then investing it in capital projects that improve our long term competitive position. The problem with this is that public accounting fails miserably to distinguish between long term and short term spending. There is no national accounting capital account. So debt borrowed to build a productivity enhancing asset – something that adds to national wealth in the future, and which thus generates revenues to pay off the debt, is treated the same as debt used to plug the gap in current consumption. This is something we need to fix. It makes enormous sense to borrow long term money for infrastructure and education – two things that will add to the economy’s future wealth creating ability and thus help pay for the debt.

And before you MMT people write to tell me we should just print money to pay for the things we want, let me argue that, while in current circumstances mired as we are in a liquidity trap, printing money is a viable alternative, I see it as a problem down the road when, and if, we have emerged from that trap. You cannot conjure real goods and services from mid air no matter how much money you print. So there is a limit on the efficacy of MMT. Beyond that point the deficit hawks argument that a surge in money could lead to a surge in inflation comes back into play. Plosser would be right. His error is that he is making that argument, falsely, while we are stuck in a deep hole. It’s all about inflation expectations and the way they are formed: an unfettered printing press is a very different animal than a bond market with the latter’s implication of repayment and thus constraint.

The housing market is going nowhere. People forget that it was real estate construction, fueled by the bubble, that made the employment record of the last ten years look vaguely acceptable. Take it away and we have had a lost decade for jobs. And there is absolutely no sign that real estate is coming back. Sales of existing homes dropped 3.5% in July, back down to an annual rate of 4.67 million homes. To put that in context the peak rate back in 2005 was 7.08 million. One problem that has now added to the gloom is the number of sales contracts that fall through. In July 16% of all contracted sales failed to materialize. The reason for this historically high level of failure seems to be the inability of buyers to secure financing coupled with home valuations being well below the agreed contract price. This implies that people are willing to buy homes at prices that the banks think are too high. Plus there is no sign that the downward pressure on prices coming from distressed sales is abating: foreclosed and short sales comprised about 30% of the total number of sales, unchanged from June.

Lastly: the ineptitude of the economics profession continues to sadden me. Whenever  someone advocates we should adopt Texas style lower than average wages in order to boost employment nationally I cringe. It isn’t possible for everyone to be lower than everyone else. By definition. The existence of lower wage states implies the existence of higher wage states. Duh. But we still see such suggestions being made in the Op-Ed pages of well known newspapers. And these folks have tenure. Some at very respected schools. Maybe we should give up that respect.

Or is that too radical?

Just add it to the list of reasons to have no confidence in our elite to solve our problems.

We are truly on our own.

  1. Alice
    August 19, 2011 at 9:42 am

    If the current US government thinks wveryone wants to listen to a”no tax rises – oh tax rises needed (Obama – at least responsible) – definitely no tax rises (repugs – definitely not responsible)

    The point I am making is that the more people slide into this mess of unemployment – the deeper the repugs dig their own hole. Who wants or needs their “help the rish policies”. Who wants or needs Fox news right now.Who wants or needs Murdoch – the bastardAustralian son spruiking the economic policies of failure?
    What they want is an intelligent government (both sides) actually working together but I guess that impossible in the US when donations pay for what you get as a government.

    Hey guys – thats the free market for you – the free market for government. If you can afford it you too can have a government that works for you.

    Its so sad, its so tragically sad for the American people.

  2. alexyc
    August 19, 2011 at 10:15 am

    You cannot conjure real goods and services from mid air no matter how much money you print….It’s all about inflation expectations and the way they are formed: an unfettered printing press is a very different animal than a bond market with the latter’s implication of repayment and thus constraint.

    You might be interested in this book.

  3. Keith Wilde
    August 19, 2011 at 11:14 am

    This calls for a campaign to reform national accounting–to introduce the national capital account. A highly useful base for that campaign would be Michael Hudson’s observation (and expositions) that Simon Patten identified such collective (pubic) investment in infrastructure and technology development as a fourth factor of production.

    • Alice
      August 20, 2011 at 10:26 am

      OMG Keith – you couldnt possibly be suggesting “real production” could you…?? When everyone knows or is told on Murdochs media that they can make much more by diversifying their portfolios, investing electronically in blue ribbons stocks and the any crashes are a “buying oppportunity: for already grossly over valued stocks.

      After all – this is what finance news today says you should do with your retirement savings.

  4. August 19, 2011 at 12:49 pm

    Imagine for a moment the Defense Department engaged in action on climate change, education, infrastructure repair instead of useless wars. No, too far from reality, it will just hurt your brain. But even as the tsunami of climate change looms ever larger, the real returns to the society are there if we will only invest, and the mirror image — the damage of not putting our resources to practical use — increases. The crumbling infrastructure is bad, but the calamity of an idle or misused workforce is worse.

    But we should not expect things to get better. Social unrest. Starvation and privation. Political dysfunction or anarchy. All on a planet ever more sterile.

    But your points are exactly correct. One wishes for a return of the 2008 campaign Obama in some form or other. This President Obama is just in the way, or worse, blocking real change.

  5. August 19, 2011 at 1:36 pm

    “And before you MMT people write to tell me we should just print money …” and etc. the remainder of that paragraph …

    I am not sure if I read that as non-sequiturs, or an endorsement of Krugman’s objections, or an enthymeme, where the missing premises include statements like “MMT cannot get from its technical accuracy to political efficacy.” No MMT proponent I’ve read says “You CAN conjure real goods and services from mid air by printing money, and printing money alone.” That practice makes as much a sense as the Fed loaning money at nearly zero real interest or engaging in QE1/2/3 when capitalists have no profitable places to invest.

    But I do think that an MMT proponent would point out, or should point out, “a bond market with the latter’s implication of repayment and thus constraint” is another form of political constraint, one practiced by a rentier class.

  6. August 19, 2011 at 3:57 pm

    And by coincidence (I just found this, haven’t read it, but it is on point re MMT, bonds being inflation constraints, etc…)

    “Painstaking, dot-point summary – bond issuance doesn’t lower inflation risk”


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