I have had no student of whom I have been prouder than Alan Krueger. It has taken me a few days since the shock of learning of his death to think of how I wanted to pay tribute to him.
Alan was the kind of student who is the most satisfying to teach. He was not the kind of genius who grasps everything instantly, making his instructor feel unnecessary or irrelevant. Instead, he was someone with an extraordinary gift that could be unlocked through the diligent work of mastering the basic techniques of the economics field.
What made Alan perhaps the most interesting and influential labor economist of the past four decades? Although many say economics is too much applied math, it was not preternatural mathematical statistical talent. Nor was it an ability to think through hard problems at high speed.
Alan’s gift was something different — something that cannot really be taught. He had the knack of identifying important questions that he could convincingly answer with the data and data-analysis tools at his disposal. Again and again, sometimes on his own and sometimes with a range of co-authors, he shed light on the most important issues regarding labor markets. Our understanding of the economy and, equally important, how best to do economics was forever changed.
Take his celebrated work with David Card on the minimum wage. They looked at how relative hiring patterns changed when one state raised its minimum wage and one right on its border did not. Not much except the minimum wage differed between the two situations, so it was about as close to a controlled experiment as economists will ever get. Alan was a pioneer in the exploitation of such natural experiments. After Alan showed what kind of evidence can be marshaled to study a labor-market intervention, economists have raised their standard of what constitutes convincing evidence. What followed has been called a “credibility revolution” in empirical economics.
Alan’s knack seemed to include not just finding answerable important questions but sensing when the answers were likely to be new, surprising and overturning of conventional wisdom. The finding that raising the minimum wage did not reduce employment is only the most famous example. His research also has demonstrated convincingly that poverty is not a cause of terrorism, that past a certain point economic growth is good for the environment, and that even marginal increases in schooling meaningfully increase workers’ market value.
All these accomplishments could have been enough. But Alan wanted to serve more directly. And he did that with three major stints in government at the Labor Department, the Treasury Department and the White House Council of Economic Advisers. His heart and temperament were those of a professor of economics, not a political operative, but he turned that into an asset. Others in government meetings had their opinions or their agency’s position or their talking points. Alan always had a survey of the academic literature at hand, and sometimes, as in the Obama administration’s internal debate on wage subsidies, had his own specially commissioned survey to report.
It mattered. Whether in the Clinton administration’s push for higher minimum wages, the Obama administration’s emphasis on spurring hiring after the financial crash or in its focus on the problem of jobless middle-aged men, Alan was one of the rare academics in government who had a real impact on policy.
Many distinguished economists have worked in government over the years — most but not all at the Council of Economic Advisers. Alan stands out in a final respect. After he returned to academe, he did not rest on his laurels or become a commentator and consultant on all matter of economic issues. Rather, he returned to great effect to doing serious academic research on opiates, on the determinants of happiness and even on the economics of rock music. His commitment to research was an inspiration to me and many others.
Always, from the day he walked in to my office at Harvard as a first-year graduate student, Alan seemed a happy man, excited about what he was learning and teaching, intensely connected to his family, looking to his next tennis game and his next trip. He certainly enriched the lives of all those honored to count him as a friend and helped make life better for millions of people who will never know his name. Alan’s life was short, but his legacy will be long. Rest in peace, my friend.
My paper with Lukasz Rachel on secular stagnation and fiscal policy summarized here has attracted a number of interesting responses including from Martin Wolf, David Leonhardt, Martin Sandbu and Brad DeLong and also many participants at the Brookings conference.
I’m gratified that there seems to be general acceptance of the core secular stagnation argument. “Normal” policy settings of real interest rates in the 2 percent range, balanced primary budgets and stable financial markets are a prescription for stagnation and underemployment. Such economic success as the industrial world has enjoyed in recent decades has reflected a combination of very low real rates, big budget deficits, private leveraging up and asset bubbles.
No one from whom I have heard doubts the key conclusion that a combination of meaningfully positive real interest rates and balanced budgets would likely be a prescription for sustained recession if not depression in the industrial world.
Notice that this is a much more fundamental argument than the suggestion that the some effective lower bound on interest rates may impede stabilizing the economy. The argument is that because of chronic private sector tendency towards oversaving, economies may be prone to underemployment and financial stability absent policy responses which are themselves problematic.
This is an argument much more in the spirit of Keynes, the early Keynesians, and today’s Post-Keynesians than the New Keynesians who have set the terms for much of contemporary macroeconomic discourse both in academia and in the world’s central banks.
The central feature of New Keynesian models is an idea that economies have an equilibrium to which they naturally revert independent of policies pursued. Good central bank policy achieves a desired inflation target (assumed to be feasible) while minimizing the amplitude of fluctuations around that equilibrium.
In contrast contemporary experience, where inflation has been below target almost throughout the industrial world for a decade and is expected by markets to remain below target for decades, and where output is sustained only by large budget deficits or extraordinary monetary policies, suggest that central banks acting alone cannot necessarily attain inflation targets and that misguided policy could easily not just raise the volatility of output but also reduce its average level.
While there seems to be little doubt that real interest rates–short and long, ex ante and ex post — have declined very substantially even as (other things equal) budget deficits and expanded social security programs should have increased them, there remains debate about how to analyze these trends. Lukasz and I argue that adjustment to balance saving and investment is the best way understand declining real rates. DeLong wonders about changing risk premiums and Wolf cites BIS work arguing that low rates reflect the monetary policy regime. There is no reason why there needs to be only one cause of low real rates so these factors may enter. But as I expect we will illustrate in the revised version of the paper, the largest part of the low frequency variation in ex ante real returns is accounted for by a downward trending factor common to all asset prices. This is illustrated for the US in the figure below. So risk premiums or factors specific to Treasuries are likely not high order.
Figure: Decline in US real asset returns
Granting that secular stagnation is a problem, there is the question of policy response. The right policy response will be the one that assures that full employment is maintained with a minimum of collateral problems. Sandbu argues against the notion of secular stagnation in part because he thinks it may lead in unconstructive directions like protectionism and because he believes that stagnation issues can be feasibly and relatively easily addressed by lowering rates. Wolf, relying on the BIS, is alarmed by the toxic effects of very low rates on financial stability in the short run and economic performance in the long run, and prefers fiscal stimulus. Leonhardt prefers a broad menu of measures to absorb saving and promote investment.
I am not certain of the right approach and I wish there was more evidence to bring to bear on the question. I can certain see the logic of the “zero is just another number” view, that holds that the current environment poses no new fundamental issues but just may require technical changes to make more negative interest rates possible. I am skeptical because (i) I am not sure how large the stimulus effect of rates going more negative is because of damage to banks, reduced interest income for consumers, and because capital cost is already not the barrier to investment; (ii) I wonder about the quality of any investment that was not made at a zero rate but was made at a negative rate; and (iii) I suspect that a world of significantly negative nominal rates if sustained will be a world of leveraging, risk seeking and bubbles. I have trouble thinking about behavior in situations where people and firms are paid to borrow!
I am inclined to prefer more reliance on reasonably managed fiscal policies as a response to secular stagnation: government borrowing at negative real rates and investing seems very attractive in a world where there are many projects with high social returns. Moreover, we are accustomed to thinking in terms of debt levels but it may be more appropriate to think in terms of sustained debt service levels. With near zero rates these are below average in most industrial countries. The content of fiscal policies is crucial. Measures which run up government debt without stimulating demand like large parts of the Trump tax cut are ill advised. In contrast measures which promote investment and raise the tax base down the road are much more attractive.
There are of course other measures beyond stabilization policies like fighting monopolies, promoting a more equal income distribution, and strengthening retirement security for which the desire to maintain macroeconomic stability provides an additional rationale.
How Washington Should End Its Debt Obsession
By Jason Furman and Lawrence H. Summers
The United States’ annual budget deficit is set to reach nearly $1 trillion this year, more than four percent of GDP and up from $585 billion in 2016. As a result of the continuing shortfall, over the next decade, the national debt—the total amount owed by the U.S. government—is projected to balloon from its current level of 78 percent of GDP to 105 percent of GDP. Such huge amounts of debt are unprecedented for the United States during a time of economic prosperity. continue
My friend Fareed Zakaria has celebrated his well-deserved recognition by Foreign Policy Magazine as one of the 10 most important foreign policy thinkers of the last decade by writing an essay entitled “The End of Economics,” doubting the relevance and utility of economics and economists. Because Fareed is so thoughtful, and echoes arguments that are frequently made, he deserves a considered response. continue
It is often said that the chair of the Federal Reserve is the second most important person in Washington. I’m not sure the statement is exactly right, but that it is plausible is, in a sense, remarkable. Why should the second most important person in Washington not be elected by the people, or at least directly accountable to and subject to dismissal by elected officials? The president cannot fire members of the Federal Reserve Board of Governors, and for the past quarter-century it has been taboo for the president or his economic team to so much as comment on the Fed’s activities. continue
A, if not the, preoccupation of macroeconomists for the last generation has been providing macroeconomics with a microeconomic foundation. At one level this totally makes sense. How can one be against establishing foundations? And it makes sense to think that macroeconomic theories of fluctuations in investment, for example, should be rooted in theories of how individual businesses makes investment decisions. continue
Joseph Stiglitz recently dismissed the relevance of secular stagnation to the American economy, and in the process attacked (without naming me) my work in the administrations of Presidents Bill Clinton and Barack Obama. I am not a disinterested observer, but this is not the first time that I find Stiglitz’s policy commentary as weak as his academic theoretical work is strong.
Stiglitz echoes conservatives like John Taylor in suggesting that secular stagnation was a fatalistic doctrine invented to provide an excuse for poor economic performance during the Obama years. This is simply not right. The theory of secular stagnation, as advanced by Alvin Hansen and echoed by me, holds that, left to its own devices, the private economy may not find its way back to full employment following a sharp contraction, which makes public policy essential. I think this is what Stiglitz also believes, so I don’t understand his attacks.
In all of my accounts of secular stagnation, I stressed that it was an argument not for any type of fatalism, but rather for policies to promote demand, especially through fiscal expansion. In 2012, Brad Delong and I argued that fiscal expansion would likely pay for itself. I also highlighted the role of rising inequality in increasing saving and the role of structural changes toward the demassification of the economy in reducing demand.
What about the policy record? Stiglitz condemns the Obama administration’s failure to implement a larger fiscal stimulus policy and suggests that this reflects a failure of economic understanding. He was a signatory to a November 19, 2008 letter also signed by noted progressives James K. Galbraith, Dean Baker, and Larry Mishel calling for a stimulus of $300-$400 billion – less than half of what the Obama administration proposed. So matters were less clear in prospect than in retrospect.
We on the Obama economic team believed that a stimulus of at least $800 billion – and likely more – was desirable, given the gravity of the economic situation. We were told by those on the new president’s political team to generate as much validation as possible for a large stimulus because big numbers approaching $1 trillion would generate “sticker shock” in the political system. So we worked to encourage a variety of economists, including Stiglitz, to offer larger estimates of what was appropriate, as reflected in the briefing memo I prepared for Obama.
Despite the incoming president’s popularity and an all-out political effort, the Recovery Act passed in Congress by the thinnest of margins, with doubts about its ultimate passage linger until the last moment. I cannot see the basis for the argument that a substantially larger fiscal stimulus was feasible. And the effort to seek a much larger one certainly would have meant more delay at a time when the economy was collapsing – and could have led to the defeat of fiscal expansion.
While I wish the political climate had been different, I think Obama made the right choices in approaching fiscal stimulus. It is of course also regrettable that after the initial Recovery Act, Congress refused to support a variety of Obama’s proposals for infrastructure and targeted tax credits.
Unrelated to the topic of secular stagnation, Stiglitz takes a swipe at me by saying that Obama turned to “the same individuals bearing culpability for the under-regulation of the economy in its pre-crisis days” and expected them “to fix what they had helped break.” I find this a bit rich. Under the auspices of the government-sponsored enterprise (GSE) Fannie Mae, Stiglitz published a paper in 2002 arguing that the chance that the mortgage lender’s capital would be depleted was less than one in 500,000, and in 2009 he called for nationalization of the US banking system. So I would expect Stiglitz to be well aware that hindsight is clearer than foresight.
What about the Clinton administration record on financial regulation? With hindsight, it clearly would have been better if we had foreseen the need for legislation like the 2010 Dodd-Frank reforms and had a way to enact it with a Republican-controlled Congress. Certainly we did not foresee the financial crisis that came eight years after we left office. Nor did we anticipate the ways in which credit default swaps would mushroom after 2000. We did, however, advocate for GSE reform and for measures to rein in predatory lending, which, if enacted by Congress, would have done much to forestall the accumulation of risks before 2008.
I have not seen a convincing causal argument linking the repeal of the Glass-Steagall Act and the financial crisis. The observation that most of the institutions involved – Bear Stearns, Lehman Brothers, Fannie Mae, the GSE Freddie Mac, AIG, WaMu, and Wachovia – were not covered by Glass-Steagall calls into question its centrality.
Yes, Citi and Bank of America were centrally involved, but the activities that generated major losses were fully permissible under Glass-Steagall. And, in important respects, the repeal of Glass-Steagall actually enabled the resolution of the crisis, by permitting the merger of Bear and Merrill Lynch and by allowing the US Federal Reserve to open its discount window for Morgan Stanley and Goldman when they otherwise could have been sources of systemic risk.
The other principal attack on the Clinton administration’s record targets the deregulation of derivatives in 2000. With the benefit of hindsight, I wish we had not supported this legislation. But, given the extreme deregulatory approach of President George W. Bush’s administration, it defies belief to suggest that it would have created major new rules regarding derivatives but for the 2000 act; so I am not sure how consequential our decisions were. It is also important to recall that we pursued the 2000 legislation not because we wanted to deregulate for its own sake, but rather to remove what the career lawyers at the US Treasury, the Fed, and the Securities and Exchange Commission saw as systemic risk arising from legal uncertainty surrounding derivatives contracts.
More important than litigating the past is thinking about the future. Even if we disagree about past political judgements and about the use of the term “secular stagnation,” I am glad that an eminent theorist like Stiglitz agrees with what I intended to emphasize in resurrecting that theory: We cannot rely on interest-rate policies to ensure full employment. We must think hard about fiscal policies and structural measures to support sustained and adequate aggregate demand.
My friend Dick Spangler died this week. He was a great supporter of Harvard and a very good friend to me. I feel his loss in a profound way.
I met Dick when he was a member of Harvard’s Board of Overseers and I became President. In a group of distinguished people, Dick was a towering figure. He contributed more to Harvard than anyone else; he had more experience as a higher education leader than anyone else; he worked harder than anyone else reaching out often to people a third of his age. He was wise, pithy and clear in all his statements.
Dick was a very good friend to me. During my time as Harvard president he taught me much about treating people right, about fundraising, about setting priorities and about leadership. I’d have been better off if I had followed more of his advice.
Knowing Dick, I was not surprised to learn from his obituary that he had been a hero for civil rights, civility and public schooling in North Carolina. He was a business leader who understood (as many do not) business’ dependence on the broader society.
In the last long decade I saw Dick only every couple of years. He would drop by my office when he was visiting Harvard. He would always insist on waiting while I finished up a conversation with a stray sophomore. Then we would talk about Harvard, politics and family. As I became more involved in the business world, he gave me some of the best advice I have ever received.
Dick Spangler may be gone but his influence will endure through the many people he made better. I am proud to have been his friend.
Desmond Lachman, Brad Setser and Antonio Weiss have written a strong analysis of the Puerto Rico situation. If ever there was a disconnect between underlying reality and what is happening in financial markets, it is the boom in Puerto Rican debt which has nearly doubled the value of some of its debt securities over the last few months. continue
The Wall Street Journal’s Greg Ip, reviewing the Trump administration’s first Council of Economic Advisers report, finds credible its claims that President Barack Obama’s policies, particularly in his second term, materially slowed economic growth, even though Ip acknowledges that the CEA’s assertions regarding magnitudes are likely exaggerated.
The CEA’s thesis is that a wave of tax and regulatory policies reduced both workers’ incentives to work and businesses’ incentives to invest, leading to slower economic growth than would otherwise have been achievable.
I am sympathetic to arguments of this type, having often observed that “business confidence is the cheapest form of stimulus.” And I would be the last to argue that every regulatory intervention of the late Obama years was salutary. I would also note that much of what the Obama administration proposed (for example, more infrastructure spending and responsible tax reform) would have triggered even greater economic growth but never came to pass, largely due to congressional roadblocks. There was certainly more that could have been done.
But at least three broad features of the economic landscape make the CEA’s view an unlikely explanation for disappointing economic growth.
First, the dominant reason for slow growth has been what economists label slow “total factor productivity” (TFP) growth. That is, the problem has not primarily been a shortage of capital and labor inputs into production, but rather slow growth in output, given inputs. After growing at about 1 ¾ percent per year between 1996 and 2004, the TFP growth rate has dropped by half since 2005.
While TFP has fallen off rapidly, there is no basis for supposing that levels of labor input or capital are less than one would expect given the magnitude of the Great Financial Crisis. In fact, labor force participation rates in 2016 lined up closely with Federal Reserve researchers’ 2006 predictions. This suggests the lack of importance of the various factors adduced by the CEA’s report.
Second, perhaps the biggest surprise of the last few years has been the remarkably low rate of inflation even as the unemployment rate has reached 4 percent. Year after year, consensus and Federal Reserve Board forecasts of inflation have fallen short of predictions. If, as the CEA believes, our slow economic growth is a result of too little supply of labor and capital, one would expect surprisingly high, rather than surprisingly low, inflation as demand growth collided with constricted supply. This is the opposite of what we observe. On the other hand, the secular stagnation hypothesis that emphasizes issues on the demand side would predict exactly the combination of sluggish growth, low inflation and low capital costs that we observe.
Third, the essential idea behind the CEA’s thesis is that capital has been greatly burdened in recent years by onerous regulation, high taxes and a lack of availability of labor. This idea is belied by the behavior of the stock market and of corporate profits. Over the course of Obama’s second term, corporate profits increased by nearly 20 percent, and the S&P 500 grew by more than 50 percent. This hardly suggests a period of excessively increasing burdens on capital.
The observation that share buybacks appear to be the largest use of the proceeds from the Trump tax cuts points in the same direction. Costs of capital have not been responsible for holding back investment in the United States in recent years.
If the “Obamasclerosis” theory does not fit the facts of slow growth in recent years, what are its likely causes? This will remain a matter for active research. But my guess is that key elements include hysteresis effects from the financial crisis and associated recession, reduced application of innovation in the economy in recent years, and possibly the adverse effects of rising monopoly power and diminishing competition in a range of markets.
William “Bill” McDonough was my friend. We met in January 1993 when I took up my new position leading international affairs at the Treasury Department, and Bill was preparing to become president of the New York Federal Reserve Bank. For the next eight years we probably spoke twice a week and much more frequently in times of crisis. I learned more from Bill than I was ever able to express to him.
In some ways, Bill was from central casting’s traditional idea of a central banker, and he acted the part. I never saw him in public and in doubt. In other ways, he was a very different from the typical central banker.
- Most prefer to read a data table than a face. Not Bill. He knew how important relationships were when the chips were down and invested in them every day.
- Most see the world in terms of global generalities. Bill cared about national particularities from native languages, to local rules, to culture. It made him a uniquely trusted figure, especially in Latin America but also around the world.
- Most are stern and serious. I always picture Bill with a smile on his face as he explained to me what you had to grab to get hearts and minds to follow. He took what he did plenty seriously but he never took himself too seriously.
- Most are pragmatists. Bill was too, but he was also a moralist. He knew that he lived a lucky life and he never forgot his good fortune. And he never let his friends forget that they too were, for the most part, highly fortunate and had obligations to those whose luck had been less good.
History alters perspectives. Some of Bill’s most important policy thrusts look more clearly right today than they did at the time. Bill was on to what we delicately call agency issues in finance before it was fashionable, as he warned about compensation practices. He was prescient on issues of systemic risk and capital adequacy. And his handling of Long-Term Capital Management, a hedge fund, presaged contemporary discussions of orderly workouts in important respects.
Gerry Corrigan had a worthy successor and Tim Geithner had a worthy predecessor in William McDonough.
I treasured Bill’s humor, wisdom and loyalty in equal measure. In those years of the Mexican financial crisis, the Asian financial crisis, a struggling Japan, and an ultimately defaulting Russia, Bill’s earthy, forceful warmth was a wonderful counterpart to the more abstract and analytical Greenspan in the conduct of financial diplomacy. Millions who never knew his name lived better more secure lives because of what he did.
May he rest in peace.
Yesterday in Davos, Secretary Mnuchin left the impression that he might be reversing 25 years of US Treasury strong dollar policy by asserting that, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” The dollar then had its biggest one day decline in nearly a year and bond yields rose. Commerce Secretary Ross later joined the fray claiming that the US strong dollar policy was unchanged but this did not affect markets. continue
The world is going through a huge health transition, where the problems of the six billion people who live in emerging markets are increasingly the problems of the one billion people who live in rich countries. For the first time in history, more people suffer from eating too many calories than too few. Improving global health is no longer primarily about combating infectious diseases. continue
On Monday, The Washington Post published an article by Casey Mulligan and Tomas Philipson attacking Lawrence Summers’s statement that “thousands” of individuals would die if the Republican tax bill became law. Summers reached his estimate after carefully reviewing the literature and consulting with health economists Jonathan Gruber and Mulligan and Philipson’s University of Chicago colleague Dean Kate Baicker, who has published a number of influential studies on the effect of health insurance on health. continue
Susan Collins is wrong to say that the tax cuts will pay for themselves, despite the economists she cites
I suggested on Friday when it became clear that the tax bill would pass that “thousands would die.” In light of my sharp criticisms of other economists claims regarding the tax bill, some have asked whether my statement is well grounded. I believe so, but this should be open to debate.
In reaching my judgement I relied primarily on work by Kate Baicker, a former colleague now serving as Dean of the University of Chicago’s Harris School of Public Policy. Baicker served at the CEA during a Republican administration, so I judged that any political bias would operate against the conclusions I drew. continue
We appreciate that in response to our questions you clarified a number of points in your letter to Treasury Secretary Steven Mnuchin and, in particular, that you are backing off the statement in your original letter that “the gain in the long-run level of GDP would be just over 3%, or 0.3% per year for a decade.” As you state in your response to us, “We did not offer claims about the speed of adjustment to a long-run result.”
The only three studies you explicitly called out in your original letter do, however, provide specific estimates of the speed of adjustment that would imply that a 3 percent increase in long-run output would increase the annual growth rate by a 0.1 to 0.2 percentage point a year for the next decade — rates of growth that would not come close to paying for the cost of the proposed tax cut.
You recently wrote an open letter to Treasury Secretary Steven Mnuchin quantifying the economic impact of tax reform. We are interested in and surprised by your analysis. We share your commitment to the idea that well-designed tax reform can make the economy stronger and that careful economic analysis is essential. And we know that you all share our belief that such careful analysis is well served by discussion and debate of these issues that is at least as frank and vigorous as what we are all accustomed to in the average economics seminar. To that end, we think it would be useful to lay out some of the questions we have about your analysis: