Tuesday, January 5, 2016

Baker and Bernstein on Growth

I couldn't read Dean Baker's The Effort to Divert Class War Into Generational War: Lessons On Economics You Won’t Get from Jeff Bezos. Heck, I could barely get through the title. But Jared Bernstein's brief remarks on Baker's post interested me:

... as Dean and I argue in Chapter 4 here, the most reliable way to reduce the debt is to run the economy at full employment.


Bernstein's "here" links to a 115-page PDF he wrote with Dean Baker: Getting Back to Full Employment. I couldn't read 115 pages if you paid me. Thankfully, Chapter Four (which Bernstein mentions) is only ten pages long. Pages 46 to 55.

I like the opening. It looks at the economy of the early 1990s and the Clinton years:

While there is a case to be made that the high deficits of the early 1990s were raising interest rates and reducing investment, the budget did not get to a surplus because of spending cuts or higher taxes. It got to a surplus as a result of economic growth and low unemployment, delivered, as it happens, by an unsustainable and unpredicted stock bubble. This latter point is important since it shows that, though there may both be wise and foolish ways to get there, growth and low unemployment are good for the federal budget.

I think that's about right. (Not the part about deficits and interest rates. I don't know about that. But the rest.)

Okay. On page 49, Baker and Bernstein ask a question:
The United States had experienced plenty of years of economic growth in the postwar decades through the 1990s, and yet deficits rose. Why were the late 1990s different?
Why were the late 1990s different? Here is my answer:

Graph #1: Potential GDP shows a full percentage point improvement between 1993 and 2000,
in response to the reduced ratio of accumulated debt to circulating money.
Bernstein and Baker's answer is that economic growth improved, and that's how the budget got balanced. My answer identifies the source of the improved growth.

B&B (page 49):
If the Federal Reserve had raised interest rates to slow the economy and prevent the unemployment rate from falling below the accepted range for the NAIRU -- the "noninflationary" unemployment rate -- the deficit in 2000 would likely have been close to the level predicted by CBO, and we would not have seen budget surpluses. Instead, the Fed allowed the unemployment rate to fall below generally accepted estimates of the NAIRU.

Yeah, but Greenspan was taking a chance by not raising rates. As Izabella Kaminska put it a few years back,

Anyone who has watched the 2011 Adam Curtis documentary series “All watched over by machines of loving grace” will remember the bit about Alan Greenspan becoming confused about America’s exceptional growth in the 1990s.

At the time, the data didn’t seem to fit the prevailing reality. The incredible and seemingly unstoppable growth Greenspan was seeing on the ground was at odds with his economic models, which instead were signalling an imminent rebalancing on the back of wage pressures and implied inflation.

Greenspan was taking a chance by not raising rates. Baker and Bernstein present their he didn't raise rates story as if it explains the improved growth. They suggest that the economy improved because Greenspan didn't raise rates. But this is just backwards. Greenspan decided not to raise rates because he saw growth improving. Greenspan didn't create that growth by not raising rates; he only allowed it to continue.

I made it to page 53. This is dreary reading: paragraph after paragraph explaining the pittances of savings that reduced Federal deficits.

Here we go. Page 54:
While this period of lower-than-projected deficits was in part the result of a confluence of events that are not likely to be repeated -- a speedup in productivity growth, lower-than-expected health care cost growth, and slowing inflation -- it is nevertheless the case that more rapid growth reduces the burden of the debt.

Bernstein and Baker don't think we'll see another speedup in productivity growth. That's because they don't know why we had the productivity speedup of the 1990s. They wouldn't know how to duplicate the experiment. I told you how: Reduce private debt, and increase the quantity of circulating money.

Actually, both those things are happening, and have been happening since the crisis. But there was no plan to reduce private debt. That just happened by accident, a reaction to the crisis. And the plan to increase the quantity of circulating money is working, sort of, but the money isn't circulating much among the people whose spending buys 70% of our GDP.

If policy doesn't drive these things and guide them, we will never manage to raise economic growth to the level where full employment prevails.

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