Friday, July 28, 2017

In reply to Mark Thoma

Half a dozen years back there was so much right-wing chatter about the threat of inflation (from quantitative easing) that it seemed the chatters wanted hyperinflation, just to show they were right about the economy.

It is a mistake to focus on one economic issue. It is a mistake, no matter the issue and no matter what wingnut is focused on it. It's not quite so bad these days, not yet at least, and I'm not sure it's only a left-wing phenomenon, but these days the chatter seems to be about impending recession.

In this case, it is definitely a left-wing phenomenon. "Maybe I’m wrong that hypocrisy doesn’t seem to bother Republicans these days," Mark Thoma says. Hey, whatever. At least he's not hiding it. But politics interferes with economic analysis, and weakens it.

Apart from Thoma's one-line conclusion -- "It would be hard to be less prepared for a recession than we are right now" -- there are a dozen paragraphs in the article. Six of the last seven of those discuss Republicans. And the seventh covers what will happen "if Congress overcomes gridlock and pursues austerity as a way of achieving its ideological goals under the false cover of helping the economy". Make that seven of the last seven.

Thoma's article is mostly politics. But he does have an interesting analysis and two good paragraphs about a change in the behavior of the unemployment rate. The unemployment rate. Thoma says:

Instead of reaching a low point and then leveling off for a period of time, it has tended to “bounce” off the low point and almost immediately begin rising again.

And if that is the case, then

The question is, if we are at or very near a new low point for the unemployment rate, how long will it last before it begins rising again?

Very interesting. But it is disappointing to see Mark Thoma fail to explain why we now get the bounce. And fail to consider whether the behavior of unemployment may have changed again, since the crisis and all. And it is most disappointing to see him treat such changes as acts-of-God. Reminds me of what "Adam Smith" said in The Roaring 80s:

Kenneth Boulding, the distinguished economist, wrote that in the Great Depression, economists wrote about unemployment as if it were a bad hailstorm; then the Keynesian revolution gave some hope that nations could do something about the 'economic blizzards' that had previously been considered as random as the weather.

Thoma says

Without much room to cut interest rates, and without support from the Trump Fed for other stimulative measures, there’s little the Fed will be willing and able to do in response to economic problems.

Rather than dwelling on dead ends, Mr. Thoma, look for alternatives.

Instead of depending on interest rate policy to encourage or discourage growth, take a moment to notice that half the time, interest rate policy and the tax code are at odds with each other. The tax code always encourages economic growth. The tax code never discourages credit use.

As an alternative to giving people a tax break for paying the interest they owe, why not offer a tax break for making extra payments on that debt? Give a tax break that accelerates the repayment of debt rather than encouraging indebtedness. Such a tax break could work better than raising and lowering interest rates. It is an alternative policy that could be used to help solve the problem that we are "without much room to cut interest rates".

The basic principle that underlies all of economic policy is this: We encourage economic growth by encouraging credit use. At one time, and for a long time, this principle led to effective policy. It no longer does. Why? Because credit use encourages debt accumulation.

Debt accumulation is an unintended consequence of pro-growth policy. But we have no policy designed to offset this unintended consequence. So debt has grown excessively.

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