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Workers

Larry Summers' Warnings and the Robots Taking Our Jobs

In a Washington Post column this morning, Larry Summers rightly points out that there is little reason to believe that President Trump has much to do with the US economy's relatively good performance over the last year. As he notes, most other major economies have seen even larger upturns relative to their predicted growth path.

In addition, it is worth noting that some of the uptick in the US may simply be due to the continuation of the Obama–Yellen recovery. As Jared Bernstein and I pointed out last month, there is reason to believe that the tightening of the labor market may lead to an uptick in productivity growth. There is some preliminary evidence that we are now on a trend of faster growth.

The place where I would differ with Summers is his dire warnings about the next recession, which surely will come at some point.

"If and when recession comes, the world will have much less room than usual to maneuver. From a narrow economic perspective, there will be much less room than the usual 500 basis points of space to bring down interest rates. There will also be much less space for fiscal expansions than there was when countries were less indebted."

Summers is right that the Fed will again have to rely on unorthodox monetary policy, such as quantitative easing, to provide a boost in the next recession. (This is why many of us have argued for an inflation target higher than 2.0 percent.) However, it is not clear that there actually will be less space for fiscal expansion.

The limit for countries like the United States, which have their own currency, is the point at which spending overheats the economy and leads to inflation. Since the point of stimulus is to boost the economy out of a recession, there is no reason we would want to get to this point in any case.

CEPR / January 22, 2018

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Lessons in Economics for Bret Stephens: Apple and Donald Trump's Big Tax Cut

We all know about the skills shortage. Many employers can't find workers with the necessary skills. For example, the NYT can't find columnists who understand economics, so they had to hire Bret Stephens instead.

Mr. Stephens is angry that many people won't join him in celebrating the decision by Apple and other big companies to repatriate foreign earnings back to the United States. He tells readers in his column, "Clueless Versus Trump":

"Apple’s announcement on Wednesday that it will repatriate most of the estimated $274 billion that it holds in offshore earnings is great news for the United States. Uncle Sam will get a one-time $38 billion tax payment. The company promises to add 20,000 jobs to its U.S. work force, a 24 percent increase, and build a new campus. Another $5 billion will go toward a fund for advanced manufacturing in America.

"C’mon. What’s with the long face?"

There is some real world confusion here, most of it on the tax side. The basic point here is that Stephens doesn't seem to have a clue why the government taxes in the first place. He wants us to celebrate the fact that Apple is paying $38 billion to the Treasury. Wow, are we all rich now?

How would the world be different if Apple still held its money overseas and we had the Fed credit the government with another $38 billion to count against its debt? If Mr. Stephens can see the difference, perhaps he can use another column to tell us, but the reality is the world would be little different in that scenario.

CEPR / January 20, 2018

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Former AIG Director Martin Feldstein Warns of Stock and Housing Bubbles

That's one of the things we learn from reading Robert Samuelson's Washington Post column today, although Samuelson identifies Feldstein only by his professorship at Harvard, not his moonlighting work on AIG's board. (In addition to requiring a massive government bailout during Feldstein's tenure as a director, AIG was also rocked by an accounting scandal that forced the resignation of Maurice Greenberg, its longtime CEO.) I'm one of those old-fashioned types who think that track records should matter in assessing the accuracy of economists' assessments, which is why it is appropriate to mention AIG here.

While it would have been enormously valuable if a person of Feldstein's prominence had warned of the housing bubble back in 2003 or 2004, before it had grown so large as to pose a major threat to the economy, his warning now is off the mark according to some of us who did see the earlier bubbles. High stock prices and housing prices are justified by extraordinarily low interest rates we have been seeing in the last decade.

While this could change (interest rates could rise) it would not be nearly as harmful to the economy as the collapse of the housing bubble in 2007–2009 or the collapse of the stock bubble in 2000–2002. Unlike in those two earlier periods, the high asset prices in these markets are not driving the economy. Investment and housing construction are not especially strong, so there is no reason to think they would plummet even if prices in both markets were to fall 20 or 30 percent. Consumption is somewhat high and could fall back 1–3 percentage points of GDP in response to the loss of wealth implied by these sorts of declines. That would slow growth, but need not lead to a recession.

CEPR / January 15, 2018

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Taxing Money: The Goodfriend Approach to Monetary Policy

At a time when the inflation rate has been consistency been well below the Federal Reserve Board's 2.0 percent target, Donald Trump has nominated Marvin Goodfriend to fill one of the Fed's vacant governor positions. Goodfriend argues that the Fed's major policy failure has been that it has inadequately convinced the public of its commitment to fighting inflation.

This seems more than a bit otherworldly, but in the era of Donald Trump, anything is now possible. In Congressional testimony given last year Goodfriend complained:

"If in years past the Fed had been fully committed to price stability as embodied in an inflation target, retirees would be in a much better position today. Years ago, households would have been advised and willing to hold a significant share of their lifetime savings in long-term nominal bonds paying a safe nominal rate of interest. Households could have counted upon the fact that the nominal return would have been locked in purchasing power terms. The promised nominal interest rate, having incorporated a 2% inflation premium to offset the steadily depreciating purchasing power of money at the Fed's inflation target, would have delivered a safe long-term real return upwards of 3% per annum.

"Instead, the Great Inflation called the Fed's commitment to price stability into question as it decimated the real return on long term nominal bonds. Responsible households have since steered away from saving in long-term nominal bonds to protect themselves from inflation risk. To avoid inflation risk, households have shortened the maturity of their interest-earning savings and reached for more return in equity products, forced to accept the risk of ultra-low short-term interest rates and volatile equity prices in the bargain."

This one is worth stepping back from and taking a deep breath for a moment. We have just gone through a long period following the Great Recession in which the unemployment rate was needlessly kept higher than necessary primarily due to lack of adequate fiscal stimulus, but also a monetary policy that was less aggressive than it could have been in trying to boost demand.

CEPR / January 14, 2018