For the next few posts I need to allude to an ongoing battle of ideas about what is troubling our economy and what solutions are available. I figured it might be a good idea to try and create some sort of topological map of the various clustering of ideas and policies that constitute these arguments as well as the overlap among them. This is a preliminary version of this map: I’d really appreciate your input about what is missing and how to make this better.
From those who think that the problem is related to demand and Keynesian ideas, there tends to be three areas of focus: fiscal policy, monetary policy and the debt hangover in the broken housing market. One can think all three are important – I certainly do – but most think one has priority over the others. Many will think one of the three isn’t in play or particularly useful as a focus of policy and energy. Here’s a rough map. Quotations are ideas, non-quotes are policies and parentheses are people associated with each:
This war of ideas is being fought in white papers and articles, and at academic institutions, policy shops and the blogosphere. As a general resources, here are the best one-stop resources online for most of the bulletpoints above:
Fiscal Policy as Expectation Channel: Woodford on Monetary and Fiscal Policy, Paul Krugman.
Quantatitive Easing: The World Needs Further Monetary Ease, Not an Early Exit, Joe Gagnon.
NGDP Targeting: Re-Targeting The Fed, Scott Sumner. The Case for NGDP Targeting: Lessons from the Great Recession, Scott Sumner. Market Monetarism: The Second Monetarist Counter-revolution, Lars Christensen.
Mass Refinancing: Economic Stimulus Through Refinancing — Frequently Asked Questions, R. Glenn Hubbard and Chris Mayer.
Inflation to help Deleveraging: U.S. Needs More Inflation to Speed Recovery, Say Mankiw, Rogoff, Bloomberg. Overcoming America’s Debt Overhang: The Case for Inflation, Chris Hayes.
Higher Inflation Target: Rethinking Macroeconomic Policy, Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro. A 2% Inflation Target Is too Low, Brad Delong.
Bankruptcy Reform/Cramdown: January 22nd, 2008 Testimony, Adam Levitin.
Foreclosure Spillovers: Foreclosures, house prices, and the real economy, Atif Mian, Amir Sufi and Francesco Trebbi.
Balance Sheet Recession: U.S. Economy in Balance Sheet Recession: What the U.S. Can Learn from Japan’s Experience in 1990–2005, Richard Koo.
Housing Backlog: There is a Boom Out There Somewhere, Karl Smith. Yes, Virginia, Our Housing Stock Is Now Way, Way Below Trend, Brad Delong.
Debt-for-Equity Swaps: Why Paulson is Wrong, Luigi Zingales.
Debt, Deleveraging, and the Liquidity Trap: Debt, deleveraging, and the liquidity trap, Paul Krugman. Sam, Janet and Fiscal Policy, Paul Krugman. Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery, Atif Mian and Amir Sufi.
The flip-side to a demand crisis is a supply crisis, and there’s been a large effort to explain our high unemployment and below-trend growth as the result of supply-side factors. Having surveyed the arguments, I’ve split them into two categories. There are those who think that the government has created an increase in uncertainty. This is from a combination of deficits that scare bond vigilantes/job creators, new regulations that have killed all the potential new jobs as well as the government creating disincentives to work. The second area of focuses is on the productivity of the labor force, with special emphasis on skills mismatch, the characteristics of the long-term unemployed and the idea that something has changed fundamentally in our economy that will keep so many unemployed for the foreseeable future.
I’m making the productivity circle conceptually expansive enough to include “recalculation” stories, though I suppose I could add a third circle in the next version. I tend not to find these arguments convincing, but here are the arguments made in full as best as I could find them online:
European Policies: The U.S. Recession of 2007-201?, Robert Lucas. The classical view of the global recession, Gavyn Davies.
Expansionary Austerity: A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked, AEI. Large changes in fiscal policy: taxes versus spending, Alesina and Ardagna.
Liquidate the Homeowners: Are Delays to the Foreclosure Process a Good Thing? Charles Calomiris and Eric Higgins.
Stimulus is Sugar: Geithner Finds His Footing: Zachary Goldfarb.
Two-Deficit Problem, Bond Vigilanties: Growth in a Time of Debt, Carmen M. Reinhart and Kenneth S. Rogoff. Spend and Save, Noam Scheiber.
Great Vacation: Compassionate, But Inefficient, Casey Mulligan. The Dirty Secret of Unemployment, Reihan Salam.
Long-Term Unemployed: Potential Causes and Implications of the Rise in Long-Term Unemployment, Andreas Hornstein, Thomas A. Lubik, and Jessie Romero. 10 Percent Unemployment Forever?, Tyler Cowen, Jayme Lemke.
Great Stagnation: The Great Stagnation, Tyler Cowen.
Patterns of Sustainable Specialization and Trade (PSST): PSST vs. the Aggregate Production Function, Arnold Kling.
Labor Mobility: Housing Lock is not a Major Part of this Crisis, Plus Scatterplots of Deleveraging!, Mike Konczal.
Health Care, Financial, Reform: Activism, Alan Greenspan.
So what did I miss? What should go in the next version of this chart?
Rortybomb 
How about a left/green version of the supply side problem:
1) We’re running out of fossil fuels. More expensive energy squeezes middle class households and reduces their buying power. (John Bellamy Foster; Gus Spaeth; Tim Jackson)
2) Instead of making productive investments in infrastructure, we’ve allocated our science/math talent to finance, which just shuffles money around. (Cohen/Delong in The End of Influence; Umair Haque, New Capitalist Manifesto). The subsidies to finance are hidden; Solyndra is shouted from the rooftops. Expect more misallocation.
3) Other government-subsidized sectors are also being captured by the groups best able to lobby, rather than the most productive groups. (Maggie Mahar, Money-Driven Medicine; Priest/Arkin on Top Secret America; virtually any objective analysis of telco/cable regs of the past decade). Interest groups leverage past victories to pay for more influence in the future. (http://is.gd/I1u4r9)
Of course, many of these supply side problems very quickly turn into demand side problems. Households squeezed by high energy/health costs can’t spend on other things. The money shuffling has led to leverage that unnaturally inflated housing costs, again reducing buying power of the middle class. (And as Krugman recognized in his Hysteresis Begins column in SEJ, the reverse happens, too: keeping someone unemployed for 5 years by failing to generate demand for his services is a good way to create a “zero marginal product worker.”)
Cheers, this is a terrific resource. What may be helpful (albeit at the risk of cluttering up the Venns) is to perhaps include pieces that disagree with a position. So say, have a circle next to “Fiscal Policy” that includes some broad ideas from the folks in the uncertainty/productivity camps as to why they think fiscal policy is pointless, and vice versa. A lot of this may overlap with the explanations put forward (“can’t stimulate demand because this is a problem of uncertainty, not deleveraging”), but it could help integrate everything together.
I like it. However, where does the following narrative fit into your venn diagram:
(1) Government policy over the past 30 years has shifted income from the bottom 90% to the top 1%. (You can argue whether this was deliberate or accidental.)
(2) Since the (super-)rich have a lower marginal propensity to consume, this has lowered demand growth.
(3) We papered this over by adding leverage to offset the lost demand. This was partially successful (real GDP growth of 2.5% over the last 30 years vs. 3.5% in the 30 years before that, when the income distribution was relatively constant).
(4) We have hit the wall in terms of our ability to add leverage.
(5) Thus, the only way to get the economy growing again in a healthy way is to shift income back from the top 1% to the bottom 90%.
This narrative says that while supply side arguments clearly call for more of the same stuff that got us here, the demand side arguments largely call for economic bandaids when we need massive political surgery.
It strikes me that what we ought to be looking at for solutions is examining the process that reduced the concentration of wealth between 1928 (the last peak) and 1950, and replicate it as much as possible (without having a great depression or genocidal world war, hopefully).
I didn’t see my currently favored hypothesis on the list:
Recent reporting on the Census results showing the dramatic drops in real incomes in the middle and bottom deciles has made me double-down on the view that we are indeed facing a structural problem … but I’m not talking about structural labor market problems that might or might not be operative. I think we are experiencing an “income crash.” A healthy economy in which the workers and the consumers are the same people needs to maintain a decent balance in the way output flows as income to its workers. If it tolerates a trend over time of ever-higher proportions income flowing into small concentrations of the population, it raises the ratio of saved output to consumed output. Eventually the society can’t sell all of its own output and puts some of its own productive operations out of business.
We have an anchor on our output not just because people are unemployed and because the employed are experiencing a temporary need to de-leverage, after which time they would presumably return to old patterns, but also because the pre-recession volume of consumer spending was built on inherently unsustainable debt levels, and people have re-calibrated down to lower levels of consumption.
If this hypothesis is right, then the policy need is not just a question an immediate-term fiscal “stimulus” to jump-start the economy. There is a persistent structural income distribution drag that has to be dealt with. Tax policies can surely help. But there are other legislative steps that can be taken to impose healthy constraints and incentives on income flows. And perhaps the fiscal and monetary authorities need to target the GINI coefficient, or some other measure of income distribution.
And just one side-comment. Because our recession/contraction/whatever began as a disruption in the financial sector, I think a lot of the blogging and punditry has focused way too heavily on monetary effects, monetary disruptions, and monetary policy. We need to refocus on the political branches of government, and also avoid the bad habit of lumping everything those branches of government do in the realm of economic policy under the rubric “fiscal policy.” The political branches have enormous regulatory powers to influence economic activity in many ways, powers that go beyond decisions on taxation and spending.
I think that’s exactly right. There are two economies now: a stratospheric plutonomy, and a a mass that competes ever more fiercely for shrinking pie. Some of the plutonomy are increasing productivity, but they’re not sharing the gains more widely.
“. . . focused way too heavily on monetary . . . monetary . . . and monetary . . .”
Well, the keys may be up the block but the lamp post is down here.
What is missing is evidence and logic.
“Unemployment is high, so there must have been a structural change” argues from effect to cause.
There was no regulatory uncertainty related to 2007 – 2008, when the recession began. Business owners today indicate their uncertainty is primarily related to a lack of customers.
We have a general glut– excess supply for everything except money (and near-money substitutes)– and people are proposing explanations that ignore the problem.
Ah, me! You say “topology” and I got so excited. I was expecting 3-manifolds, not Venn diagrams!
An admirable resource, nonetheless, just not staggeringly mind-blowing. But I do think noompa has the right idea about how to realistically advance–connecting ideas to their others. And, of course, Frank Pasquale and Dan Kervick both make excellent points. We need more than just the two broad camps mapped out so far. But this is a very good start to build on.
Typo in Housing Policy and Debt Hangover oval: should be “principal writedowns,” NOT “principle writedowns.
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Solutions to our economic woes.
Price transparency in medicine.
Medical care for Americans is very expensive, and the pricing is very unpredictable. Consider purchasing an item on Amazon.com. You can find the item easily, you can sort items by price or quality, you know the exact price, the service is free until you make a transaction, you can drill down for details about any product, you can choose and determine any ancillary services such as gift wrapping or shipping, you can leave reviews, and after the transaction, Amazon emails you to inquire if you were satisfied with the transaction. If such a website were available for medical consumers, including offshore and interstate medical solutions, they could shop for medical services as they shop for everything else. This would work in cooperation with insurance companies, so a customer could get a number from the insurance company regarding coverage and co-pay. Empowered customers(patients) shopping for price and quality, would drive down medical prices with no regulatory change at all.
Homework requirements for unemployed.
It is tough to make the jump from unemployment and its many benefits to a first job. So, we should require folks on unemployment or welfare to perform 12 hours a day of homework, either Internet based or homework from textbooks. No teaching or tutoring should be available. The work should reflect the abilities of each student for self-study. Frequent, over the phone testing would evaluate students. Those making an effort get their full benefits, and those who chose not to work would get much less.
Currency stability through commodity price supports, including vouchers.
Older folks are scared that the dollars they have saved will be eroded through inflation, impoverishing them. If the government revives price supports for a basket of commodities, such as wheat, corn, plywood, coal, and vouchers for routine medical, dental, and legal services would provide support for the value of a dollar, and create job opportunities.
Home mortgage pre-foreclosure activity, plus quick foreclosure auctions.
If a home owner is starting to struggle with home mortgage payments, the bank should be able to provide options such as co-op home ownership, renting rooms out to boarders, renting room and services out to elderly boarders, or if things are not working out, moving to an apartment. The actual foreclosure should be completed within two weeks and the house auctioned off to a new owner. No more shadow inventory and empty houses.
Get the government out of home, business, and student loans.
Permit residents of a community to invest in houses, businesses, and students in their own community, and make such investments available to trade. End government activity in these mortgages.
Super easy first round of financing.
It should be quick, inexpensive, and easy to get the first round of an IPO. We should reduce the regulatory burden for the early stages of a company.
EPA and Federal regulatory reform, eliminate some regulations, make others easy to repair.
The level of EPA regulations and oversight should be minimized, and what regulations remain should be subject to quick fix rather than big litigation. When you get your car inspected and it fails, they don’t impound your car and start a lawsuit. You go get the taillight fixed, come back later that day, and get your sticker. This is how the EPA should operate.
Make it easy to fire someone.
It should be possible and easy to fire any employee, without cause, without any delay.
Do not change the tax code, except reduce corporate tax rate for companies for what they produce domestically, and an increase for all taxes of companies that shift profits overseas, such as GE.
Close the Department of Energy except for massive development of a change over from Uranium to Thorium for nuclear energy.
Get government out of the education, business, and student loan business.
Subsidize student success in online high school, college, and graduate school degrees.
Return the wall between banks and investment houses.
Get government out of the car business.
Return the rule of law to bankruptcy.
Get the federal government out of business subsidies.
Get the government out of passenger rail.
Improve airport traffic with incentives for airlines to fly during off-peak hours, serve smaller airports, and use larger planes for more capacity.
Use the federal gas tax only for highway maintenance.
Pay more attention to water projects and flood control.
California and Louisiana waste federal water control funds. Army Corps of Engineers did a bad job with Mississippi floods. Gulf Coast and East Coast flood control needs some more organization. National water supplies need an upgrade.
Get the federal government out of the housing business.
Let local banks do their job.
Let insolvent large banks go out of business in a controlled way.
We can divvy up assets to smaller banks, and let banks’ shareholders get the loss.
Help SEC get rid of HFT by having periodic trading, trades every half second ends the HFT advantage.
We actually have a four tier military.
We have a CIA based counter terrorism force of roughly 60,000. This force should be increased and supported. We have an active military fighting presence in Iraq and Afghanistan. Our emphasis should be on minimizing US casualties by use of robotics, mercenaries, and economic aid. The sea lanes need to be patrolled by our Navy, but they do not need cold war level forces to do this. Our many bases around the world are there to provide the capability of a quick response, and should be manned by inexpensive and minimal force levels. Emphasis on procurement should be on robotics and high tech.
We should limit foreign aid to food, shelter, water, medicine, and sewage management, and foreign aid should be direct from the US to the final recipients.
Make no changes to Social Security or Medicare, except to root out wasteful practices and remove ineligible recipients.
@ Dan. Isn’t the first part of your thesis basically underconsumptionist Marxism?
I think the supply-side chart needs a third circle. Some of the stories in your productivity heading blame high productivity for the recession while others blame low productivity.
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Isn’t the zero lower bound fundamentally a monetary problem (the Fed can’t lower interest rates) rather than a fiscal one?
MIke
This is a fantastic taxonomy, because it breaks down the policy prescriptions/major schools of thought in a way that the highly over-implied “Left-Right” framework doesn’t even come close to doing!
Could break it down further by various public intellectuals/economists/ bloggers as well.
For instance, it’s fascinating that many of the Neo-Classical/Neo Keynesian synthesis folks (“mainstream economics”) tend to be right in the center of the Demand side/expectations chart, favoring debt-writedowns and Fiscal and Monetary stimulus (Krugman/Eggertsson) at the same time. (I believe you are of this position?) Pretty much all the professional community from Mark Zandi, the guys from, ECRI, NBER, Macro-Advisors, CBO, IMF (at least in their research dept), are something close to this position, to the extent they publicly signal policy positions, either explicitly or implicitly into the assumptions built into their models.
Additionally, it’s also interesting how many traditional allies go separate ways, like Stiglitz being against QE, along with blogers like Yves Smith and your colleague Marshal Aureback – on the grounds of financial asset price inflation / volatility, but folks like Brad Delong and Krugman favoring QE along Liquidity Trap arguments
Well done sir!
@SIMON. You might be right. But I just haven’t read enough Marx to say for sure. Maybe the wrinkle in what I wrote is that it’s not based just on the idea that there is a big difference between capitalists and workers, and capitalists are impoverishing their workers by exploiting surplus value from the workers through profits. That might be part of it too. But I was thinking also in terms of a model in which there is a great variety of different kinds of “workers” who start of with different levels of income due to market decisions. The different levels of income give the richer workers greater political and institutional power, and more bargaining power, and that drives the income gap even farther apart over time.
Of course, many people are investors of one kind or another in a capitalist society, and are thus at least part-time capitalists deriving rental income from their investments. And the richer you are, the more you save and the more of these rents you collect. It seems to me that a lot of the political energy in the western countries since the start of the recession has gone into protecting creditors and their rents from the clutches of the unemployed and the indebted.
Minsky and the inherent instability of high finance is missing.
Stay inforvmatie, San Diego, yeah boy!
BTW Mike, this post is awesome.
Thanks everyone!
UPDATE:
==
Added Alan Greenspan’s Activism paper he did for Council of Foreign Relations under the supply-side health care, financial, reform title.
Added Atif Mian and Amir Sufi’s Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery to the Debt Deleveraging part, since that could use an empirical counterpart to the theory (and it’s a great piece).
Next version will add the Evans Rule under monetary policy.
==
Also:
– I’m trying to think of a way to add an “effective demand” bullet – akin to what Frank, Dan and deschain have brought up. I was originally going to put an effective demand bulletpoint in the fiscal circle but in a way it’s different than what the other parts of that are getting to. Does anyone have a good source to link to on that? Henwood’s post on the limits of monetary policy?
– Yglesias that’s a good point, productivity became a bit of a grab bag. I think I can actually just sort them in the circle in the next draft, with high productivity at the top of the circle and low at the bottom.
– Ben what’s the best way to incorporate Minsky?
– Paul, sorry to disappoint, was just excited to use the word!
– Steve, yikes. Thanks for catching the typo, will be fixed in next version. I’m just happy there’s only one typo.
For Minsky, go directly to Steve Keen. It is, of course, the immense debt bubble that has created the current mess and prevents any recovery worth the name. This is the level of private debt fomented by Minsky’s Ponzi financing stage. I have no idea why the ideas of the extremely wrong are included. Economics may not have laboratories, but for the Ptolmeic Supply Siders to still get a hearing is one of the reasons economics is not contributing to a solution.
For Minsky, I imagine there must be something at the Levy center site.
What about John Cochrane’s crazy model?
Click to access understanding_policy_EER.pdf
http://noahpinionblog.blogspot.com/2011/07/john-cochranes-sum-of-all-right-wing.html
Here’s a recent working paper by Randall Wray with a Minsky-inspired policy recommendation:
Click to access wp_681.pdf
On the “Supply Side:” Two works should be included
1) Thomas Sowell’s Housing Boom & Bust
2) Thomas Wood’s Meltdown
On support for demand and public investment through fiscal policy, from one Post-Keynesian perspective, there is this from Mario Seccareccia:
Click to access BWpaper_SECCARECCIA_040811.pdf
This Gennaro Zezza paper from March 2010 on the need for deficit-driven spending still seems relevant:
Click to access sa_mar_10.pdf
And Steve Keen has a paper in the Real World Economics Review, titled “Economic growth, asset markets and the credit accelerator” on the role of private debt and the need for – but political unlikeliness of – debt abolition.
One thing that I haven’t seen yet is mention of international factors, which seem germane. Certainly there’s been some blame assigned to the weak Yuan, the global savings glut, trade deficits, etc.
Somewhat related is the question of high oil prices as a drag on the US economy.
Maybe throw in contagion effects from the PIGS sovereign debt crisis via financial liberalization and trans-Atlantic asset holding into a kind of generalized solvency crisis.
Just my two cents from the peanut gallery.
Randall Wray really disturbs me. The whole MMT theory seems very cultish, and if I’m not mistaken he recommends a federal government jobs guarantee at minimum wage, which would destroy incentive for private sector employment and has only occurred in totalitarian societies till this point. Minsky may be right about finance, but that solution just will not do.
“The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years. The objections which are raised are mostly not the objections of experience or of practical men. They are based on highly abstract theories – venerable, academic inventions, half misunderstood by those who are applying them today, and based on assumptions which are contrary to the facts…Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense.” -JM Keynes
not calling you a conservative or anything, but the claim that eliminating involuntary unemployment is something only ‘totalitarian’ states do is lazy. i believe argentina has implemented something like this, not exactly totalitarian
we could also implement a job guarantee program at a discounted minimum wage to lessen its effects in the low-skill labor market
I don’t understand why the job guarantee would destroy the incentive for private sector employment, so long as the wage is not too high. To me the plus of the job guarantee is that it would help restore worker bargaining power and redress income imbalance, by ending the buyers’ market for labor. Employers would have to offer a serious wage to induce people to work for them.
MMT as an internet phenomenon can be cultish, I agree. But the real economists in that group are part of a broader post-Keynesian universe in which there is a lot of important debate and constructive disagreement.
Thanks Dan, I’ll check it out. I know Minsky is great on explaining how we got into this mess through an out-of-control financial system, but I’m not sure if there is a Minsky-specific way out (that, on first approximation, would differentiate from the Koo crowd). I’ll see what I can find.
That’s a good point, Mike. I think your right that the lessons of Minsky’s stuff are more about what we need to do to avoid the next financial crisis.
I don’t know that Minsky provides insight into what should be done to avoid the next financial crisis (except at such a high level of abstraction or generality as to be practically of limited value — be vigilant or somesuch) — what he provides is an analytic framework for the high level postmortem of the next financial crisis (and perhaps the next after that, and so on)
Taryn, yes! We need to get John Cochrane and Taylor represented here, but they’ve bounced from crazy idea to crazy idea that I wouldn’t know where to pin them down.
Lee, is Meltdown a properly Austrian book? I was trying to figure out how to treat the Austrians without giving them (and PSST) their own “recalculation” circle, so I just made a note of it.
Cochrane and Taylor can be identified with “whatever”
Dan & deschain, I agree with knobs on but I think that for Mike’s purposes we’re covered in the green ovoid by “Getting Money To Those Who Will Spend It” and in the purple ovoid by deleveraging; though perhaps the linkage could be identified along with that between the Minsky end point and the plutocratic sequestration of economic activity.
Mike, clearly the way out for the above convergence is green/purple fiscal/regulatory.
AlanDownunder,
I view ‘getting the money to those who will spend it’ as more of a stimulus-type argument, i.e. a short/intermediate-term fix until the economy mends itself. My belief is that we need to fundamentally restructure the way the economy distributes the gains from productivity, or all stimulus will do is prolong the agony and continue to ramp total leverage. Stimulus is clearly better than austerity but I don’t think it’s nearly enough.
Interesting post. I’d add Simon Johnson’s discussion of fraud. I’d mention improved corporate governance. IT has improved Board and Executive control over middle managers. Just to name a few: Global firms can shut down hiring worldwide in a day, HR can manage a firms average percent pay increase to the hundredth of a percent for the entire workforce. You might consider demographics: low population growth, aging workforce, and increased longevity. James Galbraith has some thoughts on policies to address demographic issues. There’s a lot of discussion on reform of the educational system and government unions.
Right – that is a trick. Incorporate each one separately I suppose (shouldn’t “crowding out” be somewhere in the diagram?)
Also, there’s Barrow’s and Mankiw’s most recent (same problem probably):
http://online.wsj.com/article/SB123258618204604599.html
Also, what about negative rates (or are you including that in QE)?
http://www.ft.com/intl/cms/s/5d3f0692-9334-11de-b146-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F5d3f0692-9334-11de-b146-00144feabdc0.html&_i_referer=http%3A%2F%2Fen.wikipedia.org%2Fwiki%2FLars_E._O._Svensson
(By the way – it’s SUPER helpful that you’re getting this together in one place. Great work!)
Also, is the Rogoff/Reinhart 90% of GDP here?
It doesn’t make sense to put Housing on the Demand side only, as it is a symptom of the over-expansion of demand (over-stimulus) and a place where we are continuing to pump up values.
Taryn, great calls. Especially on “crowding out”, which can reference the Fama/Cochrane mess from 2009. That’s in the next version.
Added:
===
Per Taryn’s idea, I’ve included Growth in a Time of Debt for the Rogoff/Reinhart 90% thesis. Though I think they’ve put distance between themselves and that argument, the underlying argument – that there’s a threshold on debt/gdp, does the heavy lifting for the two-deficits and bond vigilante crowd.
Also added Rethinking Macroeconomic Policy, Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro, to the higher-inflation target, because that was a big deal when it came out in putting it on the agenda.
===
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I would suggest adding Modern Money Theory recommendations under fiscal and monetary policy. New Economic Perspectives has quite a few suggestions, with Warren Mosler, and Professors Kelton and Wray being the main go-to people.
This is really fun (which says something about me as a person, I’m sure).
Anyway, there were two “crowding out” arguments – Accounting Identity and Ricardian Equivalence, which might help you to capture some of the freshwater mess.
I threw out “negative rates” in part because I feel like Lars Svensson should be up there somewhere. IMHO, the old school 90s Japan worriers have been the most interesting and that includes Svensson (and Bernanke, but we know why he’s not involved in the policy debate). And also Adam Posen if you can find a way to get him on the board.
Mike, framing the issue in terms of fiscal v monetary policy IMO excludes the elephant in the room — the strategic decision by many US corporations and European multi-nationals to move their investment in the future to high growth potential markets in Asia and South America.
I’m a retired director level market research executive of a Fortune 500 consumer goods company. So I know why my company began divesting in the US in the 1980s.
1. Populations in America, Western Europe and Japan are aging. Populations
in South America and Asia are much younger, with higher growth rates.
Future growth requires switching resources to these market. And so we did,
shutting down many US factories, personnel and infrastructure to free up
capital for foreign investment.
2. We had well established consumer brands in the US and we decided to cut
back on marketing and advertising, accepting managed volume declines and
instituting productivity programs to expand margins on a declining volume
base. All to generate investment cash to send abroad.
3. Last, we recognized foreign production expanded our profit margins due to
not only lower labor costs, but foreign capital investment incentives, less
costly employee benefits and regulations.
For us, divesting in the US was very profitable. We could sell our big US brands in
the US and around the world at higher profit margins. Other big outfits adopted the same
strategy. Once we started down this path, we needed to keep on it. Or Wall Street would
punish our stock prices.
Conventional economics does not try to explain changes in job creation or wages by considering corporate strategies. Conventional economics ignores how big corporations
adopting an international profit maximizing strategy can hollow out national economies.
By focusing on academic economics explanations to define the situation (bad situation analysis), we’ve not identified the real cause of our stagnant job creation and wages.
And we limit our perspective to the Great Recession time frame. Which is wrong. Divesting in America is a decades old corporate strategy.
We can’t improve America’s economic future unless we think outside the current framework provided by academic economists and policy wonks.
Should Geithner’s “Welcome to the Recovery” be in the mix?
Geithner cites Rogoff/Reinhardt – so I think it’s part of the “Two Decifits” arguments.
And there might be something else; it’s a point Koo has been pounding on – the financial crisis and the balance sheet recession are different things and therefore, recovery from one, is not recovery from both. Koo argues that the V-shaped recovery we can see is really just a recovery from the financial crisis, but it does nothing for the balance sheet problems. Geithner’s “Welcome to the Recovery” kind of assumes the recovery from the Lehman shock was THE recovery. So, maybe there’s kind of a Two Crisis (Koo), One Crisis (Geithner) distinction?
In any event, I thought I’s throw out “Welcome to the Recovery” for inclusion.
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Wonderful, valuable post, but as everyone has said, just a start.
Note that the demand graphic is almost exclusively focused on solutions, while the supply graphic is mostly causes. The disconnect is that in some cases there’s a clear link between cause and solution (or vv), in other cases (Minsky, among others) there’s not. Perhaps that’s a better basis for the “topography” than demand/supply–theories where solutions attack and solve the cause, theories where the solution may not have any direct relation to the cause.
Am surprised to see no mention of the general category of “economy run into the ground by corrupt+opaque finance/rentier interests/political capture by rent-seekers”
Am also surprised to see no real focus on systemic risk within the financial world (i.e. housing/debt problems would be nasty but manageable, but systematic risk cuts off normal flows and causes exponentially greater damage than “normal” problems would.
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