Setting the Record Straight on Secular Stagnation: Don't get into a knife fight with Larry Summers?

This post takes on Joseph Stiglitz' critique of Summers "secular stagnation" theory as a cover for the Obama administration failure to win a bigger stimulus (public  spending to raise demand) after the 2008 crash. This is really an argument about the rights and wrongs of economic outcomes vs the possibles and impossibles of political  reality. But both of these guys are among the smartest economists around.

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Setting the Record Straight on Secular Stagnation

Sep 3, 2018 LAWRENCE H. SUMMERS
Echoing conservatives like John Taylor, the Nobel laureate economist Joseph Stiglitz recently suggested that the concept of secular stagnation was a fatalistic doctrine invented to provide an excuse for poor economic performance during the Obama years. This is simply not right.

CAMBRIDGE – 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.


THE MYTH OF SECULAR STAGNATION

Aug 28, 2018 JOSEPH E. STIGLITZargues that the concept was always merely a fig leaf for bad politics and flawed economic policies.

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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 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 kind 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 by the thinnest of margins, with doubts about its ultimate passage lingering 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 highly regrettable that after the initial Recovery Act, Congress refused to support a variety of Obama's proposals for infrastructure and targeted tax credits.

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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. And 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 JPMorgan Chase 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.

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John Case
Harpers Ferry, WV

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Skimpy postings for two weeks

Carol and I are on a Baltic Cruise for 2 weeks. Skimpy postings likely from the "boat". Cheers to all. 

John

Enlighten Radio:The Enlighten Radio Profundity period -- Sept 2 - 17

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The Impact of Higher Temperatures on Economic Growth [feedly]

The Impact of Higher Temperatures on Economic Growth
http://ritholtz.com/2018/08/the-impact-of-higher-temperatures-on-economic-growth/

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For Whom the Economy Grows [feedly]

Although the subject is the collection of statistics, this is a KEY Component --- breaking 'growth' and wealth and income into their class - based dimensions---in the "more socialism" direction. It enables the complete exposure of where CEOs are raking in the lions share of a firms wealth at the expense of its producers. Such stats give you the ability to tune tax and spending incentives to target problems more effectively. No more money losing, or natural resource blood cursed socialisms, please spare us.

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For Whom the Economy Grows
https://www.nytimes.com/2018/08/30/opinion/economy-gdp-income-inequality.html

"What's in a name?" asked Shakespeare. But hey, I'm an economist, so let me ask a somewhat different question: What's in a number?

Quite a lot, suggest Senators Chuck Schumer and Martin Heinrich. This week they introduced a bill that would direct the Bureau of Economic Analysis, which produces estimates of gross domestic product, to produce estimates telling us who benefits from growth — for example, how much is going to the middle class.

This is a really good idea.

Now, I'm not one of those people who think G.D.P. is a terribly flawed or useless statistic. It's a number we need for many purposes. But on its own it isn't an adequate measure of economic success.

There are a number of reasons this is true, but one key issue is that it tells you only what's happening to average income, which isn't always relevant to how most people live. If Jeff Bezos walks into a bar, the average wealth of the bar's patrons suddenly shoots up to several billion dollars — but none of the non-Bezos drinkers have gotten any richer.


There was a time when asking who benefits from economic growth didn't seem urgent, because income was rising steadily for just about everyone. Since the 1970s, however, the link between overall growth and individual incomes seems to have been broken for many Americans. On one side, wages have stagnated for many; adjusted for inflation, the median male worker earns less now than he did in 1979. On the other side, some have seen their incomes grow much faster than the income of the nation as a whole. Thus C.E.O.s at the largest companies now make 270 times as much as the average worker, up from 27 times as much in 1980.

A similar disconnect between overall growth and individual experience seems to lie behind the public's lack of enthusiasm for the current state of the economy and its disdain for the 2017 tax cut. G.D.P. numbers have been good in recent quarters, but much of the growth has gone to soaring corporate profits, while median real wages have gone nowhere.

But how do facts like these fit into the overall story of economic growth? To answer this question, we need "distributional national accounts" that track how growth is allocated among different segments of the population.

Producing such accounts is hard but not impossible. In fact, the economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman have already produced estimated accounts with considerable detail over the past half century. The main message is one of growth going disproportionately to the top and not shared with the bottom half of the population, but there are also some surprises in the other direction. For example, the middle class, while still lagging, has done better than some common measures indicated thanks to fringe benefits.



But there's a big difference between estimates produced by independent economists and regular reports from the U.S. government, both because the government has the resources to do the job more easily, and because people (and politicians) will pay more attention. That's why the Washington Center for Equitable Growth, a progressive think tank, has been campaigning for something like the Schumer-Heinrich bill.

So why not do this?

Some might argue that creating distributional accounts is tricky, that it requires making some educated guesses about how to pool different sources of information. But that's true of the process used to create existing national accounts, including estimates of G.D.P., too! Economic numbers don't have to be perfect or above all criticism to be extremely useful.

In a reasonable world, then, something like the Schumer-Heinrich bill would become law in the near future. In the real world, of course, the proposal will go nowhere for the time being — because Republicans don't want anyone to know what distributional national accounts might reveal.

By now everyone knows that conservatives routinely yell "socialist!" whenever anyone proposes doing something to help less fortunate members of our society — which is a key reason so many Americans now think favorably of socialism: If guaranteed health care is socialism, bring it on. But the right doesn't just cry foul at any attempt to limit inequality; it does the same thing whenever anyone tries to talk about economic class, or measure how different classes are faring.

My favorite example here is still former senator Rick Santorum, who denounced the term "middle class" as "Marxism talk." But that was just an especially ludicrous version of a general attempt on the right to suppress talk about and research into where the economy's money goes. The G.O.P.'s basic position is that what you don't know can't hurt it.

And to be fair, progressives like the idea of distributional accounts in part because they believe that more knowledge in this area would help their own cause. But here's the thing: Knowledge is objectively better than ignorance. And in modern America, knowing who actually benefits from economic growth is really, truly important. So let's make finding that out, and disseminating the results, part of the government's job.

Follow The New York Times Opinion section on Facebook and Twitter (@NYTopinion), and sign up for the Opinion Today newsletter.

Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman
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Why Transforming the Economy Begins and Ends with Cooperation [feedly]

Why Transforming the Economy Begins and Ends with Cooperation
https://www.nakedcapitalism.com/2018/08/why-transforming-the-economy-begins-and-ends-with-cooperation.html

Why Transforming the Economy Begins and Ends with Cooperation

Posted on August 31, 2018 by Yves Smith

Yves here. It's not hard to infer that I'm skeptical about what sound like one-idea remedies to complex problems. While Mondragon is a noteworthy exception, I wonder if many successful cooperatives have 150 people or fewer in them. The reason for fixating on that number is that various studies have found that is largest group you can have where everyone knows each other, and accordingly, an function without a formal hierarchy.

By Esteban Kelly,Executive Director of the US Federation of Worker Cooperatives. He is a founder and core trainer with AORTA, a worker co-op that supports organizations fighting for social justice and a solidarity economy through consulting. He has served on numerous boards including the Democracy At Work Institute and the National Cooperative Business Association (NCBA-CLUSA). Originally published atopenDemocracy

"When I heard about the green economy for the first time, a light bulb went off in my head. We can create businesses and jobs for ourselves." That's how co-op worker-owner Tim Hall explains his initial spark of inspiration. Eventually he joined together with other unemployed Boston residents to found CERO(Cooperative Energy, Recycling, and Organics), an award-winning food waste pickup and diversion service. The name is fitting, since "CERO"—which means "zero" in Spanish—seamlessly blends their zero-waste mission with a green jobs strategy of workforce development among low-skilled workers, especially immigrants and people of color.

Cooperatives provide a sustainable and accountable way of providing goods and services—and they can help to transform our economies before it is too late. They promise a tantalizing future of sustainable social enterprise, community control, worker self-management and workplace democracy that places economic decision-making back into the hands of workers and consumers. Could co-ops dislodge capitalism and loosen its chokehold on what feels like every facet of our lives, or will they themselves become co-opted?

At some point in the last 50 years capitalism corralled the power to define everything about how we think about economics. That's one of the benefits baked into being the dominant organizing force of the economy. But the bigger truth is that 'the economy' includes more than the profit-maximizing ethos of capitalism, just as 'democracy' isn't the property of Congress or parliament. In democratic societies (at least in theory) we have elected and accountable representatives for everything from parent-teacher associations and children's sports leagues to the general assemblies where members deliberate with each other in neighborhood associations and union halls.

The same is true for economics, where undemocratic, shareholder-controlled, profit-obsessed enterprises have come to be equated with the concept of business itself—and especially with commerce, money, mission and productivity. Cooperatives are for-profit businesses which operate in virtually every industry. They undergird global commerce, particularly in agriculture, energy, and local banking via credit unions, but instead of maximizing profits for their investors they are driven primarily by the interests of their members–– who may be producers on a farm, the residents of an apartment complex, the consumers of utilities and retail goods, or the workers in a factory. In co-ops the goal is to get a better price for farmers, more affordable housing for residents, higher-quality goods for consumers, and meaningful, healthy, fair-paying jobs for workers.

Is this inherently anti-capitalist? In a way, yes, because co-ops use capital to put people over profit, which inverts the profit-over-people logic of the current global economy. Worker cooperatives may be the most coherent alternative to capitalism as we know it because they put capital at the service of labor rather than the other way around. Some fall short of this ideal of course, and co-ops don't guarantee social justice by themselves (which is why we still need social movements), but the co-op model inherently prioritizes the good of the many over the benefit of the few.

Generally speaking, the cooperative economy is better described as 'a-capitalist' rather than 'anti-capitalist,' because it can prosper in both market economies and socialist economies like Cuba, which currently has about the same number of worker co-opsas the United States. But in its desperation to legitimize and stabilize itself, capitalism is eager to co-opt at least the superficial characteristics of the cooperative economy, much as it has co-opted sustainable business through greenwashingcampaigns over the last 20 years. Throughout the 20th century we have witnessed capitalism absorb cooperative elements into its structures in an attempt to reconstitute itself during its many crises.

At the same time, it's disappointing but necessary to point out that some of the world's largest cooperatives have managed to compete and survive against conventional businesses by mimicking the corporate cultures of late-capitalist firms. Who knew that American household brands like Land O'Lakesand Ocean Spraywere both cooperatives? And when was the last time you were invited to vote in a general membership meeting of your credit union?

What's more important than being 'pro- 'or 'anti-capitalist' is the recognition that cooperatives must figure heavily in any democratic, post-capitalist economy. This matters a great deal now, because while the contradictions and unsustainable nature of capitalism have become glaringly clear, many people struggle to articulate what will replace it. The exception is a rising consensus that cooperatives (along with small independent and family businesses) will replace the capitalist firm as the core non-governmental form of enterprise in the future. Cooperatives are an essential instrument of economic democracy.

But to succeed in this way, co-ops must stay true to the mission and guiding values. Employee-owned cooperatives force us to confront our own desire to do what it takes to live justly, sustainably, and in a participatory, people-centered way. They remove the excuse that the problem is the demands of the shareholder or the red-tape of government bureaucracy or the bullish will of a boss. When we have worker owned and controlled businesses, we must take responsibility for how well we pay ourselves, how connected our businesses are to the community and its needs, and how healthy our own workloads and quality of life truly are.

For as long as cooperatives fight to persist in a ravenous capitalist economy, these challenges will be greater, because a co-op's products and services must rival the quality and price point of deceitful capitalist enterprises which cut corners on safety and the environment, and steal wages from workers in order to maximize benefits for their shareholders. Cooperatives are put on trial time and again because people want to imbue them with some magical or mechanical power to resolve societal problems. In the current context (or perhaps any context) this is impossible, but they do have the potential to be healthy and restorative as in the case of CERO.

The lowest income people in Boston may be on the frontlines of environmental disaster in their city, but Hall and his colleagues have found a way for their communities to become protagonists in creating solutions. Cooperatives put folks like them at the center of the economy, which means that ordinary people can use the power of business to address their needs and guide how change happens, thus helping to fulfill the promise of a democratic economy—not just voting once or twice a year but coming together to solve problems every day. The real question is this: can we as people put our full weight behind a new economic paradigm that is inclusive, inter-dependent, anti-sexist, multi-racial, anti-imperialist and liberatory?

I've spent 20 years as an active member of many different types of cooperative in the US, including the intimate living spaces of over a dozen shared housing co-ops and handling the day-to-day business of two different worker-run cooperatives. What I can tell you is this: by themselves such co-ops aren't going to save us, nor are they going to transform society. But co-ops are an especially effective tool for change. They leverage innovations from the capitalist era of enterprise and turn them into a positive force within the broader spheres of human relationships, responsible resource consumption, and transparent governance and accountability— typically while staying rooted locally and showing concern for the community.

Deep transformation happens at the level of human beings, who then bring their reorientation to the structures in which they participate. Cooperatives are a vehicle to catalyze that change, but they only yoke together the people in the pilot's seat. What ultimately matters is the disposition of the pilots themselves. We are the ones that have to change.

However, what I've also seen during my decades in cooperative communities is that while co-ops might not transform people, the act of cooperation often does. Not overnight, and not evenly for everyone. But the more my co-workers and housemates participated in cooperative processes like facilities maintenance, financial planning, passing a health inspection or some other shared work or act of problem-solving, the more humility, trust, empathy, stewardship and solidarity we each expressed. The habits of hierarchical, capitalist behaviors receded like the tide as we practiced interdependence and cooperation.

What we need are more opportunities to practice, screw up and improve in this way. And with more practice, we can all develop the qualities required to work through conflict and manage operations sensibly and democratically. Cooperation is the key to a new economy.

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DeLong: This is the most hopeful take on American productivity growth relative stagnation I have seen. I thought it was coheren... [feedly]

Brad Delong i s always up to date on the latest in trying to solve the riddle of low productivity numbers in recent years, especially in the service sector which now accounts for the overwhelming majority of jobs and businesses. Here the blame is placed on MANAGEMENT. True, in a sense, since services management is 90% management of human, not physical capital. Automating human interactions typical of services is progressing but at a slower pace than manufacturing. Plus there is a problem in the value exchange between service provider and consumer that makes the transaction a weak commodity, a poor store of value, and the consumer does not obtain exclusive use as in purchase of a physical commodity. While the provider fixes a price on a service, the value exchanged (labor performed) is NOT homogeneous. The talents, experience, preparation, personality, appearance and reputation of a provider play a bigger and wider role than in, say, a line worker in a hammer factory.

Anyway -- this is an important question in economic policy any serious effort to restructure US capitalism, or corporate governance, or industrial policy must understand and address. 

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This is the most hopeful take on American productivity growth relative stagnation I have seen. I thought it was coheren...
http://www.bradford-delong.com/2018/08/author-_managing-our-way-to-higher-service-sector-productivityhttpshbrorg199707managing-our-way-to-higher-serv.html

This is the most hopeful take on American productivity growth relative stagnation I have seen. I thought it was coherent and might well be right 20 years ago. I think it is coherent and might possibly be right today. But is that just a vain hope?: Michael van Biema and Bruce Greenwald (1997): Managing Our Way to Higher Service-Sector Productivity: "What electricity, railroads, and gasoline power did for the U.S. economy between roughly 1850 and 1970, computer power is widely expected to do for today's information-based service economy...

...But there is increasing concern because improvements in productivity growth are continuing at low levels despite the expenditure of trillions of dollars on information technology. Whereas productivity grew at an annual rate of 3% in the two decades following World War II, it has grown at an annual rate of only about 1% since the beginning of the 1970s. Had the earlier level of productivity growth been sustained, the gross domestic product would now be approximately $11 trillion instead of about $6.5 trillion. That extra $4.5 trillion per year in economic output—which amounts to roughly an additional $18,000 for every man, woman, and child—would be having a profound impact on a wide range of social and economic problems.

What is preventing a productivity revival in the U.S. economy? Clearly, the manufacturing sector cannot be blamed.... Goods-producing activities (such as manufacturing and construction) employed only 19.1% of the labor force in 1992—down from 26.1% in 1979.... Service-producing activities, on the other hand, employed 70% of all U.S. workers in 1992—up from 62.2% in 1979. By 1994, 71.5% of U.S. workers performed service jobs—whether in manufacturing or service organizations—as managers and professionals, salespeople, or technical support staff. Although the service sector's size has grown in the past 20 years, its productivity growth has declined....

Why hasn't productivity grown as fast in the service sector as in the manufacturing sector? Several incomplete explanations have been offered and have resulted, in our view... blame in two places: the ineffectiveness of many U.S. business managers at improving productivity and the inherent complexity of the service sector itself. A management-based approach to improving the service sector's productivity offers hope for a rapid and significant turnaround of the sector's productivity growth rate.... The problem is not a lack of resources; rather, it is that service sector companies operate below their potential and increasingly fail to take advantage of the widely available skills, machines, and technologies. The main reason the service sector has not reached its total potential output is management. If managers were focused energetically and intelligently on putting the existing technologies, labor force, and capital stock to work, rapid productivity growth would follow. To be sure, the management challenges are more severe in the service sector than in the manufacturing sector. However, the high productivity levels attained by leading-edge service companies indicate that attention from management can result in vastly improved performance throughout the service economy...

#shouldread

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