(Trying to Be) the Honest Broker for the Week of December 29, 2013: John vs. John on the Savings Glut Question: John Taylor vs. John Aziz, Tim Geithner, Ben Bernanke, Larry Summers, Paul Krugman, Me, and a Cast of Thousands Weblogging
The thoughtful and hard-working John Aziz on Twitter:
John B. Taylor: "There is little evidence of a savings glut" http://t.co/tquaxSCfbs
Er, what? http://t.co/hv7bP40M1x
Indeed. I cannot follow it either.
John Aziz provides some context and explanation
John Aziz (April 30, 2013): A Visual Representation of the Zero Bound:
This graph shows savings at depository institutions as a percentage of GDP against the Federal Funds Rate. The actual cause of the desire to save rather than consume or invest is uncertain... demographic trend... psychological trend... shortage of “safe” assets... anticipation of deflation.... But whatever it is, we know that there is an extraordinary savings glut. There have been a lot of assertions that interest rates at present are unnaturally or artificially low. Well, what can we expect in the context of such a glut?... Theoretically, lower[ing] interest rates ceteris paribus should inhibit the desire to save, by lowering the reward for doing so. But interest rates cannot fall below zero, at least not within our current monetary system.... Even tripling the monetary base — an act that Bernanke at least believes stimulates an interest rate cut at the zero bound — has not discouraged the saving of greater and greater levels of the national income.... Investors are not finding better investment opportunities for their savings and the structure of production does not appear to be adjusting very fast to open up new opportunities for all of that idle cash.
If that isn't a "savings glut", what would a savings glut be?
And when I go to John Taylor, I achieve no enlightenment at all. First he attacks Tim Geithner:
The evidence continues to mount that government policy has been to blame for the disappointing economic performance in recent years. Yet many don't want to hear it, and they offer a series of alternative explanations including most recently the re-emergence of a chestnut, "secular stagnation." When it became clear that the recovery from recession—which officially ended in mid-2009—was unprecedentedly weak, policy makers found an excuse in the depth of the financial crisis. Treasury Secretary Tim Geithner argued in August 2010 that "recoveries that follow financial crises are typically a hard climb. That is reality."... Five years into a sluggish recovery, this explanation has worn ridiculously thin. The credit crunch and financial disruptions due to crisis have long since been resolved. Residential investment picked up more than two years ago, so the "weak housing market" excuse is gone.
Here I have to call a personal foul on John Taylor:
Taylor's assertion that "residential investment picked up more than two years ago" is simply false. Residential investment has moved only 1/5 of the way from its trough back to its normal value as a share of productive potential. Taylor should not say such things.
That aside, I will have to leave Tim Geithner to take care of himself...
Taylor continues, turning to attack Larry Summers (and, I think, although not explicitly, Paul Krugman):
now comes a new excuse, emerging like a vampire from the crypt. Though it has been quietly gestating for some time, a new-old idea, "secular stagnation," has received a great deal of attention since former Treasury secretary and White House adviser Lawrence Summers made the case at a Brookings-Hoover conference in October, and then again at an International Monetary Fund conference in November.... According to the modern version, secular stagnation began 10 years ago when the rate of return on capital—or what Mr. Summers called in his IMF speech the "real interest rate that was consistent with full employment"—fell well below normal levels experienced since the end of World War II. The decline, say to "-2 or -3%," continues today and will likely continue into the future, [Summers said] said. The low rate of return is due to a supposed glut of saving and dearth of investment opportunities.... It is hard to get real interest rates down enough.... Hence, the economy stagnates....
There are many problems with this neo-secular stagnation hypothesis. First, it implies that there should have been slack economic conditions and high unemployment in the five years before the crisis, even with the very low interest rates—especially in 2003-05—and the lax regulatory policy.
I must say that when I read this, I think that Summers already answered this criticism before it was made:
Lawrence H. Summers: IMF Fourteenth Annual Research Conference in Honor of Stanley Fischer:
If you go back and you study the economy prior to the crisis, there is something a little bit odd. Many people believe that monetary policy was too easy. Everybody agrees that there was a vast amount of imprudent lending going on. Almost everybody believes that wealth, as it was experienced by households, was in excess of its reality: too much easy money, too much borrowing, too much wealth. Was there a great boom? Capacity utilization wasn’t under any great pressure. Unemployment wasn’t at any remarkably low level. Inflation was entirely quiescent. So, somehow, even a great bubble wasn’t enough to produce any excess in aggregate demand...
Summers points out that normally a time of irrational exuberance is also a time of a high-pressure economy and rising inflation, but that the mid-2000s was not such a time. Summers does not require that the economy be permanently depressed as a result of a secular stagnation-driving savings glut, but only that something like full employment is attained only when irrational exuberance is present.
Does Taylor have an argument to make against Summers's belief that an economy suffering secular stagnation can attain full employment if there is a financial bubble going on? He gives no sign of having an argument.
And Taylor then turns to attacking Ben Bernanke's argument that underpins Summers's--Bernanke's belief that the U.S. macroeconomy in the 2000s was suffering from what he, I think inaptly, called a "savings glut":
There is little direct evidence for a saving glut. During this recovery, the personal saving rate is well below what it was during the 1980s rapid recovery from a deep recession; 5.5% now versus 9.2% then...
Here it is important to note that when Fed Chair Ben Bernanke coined the term "savings glut", he was referring to the sum of (a) savings coming into the U.S. from abroad--the U.S. trade deficit--(b) private savings, and (c) corporate savings. Taylor's reference to personal savings does not engage Bernanke's argument at all.
In the current era, business firms have continued to be reluctant to invest and hire, and the ratio of investment to GDP is still below normal...
Here I once again have to call a personal foul on Taylor. Yes, investment to GDP is below normal. But break investment down into business and housing components:
Business investment is back to normal--which, some might say, is surprising given how much slack capacity remains in so many sectors of the economy. It is housing investment that is depressed.
And at this point the eye travels upward on the page and revisits Taylor's:
Residential investment picked up more than two years ago, so the "weak housing market" excuse is gone...
So: business investment is normal, Taylor claims "residential investment picked up more than two years ago", and yet Taylor also claims that the sum of business and housing investment remains depressed?
I can make no sense of this.
Taylor then goes on to claim that low housing investment--never mind that he also says it "picked up more than two years ago" is:
most likely explained by policy uncertainty, increased regulation, including through the Dodd-Frank and Affordable Care Act, about which there is plenty of evidence, especially in comparison with the secular stagnation hypothesis...
Now I can see how you might make an argument that Dodd-Frank has made it more difficult to finance housing investment. I would find such an argument unconvincing--if Dodd-Frank were doing so, we would expect to see its traces in a widened spread between the cost of funds to financial intermediaries and mortgage interest rates, and we do not see such a widened spread--but such an argument cannot be made.
What for the life of me I cannot understand is what the argument that the ACA has had an especially negative impact on housing investment is. Is there any way to understand Taylor's invocation of the ACA here other than as a way to punch his ticket in the competition for high federal office in the next Republican administration? I am genuinely asking--I would like to understand John's invocation of the ACA in this context in some other manner, but I need help if I am to figure out a way to do so.
And then comes Taylor's final paragraph: snark directed at Ben Bernanke and Larry Summers as hokum-sellers satisfying an ideological and political demand for hokum:
I suppose the emergence of the secular stagnation hypothesis shouldn't be surprising. As long as there is a demand to pin the failure of bad government policies on... exogenous factors, there will be a supply of theories.
The hokum is, one presumes, for Democratic politicians who must not admit and Progressive ideologues who cannot believe that the Obama administration has failed in its task of managing the economy. Needless to say, of the two big-name economists who have been thinking along these lines, I don't think Republican Ben Bernanke is plausibly in the business of selling political hokum to excuse Democrat Barack Obama; and I don't see Larry Summers as excusing the failures of Obama Administration economic policy but rather of explaining them with an eye toward doing better in the future.
But the ellipsis above is there because Taylor gives us a choice: the hokum is either blaming the bad economy not on its true source--Obama--but rather on "exogenous factors" or "the market system". The paragraph above noted the first alternative. And the second is Taylor saying:
I suppose the emergence of the secular stagnation hypothesis shouldn't be surprising. As long as there is a demand to pin the failure of bad government policies on the market system... there will be a supply of theories.
And here I am tempted to say that we have gotten to the heart of the issue: I think Taylor's animus--the snark, the failure to grasp what the data says, etc.--comes because, like too many economists at Chicago and Stanford, for him the market system cannot fail, the market system can only be failed.
Thus, I think, Taylor's concluding paragraph fundamentally misreads what is going on. Neither Summers nor Bernanke is in the business of bashing the market system for the sake of bashing the market system--neither has a fan-base among market system-bashers, suffers himself from an ideological deformation that leads them to market-bashing, or can plausibly be seen as believing that market-bashing is a desirable careerist ticket-punching step. That is just not the business that either Ben or Larry is in. And I don't think John should be snarking that it is.
There are a large number of serious and, so far, unanswered questions about the financial panic of 2007-2009 and our current macroeconomic predicament. Among them are:
- Why is housing investment still so far depressed below any definition of normal?
- Why has labor-force participation collapsed so severely?
- Why the very large spread between yields on safe nominal assets like Treasuries and yields on riskier assets like equities?
- Why didn't the housing bubble of the mid-2000s produce a high-pressure economy and rising inflation?
- To what extent was the collapse of demand in 2008-2009 the result of the financial crisis and to what extent a simple consequence of the collapse of household wealth?
- Why has fiscal policy been so inept and counterproductive in the aftermath of 2008-9?
- Why hasn't more been done to clean up housing finance (in America) and banking finance in Europe)?
These are all important and, in my view at least, inadequately understood questions. And we badly need smart people to advance the ball. And--given my failure to advance the ball sufficiently on many of these to satisfy even myself--we desperately need smart people who think differently than me to advance the ball.
But I have to judge that Ben Bernanke's thoughts about "savings gluts", and Larry Summers's and Paul Krugman's on "secular stagnation" are worthy attempts to advance the ball on some, at least, of these issues. (However, note I also think that they are all horrible at public communication: "savings glut" and "secular stagnation" are the wrong phrases to use as thumbnail summaries of these ideas.)
And I don't think Taylor's blaming the ills of the economy on Dodd-Frank, and the ACA advances the ball at all. I would be willing to look at evidence that they have played a role. But Taylor doesn't present any.