Paul Krugman: What They Say Versus What They Mean:
Over at Wonkblog, Lydia DePillis asks, "Remember when Republicans were worried about 'economic uncertainty'?" Actually… I don’t…. They claimed to be worried… but it was… an attempt to put a new, quasi-academic gloss on the same old same old… that the economy will boom only once we get rid of the Islamic atheist Kenyan socialist, and install someone who will be nice to rich people…. There was never any question that they would drop the uncertainty thing the moment it became inconvenient…. And so they did. It’s a lot like the austerity debate, where… the carping on debt was really a way to go after the welfare state…. There are a lot fewer good-faith economic arguments out there than a naive observer might think--and that’s precisely because powerful forces are doing their best to hoodwink said naive observers. So, goodbye “economic uncertainty”. The truth is that nobody ever took it seriously.
Let me cavil. They seem to take it very seriously indeed--and that it is nationwide RomneyCare that is the cause of "uncertainty".
Why they think this is not clear to me: as I see it, the state-of-play is that the "surge in part-time employment" out of fear of pay-or-play is simply not a thing in the data, but rather something that makes its way from spin masters to Fox News and then out to executives and then into Beige Books looking for it; that if uncertainty were a big deal equity prices would be low as it impacted the valuation of old capital, which is not a thing either; and that if uncertainty were a big deal investment in equipment would be more anemic than we would expect given the state of demand, which it is not.
Yet when I try to engage on these points, I don't get anything coherent in reply.
Here--reconstructed from my notes--is my guess at what Michael Boskin and I said about the topic at the NABE meeting in San Francisco nearly three weeks ago:
Well, certainly the unemployment report is a big disappointment. After the 74,000 revision in the previous two months, there is less than a 100,000 job month--far below what seems to be normal growth in the working-age population. We’ve had an anemic recovery: 40% of normal GDP growth from a deep recession over five years. The labor market has been even worse--there are too many out of the labor force. A variety of factors are contributing to this sub performance. It is disappointing. But is it a surprise? No. We have had mediocre job growth throughout Obama's presidency. By now this is expected.
I said when the crisis first hit that recovery could take years, that it was going to be very deep, and that we needed to avoid all policy changes that would wind up adding a lot of costs and lengthening the period of slow recovery. It was unfortunate that that happened. A variety of other objectives than cyclical recovery are being pushed in economic policy. You can argue whether those are good or bad, I have my opinion--Brad probably doesn’t agree with mine. It wound up causing up lots of problems for the economy: the uncertainty, the expectation of rising labor costs, capital costs, access, etc. These have been hitting the economy. And so it wasn’t at all surprising that employment growth has been so slow.
It has been a surprise for the people of Washington. The administration has forecast 4%/year growth for the next two years every year since they came into office. There was perhaps a natural tendency to not believe how bad it was. There was perhaps a natural tendency to be overoptimistic about the efficacy and the policies.
So it is a big disappointment. But it is not a surprise.
Bert van Ark:
I’m not sure you were in [the building] yet, but Bob Gordon age a presentation where he broke down GDP growth into the growth of productivity, the growth of unemployment, and the growth of labor participation. Where would you put most of your disappointment--is it the labor participation rate, the unemployment rate, or is it productivity growth?
Michael Boskin: All three. There are supply size structural issues. There are demand side issues.
Let me start by saying one thing that I think I would surprise Michael. I agree with him: reducing uncertainty is key. The biggest uncertainty facing America's small businesses has been, if you go naked with respect to employer-sponsored health insurance, whether you will have your key workers bid away by larger firms which get better terms from private insurance companies; and if you purchase insurance, whether you can afford to continue to provide it given the susceptibility of the individual-small group insurance market to adverse-selection meltdown. That has been huge for American business for the past generation--that job lock. Obama is getting rid of that.
I think Obama's taking RomneyCare for Massachusetts and rolling it out across the nation is an excellent pro-supply side uncertainty-reducing initiative. RomneyCare was a very nice market-oriented Republican initiative in the mid 1990s in Massachusetts. It was well-implemented. It looks like it is going to be reasonably well-implemented across the three-quarters of the country where Republican office holders are not now trying to block it--insurance company bids show that they are significantly more enthusiastic and hopeful about the coming of the exchange-marketplaces, and how the mandate and community rating are going to greatly broaden the risk pools. Thus they will be able to sell into the individual and small-group market without fearing the adverse-deletion meltdown. This means the end of the job lock which has been a significant bar to entrepreneurship and enterprise for America for a generation. Thus I see Obama's ACA initiative as having played a substantial role in reducing long-run uncertainty--especially for small businesses and individuals who have not had access to a large bureaucracy's benefits department.
But when I step back and look at the recovery as a whole, I cannot see uncertainty about policy as playing a very large cyclical role. I look at equity prices, and I look at investment. I think: if businesses see the situation as riddled with uncertainty, then they are unlikely to be willing to make new investments in new equipment. And that spills over into the valuation the stock market places on old equipment and on market position. So if economic policy uncertainty is a big deal for the cyclical recovery, stock prices should be low right now and equipment investment should be anemic.
But that is not so. Conditional on the state of the labor market, equipment investment is actually quite strong. And I do not have to tell this audience that stock market equity values are not low at all.
What has lagged way, way behind is housing. We have not yet managed to fix housing finance at all--the Obama administration has not even tried. We have not gotten rid of the overhang of houses subject to foreclosure. We have not set out how the GSEs are going to act in the future. As a result, very few private banks not named Wells Fargo are willing to make any substantial amount of housing loans
The situation is extraordinary. We built 600,000 houses above trend from 2003 to 2006, the fact that housing construction then collapsed means that since then we have built 3.6 million houses below trend. Thus we now have a three-million house deficit relative to pre-2003 trends. Yet we still have a weak housing market. Why? Because we have four million potential households living in their sisters' basements because of uncertainty--they are not confident that they can keep their jobs, and the banks that might otherwise lend to them are uncertain about the terms on which they will be able to put risk to GSEs. There is real uncertainly that is holding back our collective willingness to invest in housing: that is a serious drag, and the failure of the Obama administration to even attempt to faithfully execute the laws via administrative process in a way to create a housing sector-friendly framework for recovery is going to lead to very harsh judgments on it indeed when all this is over. And I think of lost opportunities for bipartisan cooperation: How much stronger would housing recovery have been had Barack Obama nominated George W. Bush Chief Economist R. Glenn Hubbard to direct FHFA on January 21, 2009, and given him the baton to create a well-working market for housing finance?
Combine the housing shortfall with the fact that the US dollar has remained strong as a safe haven over the past six years with its resulting drag on exports, the collapse of state and local government spending, and now inappropriate fiscal contraction at the federal level at all--combine all those, and I think you have about the recovery that you would expect to have. There is no great mystery here. Look at what has happened to household balance sheets and thus to consumption. Look at exports. Look at housing. And there is no room at all to claim that policy uncertainty has played any significant role in reducing business willingness to invest in plant and equipment or to hire over and above what we would expect from the weak overall level of aggregate demand.
Now it is very disappointing that the standard rule-of-thumb by which the US economy comes 40% of the way back to full employment in an average year after the recession trough hasn’t happened. But we understanding why the Federal Reserve is unable to goose the economy via cost-of-capital or wealth channels because it cannot cut low interest rate below zero.
I think as long as these trends continue, and there is every sign that they will, we are to the depressing new normal that Michael started off with: employment growth of 200000 a month when we are lucky, employment growth of 100,000 per month when we are not, and at best a very slow increase in the employment-to-population ratio--gap closing at perhaps 0.8% points per year.
Since the employment to population ratio is now a good 4 percentage points below anyone’s belief about what normal was even with the retirement of the baby boom generation six years ago, closing that gap at 0.8% per year will take another five years.
I do agree with the reasonable percentage that Brad had to say, but let me raise two points. First, there is widespread evidence that healthcare reform is a major reason why there has been a surge in part-time employment. If you just look at the last Beige Books, 4 or 5 of the 12 district banks reported full-time employment growthlagging.
Second, there is always a sector that causes disproportional tanking, and another sector that lags is coming out.
Now Brad is on to something when he says that the zero lower bound is a sticky price, and we will come back that later. I think that is certainly a plausible argument for why the fed hasn’t been able to juice things more than it has. I strongly supported the original interest rate cuts. I think the Fed has been subject to pretty big diminishing returns with its policies since then…
I am genuinely uncertain about where Republicans see uncertainty…