This is a video I did with Steve Davis and Amir Sufi, moderated by Hal Weitzman, part of the new Chicago Booth "The Big Question" series. Youtube link here. I'm actually a lot calmer through most of it than I appear in the cover shot.
Wednesday, February 6, 2013
11 comments:
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I only had time to listen to the first half so far but I wanted to comment on something while it was still fresh in my mind.
ReplyDeleteThere was an observation at about 04:30 that labor participation rate dropped dramatically during the GFC. I would argue that the process started after the 2000 dot-com bubble burst. You can see the inflection point clearly in the FRED chart. Greenspan blew a credit/housing bubble and the rate leveled off. When the second bubble burst the drop resumed at a steeper rate (making up for the artificially-induced plateau?).
Advanced economies are perpetually becoming uncompetive in the global market placed. These economies cannot grow organically and therefore have turned to a debt-based growth model. What you discovered in your labor participation rate figures is a slow demise of the U.S. and by extension other developed economies.
DeleteWhat there was of increasing growth in the last decade was only the result of increased consumption fueled by increasing debt.
We need to cut our cost structures, regulations in order to compete in the new borderless (for the most part) trade.
Or return to massive protectionism.
MDT
I liked this discussion. The economic back-and-forth was interesting, though I've heard most of these arguments before (though for individuals who don't follow the research literature, they'll probably find it much more insightful). What I found great about this though was this video showed how actual, practicing economists have debates. Here we have three serious economic researchers who not only demonstrate broad agreement, but show great respect for one another on the matters they do disagree. Contrast this with the way Delong-Krugman try to criticize anyone with their trademark "if you don't agree with me you are a moron" model. Other non-economist bloggers like to paint economists as disagreeing about everything and having pernicious motives. A truthful representation was nice to see.
ReplyDeleteI do agree with you that we need to start thinking about the long-run. I'm not really taking a stand on the stimulus / austerity debate or what specific model of the business cycle is appropriate. I'm actually really uncertain about the efficacy of stimulus. But we are coming up on five years into this period of sclerotic growth. At what point is the short-run over with? The frictions and non-neutralities we think about usually don't inhibit readjustment over such a long period of time. Is household debt really still the problem? Do shocks to wealth lead to permanent stagnation? New Keynesian models posit rigidities that inhibit the adjustments in response to a wealth shock, but are wage and price rigidities really the problem at over 4 years?
Here's a rather sobering report on employment from the man-in-the-street POV http://www.heldrich.rutgers.edu/sites/default/files/content/Work_Trends_February_2013.pdf
ReplyDeleteThe last few minutes of the discussion sort of dovetail with what I was alluding to above. I think the sickness started in about 2000, as reflected by the downward inflection in labor force participation rate. The gap between affordable standard of living and target standard of living was filled in by borrowing. Private credit absolutely exploded in the early 00's, dwarfing whatever the federal debt was. I don't think it's a coincidence that this was when gold started to take off. I think you ignore movements in the private credit market at your peril.
As discussed toward the end of the video, instead of addressing the real problems Greenspan just blew another bubble. This stalled the deterioration somewhat, but actually worsened the problem of massive credit expansion without commensurate wealth expansion. When the second bubble popped, the process simply resumed with a vengeance, which is what happens when you ignore problems while they're small - they get big. And, as you all said at the end of the discussion, it was sold to us as a "liquidity" problem. If the players had been solvent there would have been plenty of liquidity.
But wait! There's more! If raising taxes leads to lower tax revenues, then lowering taxes should do what?
ReplyDeleteHere's what I'd do and it has absolutely no chance of happening. Wipe out the whole tax code and get rid of all the market-distorting favors and loopholes, then cut tax rates across the board. It won't help the federal deficit in the short term, but it would divert money from the government to the private sector.
Collateral has to catch up to credit or the debt has to be written down. That's why people are stuck in their underwater houses. I think the latter is the most likely course.
I'm just a poor country doctor trying to help sick folks so I don't know much about economics or finance. But I do know what happens when you make the system clear and simple and let human beings - the world's most sophisticated self-optimizing machines - proceed to optimize their position in life without interference.
Adult human beings making their own decisions without the help of a government bureaucrat or a politician? Preposterous! Next you will be trying to tell me that people should be held responsible for their own actions!
DeleteWow.
ReplyDeleteBoth of your colleagues cannot resist the conceit that they could solve all of our problems – if only their carefully researched theories were precisely imposed on the economy.
I watched the whole thing and I don't think that accurately reflects what the other two were saying - neither of them claimed to have a soluton. The only one I heard who claimed to know the solution was Professor Cochrane. Cochrane did not say what he thought the solution was but I assume his solution would involve cutting taxes, cutting spending and cutting regulations.
DeleteThe notion of facilitating or adjusting the recalibration of capital flows by policy begs the question of how effective such policies have been in the past. Consider the whole host of energy policies (ethanol, wind energy, solar), housing (Community Re-Investment Act, Fannie, Freddie), education (student loans), not to mention the calibrations / distortions induced by the tax code. The list goes on.
ReplyDeleteThe notion that the political process is either willing or able to divest its ability to monetize rent seeking behavior is questionable.
I find it interesting that none of the three thought to bring up our massive trade imbalance or the financialization of our economy as problems holding back our economy. And then there is the malfunctioning corporate board structure where rewards and incentives have little to do with actually being productive. Yeah but sure policy and regime uncertainty are some how the obvious if not nebulous problems.
ReplyDeleteWell that is because to anyone who has knowledge or a brain trade imbalances are meaningless.
Delete