The venerable von Pepe sends me a good post by Larry White, who isn’t as sure as many of his colleagues that the world economy today is primarily troubled by inadequate demand:
Scott Sumner told us in September 2009 that “the real problem was nominal,” that is, the recession and its high unemployment were primarily due to an unsatisfied excess demand for money (combined with real effects on debt burdens of nominal income being below its previous path)….The price level had not yet adjusted enough to clear the market of unsold goods corresponding to deficient money balances. This was a reasonable – almost inescapable – diagnosis in 2009, when the price level and real income were both falling.
Market Monetarists who have been celebrating the Fed’s recent announcement of open-ended monetary expansion (“QE3′) seem to believe that Sumner’s 2009 diagnosis still applies. But what is the evidence for believing that there is still, three years later, an unsatisfied excess demand for money? Today (September 2012 over September 2011) real income is growing at around 2% per year, and the price index (GDP deflator) is rising at around 2%. If the evidence for thinking that there is still an unsatisfied excess demand for money is simply that we’re having a weak recovery, then as Eli Dourado has pointed out, this is assuming what needs to be proved….
While saluting Sumner 2009, like Dourado I favor an alternative view of 2012: the weak recovery today has more to do with difficulties of real adjustment. The nominal-problems-only diagnosis ignores real malinvestments during the housing boom that have permanently lowered our potential real GDP path. It also ignores the possibility that the “natural” rate of unemployment has been hiked by the extension of unemployment benefits. And it ignores the depressing effect of increased regime uncertainty.
To prefer 5% to the current 4% nominal GDP growth going forward, and a fortiori to ask for a burst of money creation to get us back to the previous 5% bubble path, is to ask for chronically higher monetary expansion and inflation that will do more harm than good.
This is great stuff, but I think even Larry isn’t doing it justice by simply pointing to “regime uncertainty.”
Let’s go back to my June 2009 article, “Why I Expect Serious Stagflation.” Now my critics can rightfully say that I was wrong about the magnitude of consumer price inflation. But let’s look at why I expected stagnation:
I am not going to be foolish and give annual rates of projected real GDP growth; let me simply summarize my view by saying that the economy will be in the toilet for a decade. (Consult another economics PhD for a precise translation of those terms.)
I really don’t understand how even some free-market analysts on CNBC and the like can talk about the recession ending this year, or who speculate that we’ve finally “hit rock bottom.” If they really believe that, then I wonder why they spend so much of their careers praising free markets and blasting socialism? If all of Bush’s and now Obama’s enormous interventions only yield a few quarters of a moderately bad recession, then what’s all the fuss about?
We have all been desensitized to the federal power grabs, because they have been so sudden and so sweeping. The human mind is able to adapt to any new environment fairly quickly.
Let’s think back just one year ago. Remember when plenty of people were worried about the “unjustified” intrusion of the Federal Reserve into the Bear Stearns takeover? Contrast that to today, when the federal government is literally acquiring outright, common-stock ownership in major banks, where the precise accounting mechanism is a conversion of (TARP) “loans” that it forced some of these banks to take, and which the government (as of this writing) refuses to allow to be paid back.
Or how about this one: in the spring of 2008, the Bush administration pushed through a stimulus tax cut that cost a little more than $150 billion. Do you remember that at the time, this was considered a fantastic sum of money? Analysts on CNBC fretted about the impact on the deficit and interest rates.
Well President Obama’s stimulus package was $787 billion; the expected federal deficit this fiscal year is $1.8 trillion. The CBO projects that the federal debt as a share of the economy will doubleover the next decade, from about 41% last year to 82% by 2019.
Beyond the massive shift of resources to the government, though, are the massive intrusions of federal power into various sectors. The feds have already partially nationalized the banking sector (a process started under that “laissez-faire conservative” George Bush); they have taken over one of the biggest insurers in the world (AIG) and two of the Big Three car companies; and they have taken over Fannie and Freddie and now control more than half of US mortgages.
On top of that, they are pushing through a plan to cap carbon-dioxide emissions — which allows the government to control energy markets, and — oh why not? — they are trying to nationalize health care too. Just to make sure investors around the world stay clear of the American economy, the Obama administration has overturned secured-creditor rights in the Chrysler fiasco and has hired 800 new IRS employees to put the screws to wealthy filers with international business operations.
It is no exaggeration to say that the last time the government expanded this much, this quickly, was under FDR’s New Deal. And we got a decade of misery during that particular experiment. Why would things be different this time?
Let me put it this way: Suppose there had never been a recession. Suppose that for some reason, in the fall of 2008 the Fed took over Fannie Mae, Freddie Mac, and AIG. Then Henry Paulson convinced the free-marketeer George Bush to inject $700 billion into major banks and car companies in order to gain serious leverage over their decisions, even though some of them didn’t want the money. Then a few months later, the incoming president announced a $787 billion package of poorly-designed (from an supply-side POV) tax cuts and pork barrel spending, including a bunch of money going to renewable energy companies that would later go bankrupt.
What would free market economists have said at the time? Would we have said, “Eh, a budget deficit of 10 percent of GDP is a bad idea, but no biggie”?
No, we would have been flipping out, warning of how much damage these obscene and arguably fascist measures would do to the economy. And that would have been with a healthy economy.
So why is it such a shock (no pun intended) that some of us think maybe the US economy isn’t suffering from too much saving in the last few years? Maybe this incredible surge in federal power has something to do with it?
And–if I might be even bolder–maybe all of the crazy things FDR did under the New Deal explain the length of the Great Depression, as opposed to “tight money” (even though the US went off gold in 1933, and we never had a depression as long under the gold standard as we did after we went off it).