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Many influential mainstream Keynesian economists continue to support high deficits until the nation’s yawning jobs gap is closed. As Laura D’Andrea Tyson observes in a thorough and helpful blog entry posted this morning, this is not a fine-tuning problem requiring a careful weighing of priorities, given the current state of the job market: Like many economists, I believe that the immediate crisis facing the United States economy is the jobs deficit, not the budget deficit. The magnitude of the jobs crisis is clearly illustrated by the jobs gap–currently around 12.3 million jobs. That is how many jobs the economy must add to return to its peak employment level before the 2008–9 recession and to absorb the 125,000 people who enter the labor force each month. At the current pace of recovery, the gap will be not closed until 2020 or later. In other words, we are not even close to full employment; moreover, as many have observed, inflation appears to be extremely low, with few signs that the stimulus measures taken up to now are bringing about an inflationary takeoff. Hence, it is straightforward to see the urgency of increasing job growth relative to worrying about rising prices, at least for the time being. Parenthetically, while macroeconomists rightly devote a great deal of attention to these cyclical issues, there are… Read More

In a recent blog piece at the CNBC website, John Carney offers this interpretation of the federal debt ceiling (see also Felix Salmon’s more recent comment): “The debt ceiling applies to the face amount of obligations issued under Chapter 31 of Title 31 of the U.S. Code—basically, Treasury notes and bills and the other standard kinds of government debt—and the “face amount of obligations whose principal and interest are guaranteed by the United States Government.” But overdrafts on the Federal Reserve wouldn’t be Treasurys and they aren’t explicitly guaranteed by the U.S. government. “They’re more like unilateral gifts from the Fed. “And guess what? The Treasury is allowed to accept gifts that “reduce the public debt.” Since these overdraft gifts from the Fed would allow the government to spend without incurring additional debt, it seems very plausible to argue that this kind of extension of U.S. credit would be permitted under the debt ceiling.” In normal times, when the federal government has not reached a Congressionally imposed ceiling on its debt issuance, the Fed would indeed honor all checks issued by the U.S. Treasury Department, whether or not Treasury securities had previously been issued in sufficient amounts to “cover” the checks.  Carney may indeed be right that the debt limit law might permit this to continue after the debt limit… Read More

With all the recent coverage of the federal government’s debt-limit impasse, it has been some time since the private sector’s financial picture has received much attention in the popular press. Nonetheless, there seems to be little news, as the most recent flow-of-funds data release from the Fed depicts a continuation of trends that have held for at least the past two years or so. Specifically, for the business sector, the figure below shows declining ratios of debt to GDP and increasing ratios of cash-like assets to GDP. (You may need to click on the image to make it large enough.) (Liquid assets include checking and savings accounts at banks, Treasury securities, and currency, all of which can be useful in avoiding missed payments, etc., when financial stresses arise. Also, assets and debts are of course measured in terms of dollars, rather than numbers of bonds, shares, etc. In all of the financial ratios discussed in this post, GDP is expressed in terms of seasonally adjusted output per year, though the data are for individual quarters.) In the next figure, shown below, we can see that the personal sector (households, small businesses, and nonprofit organizations) has experienced increasing ratios of securities holdings to GDP in recent quarters, along with falling ratios of liquid assets to GDP. Moreover, as a percentage of… Read More

(Click figure to enlarge.) Could the government loan the money to itself? The federal government is expected reach its debt limit of $14.29 trillion early next month. Normally, the government more or less indirectly sells a large amount of Treasury securities to the Fed, which is technically a private entity, separate from the familiar government run by the President, Congress, and the Supreme Court. This amount has been increasing rapidly, as shown by the red line in the figure above. As the figure suggests, quantitative easing II, or QEII, which officially ended last month, represents only the most recent version of this sort of open-market policy initiative, though it was highly unusual in that it involved very large purchases of Treasury bonds. Hence, even when the government finds that it has to borrow money to pay for its expenditures, it need not borrow from domestic or foreign private investors, or even foreign central banks or the International Monetary Fund (IMF). Instead, it can essentially turn to itself, borrowing from what is close to a government agency, charged with acting in the public interest. Nonetheless, unfortunately, official Treasury Department bond auctions will presumably cease if and when the federal borrowing limit is reached, rendering Fed purchases largely irrelevant to the resolution of Washington’s debt-limit predicament. Hence, the question arises: if the… Read More

(Click figure to enlarge it.) Some “gold bugs” advocate a return to the gold standard, which the United States officially abandoned in the early 1970s.  The annual data in the chart above show that the price of gold has risen sharply in both euros and yen since 1999. Meanwhile, the dollar itself has fallen against both of the currencies, as shown by the lines near the bottom of the chart. Easy monetary policy has played a role in this drop. But a weakening currency has been one factor behind the recent increase in U.S. exports. The latter grew more than imports in percentage terms over the period shown in the figure. But nonetheless, both imports and exports grew by over 40 percent. It would have been difficult to increase exports at all with U.S. goods and services priced in a surging gold-backed currency. It goes without saying that the price of gold could possibly fall rather than rise in coming years. But dealing with a commodity money whose value can abruptly change in ways that harm the economy is always a severe drawback of a currency backed by gold. Of course, if the United States had adopted a gold-backed currency in 1999, U.S. wages, prices, etc. would likely have behaved much differently than they did. Hence, one cannot be sure… Read More

In a New York Times blog, Nancy Folbre recently discussed the alarming disconnect between economic growth and job creation in the United States. While the economy has been growing since the Great Recession’s end in 2009, the employment rate remains stuck at its December 2009 level of 58 percent. This percentage had reached 65 percent during the boom leading up to the 2001 recession—a level not seen since then. The slow recoveries of the job market after the last two recessions have fostered a concern among many that the link between economic growth and job creation has been severed, a phenomenon that might be called the American Output-Jobs Disconnect. Chart 1 at the top of this post illustrates this turning point in the employment rate (employed persons divided by population). The blue line shows the employment rate for males plunging from 71.9 percent in 2000 to 63.7 in 2010, while the red line depicts the rate for females falling from 57.5 percent to 53.6 percent during the same 11-year interval. Reading an interesting proposal from the Center on American Progress (CAP) and the Hamilton Project to reform the Social Security disability program, also known as SSDI, I noticed this chart, which seemed relevant to the same topic. Chart 2 above shows that among men aged 40 to 59, employment rates… Read More

Many Americans interested in economics will recall David Stockman as the controversial White House budget director who swam against a tide of increasing deficits during Ronald Reagan’s administration in the first half of the 1980s. Ultimately, while Reagan supported many high-profile cuts to social benefits and regulatory budgets, he vastly increased military spending and cut taxes drastically, leading to deficits that disappointed fiscal conservatives. Stockman has an op-ed article in yesterday’s New York Times blasting what he sees as weak efforts by the president and congressional Republicans to come up with long-term plans to cut deficits. He disagrees with the Ryan plan’s focus on cuts to programs that help the poor and Obama’s emphasis on ensuring that the rich pay their fair share.  In Stockman’s mind, these approaches to budget cuts leave the federal government’s main fiscal problems unaddressed but go down well politically. One should take note that while Stockman’s alarms of more than 25 years ago went largely unheeded, no serious U.S. fiscal crisis materialized, though deficits reached nearly 6 percent of GDP in 1983. On the other hand, unemployment touched double-digit levels early in Reagan’s tenure, making high deficits nearly inevitable and certainly justifiable from a policy perspective. Moreover, numerous other serious problems arose largely as a result of Reagan’s economic policies, including his attack on the… Read More

(Clicking on picture will make it larger.) Floyd Norris has an interesting column in this morning’s New York Times. Earlier this week, I was getting ready with some observations similar to his, though I am sure I could not have done as good a job as he has in getting across the gist of the problem and presenting some evidence. Essentially, Norris shows that since the introduction of the euro in 2000, products from the countries now in fiscal crisis have lost competitiveness relative to German products in international markets. Norris presents data on competitiveness. His data is similar to the series depicted in the chart at the top of this post, but the data above are real exchange-rate indexes. The lines in my chart compare the competitiveness of various economies’ exports, taking into account not only differences in unit labor costs but also the values of their currencies relative to those of their trading partners. Norris’s graph and my own feature data from different economies. Norris’s point is that Germany is an big exporter partly because it has reduced labor costs relative to its competitors. Meanwhile, according to Norris’s theory, the peripheral countries of Europe, such as Greece, Ireland, and Portugal, have become less competitive, as their labor costs have risen relative to those in Germany and other “core”… Read More

Many Levy Institute scholars and staff members are in New York City for this year’s conference on the late Institute scholar and author. Breakfast should be ending now, with the conference about to begin. The conference’s theme is “financial reform and the real economy.” More information about the conference, including the program, are available at the conference page on the Institute’s website. Update, approximately 3 pm, April 13: The first audio from the conference has now been posted to this page on the Institute website. Now available there is audio from the conference’s formal opening and from the first session. You can choose among recordings of Leonardo Burlamaqui, Dimitri B. Papadimitriou, Jan Kregel, L. Randall Wray, and Eric Tymoigne. The conference ends this Friday, April 15.

(Click graph to expand.) Recent months have seen double-digit increases in energy prices and the prices of many important agricultural commodities. Because of the recent inflation in various raw materials, fuels, and foods, many ordinary Americans have been finding it increasingly difficult to afford basic necessities. The figure above shows just how severe this trend has been. (You will probably need to click on the image to make it larger.) The lines for various commodity groups begin on the left side of the figure at a level of zero percent for the March 2006 observation. Each subsequent point on a given line shows the total percentage change since March 2006 in the amount of one type of farm product that can be purchased at the wholesale level with the average weekly paycheck. The dark blue line that appears nearly flat shows average real (inflation-adjusted) weekly earnings as reported by the government. The Bureau of Labor Statistics (BLS) uses the consumer price index (CPI-U) to deflate this series. The line shows that the purchasing power of wages for a typical job has increased by only about 2.2 percent over the five-year period shown in the figure. Moreover, ground has been lost since early last fall, when wages were as high as 3.3 percent above March 2006 levels. The other lines in… Read More

The new edition of The Atlantic contains this interesting map, showing how changing median incomes and demographics have divided the United States into 12 distinct geographic areas, each contributing to an overall picture of increasing economic inequality. (It may be helpful to use your browser’s “zoom” feature as you look at the map.) For example, our institute is located in a county described by the map as a “monied burb,” while I grew up in a county that the authors have labeled “boom town.” I would venture a guess that many readers who are familiar with these counties will be surprised to see how they are labeled. We take the new map and other efforts like it with a grain of salt, but as something to provoke thought about how things are indeed very different than they used to be.

Charts in last week’s entry, which contained approximations of  real interest rates for various European countries, were unfortunately incorrect.  The problem resulted from a silly mathematical error in the formula used to calculate the figures shown in the graphs. Accordingly, the author has recently uploaded a new version of the post, including corrected diagrams. He apologizes for the errors and any confusion they may have caused.