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Paul Krugman slugs it out with our colleague Jamie Galbraith and many other “modern monetary theory” partisans at Krugman’s New York Times blog website. Jamie’s most recent retort is at the top of this page of the blog site. Many of the points raised in the discussion there are central to our work here at the Levy Institute and to the views of Galbraith and others in our macro research group. Update: More links to the ongoing Krugman-MMT debate can be found here.  -G.H., March 31. Update, August 11: Krugman on MMT again, this time drawing lessons from French fiscal policy between World Wars I and II.

(Click picture to enlarge.) Readers may have seen two charts that are part of a column by David Wessel published last week. For five European countries, they compare actual interest rates with those prescribed by a standard policy rule. Wessel’s charts provide some interesting evidence that European Central Bank monetary policy has been either too loose or too tight most of the time for several currently ailing European economies, given these countries’ inflation rates and gaps between actual and potential output.  Wessel’s charts support the article’s theme, which is that severe economic problems in some Eurozone countries result in part from the “one-size-fits-all” interest rate policies of the ECB. Along the same lines, at the top of this entry is a chart of short-term “real interest rates” faced by business borrowers who use overdraft loans in a group of European countries, which are mostly members of the euro area. I have used data on interest rates for this common type of loan, adjusting each month’s observation to reflect the same month’s measured consumer price inflation, so that the resulting “real rates” take into account inflation’s effects on the burden of loan payments. Inflation is helpful to debtors because it has the effect of reducing the amount of goods and services represented by each dollar owed under the terms of a… Read More

Some more thoughts on the federal debt, which I blogged about last week: First, at Barry Ritholtz’s blog, there are some other interesting figures: one portraying the gross federal debt in three different ways and another breaking the gross debt down by holder. Ritholtz’s figures use data from the U.S. Treasury Department. Note that the gross debt, which stands at a little over $14 trillion, includes around $3 trillion in securities held by the Social Security and Medicare trust funds. (See Trustees’ report.) These securities are not treated as federal liabilities in flow-of-funds data, the main source for the figures in my earlier post. This difference between net and gross numbers accounts for most of the apparent gap between the figures reported in Ritholtz’s blog and those reported here. Like the Federal Reserve’s portfolio of Treasury securities, the securities owned by the trust funds are essentially both assets and liabilities for the broader federal sector, and for macroeconomic purposes, it is best to net them out in my opinion. This leaves well below $10 trillion in federal debt to the public, according to both flow-of-funds data and the Treasury Department website. Regardless of the exact size of the federal debt, which is not crucial, the point to note right now about the deficit issue is that the economy does not… Read More

(Click on graph to enlarge.) Some interesting information on the federal government’s balance sheet can be gleaned from the fourth-quarter flow-of-funds report, which was released by the Federal Reserve Board on the 10th of this month. The total amount of all federal liabilities, as reported by the Fed last week, is shown as the sum of the red and blue areas in the figure above. The blue portion of the graph represents net liabilities owed by the federal government to the Federal Reserve System, while the red portion shows the rest of the federal government’s liabilities. The blue portion is best netted out of the total debt when one is calculating a figure to be used for policy purposes, as it essentially represents a sum of money that one part of the federal government owes to another. (The Fed describes itself in its educational literature as “independent within the government,” though it is shown in flow-of-funds reports as a separate entity with a separate balance sheet from that of the federal government.) As noted in the figure above, total federal liabilities, according to the new data, rose in the fourth quarter of 2010 to 75.0 percent of seasonally adjusted U.S. GDP from 72.6 percent the previous quarter. Of this 2.4 percentage-point increase, 1.6 percentage points were accounted for by an… Read More

(Click figure to enlarge.) Two Fridays ago, I blogged about some newly released Bureau of Labor Statistics (BLS) data from a monthly household survey. I was surprised later to see that Multiplier Effect was one of only a handful of websites to mention that non-seasonally adjusted data showed vastly different and perhaps more disturbing results than the widely reported deseasonalized numbers: a flat unemployment rate, a sharp fall in employment, and a rise in the number of people unemployed. All of the numbers I discussed were based on traditional concepts of unemployment, which have been familiar to newspaper readers for decades. It is important to put such survey results in context, and I have now had time to finish putting together some further information on the effects of seasonal adjustment on the numbers released early this month. While the standard version of the unemployment rate is widely reported and debated, it does not include potential workers who are not considered to be in the labor force because they have not recently been looking for work. If the labor market were stronger, most of these individuals would almost certainly return to the workforce and find work. Hence, it is interesting to look at a broader measure of unemployment that includes at least some of those out of workforce who want to… Read More

The White House remedies for the mortgage meltdown have now been presented. Congress will debate the life extension, death, or rebirth of federal mortgage entities Fannie Mae and Freddie Mac during the coming weeks. When the noise has died down, don’t expect substantial change. But those who hope for genuine financial reform should, nonetheless, listen carefully not only to what Washington says, but to whom it says it. Will the new guidelines call on traditional home-loan bankers to make traditional loans? Or will we hear a shout-out to the investment bankers/mortgage traders who designed the mess? In any new financial structure for home loans, the single most important issue will be the ratio of debt to assets that the government will expect lenders to show. During the real estate boom, lenders were willing—and able—to provide mortgage brokers with financing for 100 percent or more of the value of a property with the expectation that real estate prices would rise. We witnessed the triumph of the trader over the banker: Profit relied on the sale or refinancing of the asset. For a mortgage originator or securitizer with no plans to hold on to the mortgage, what really matters has been the ability to place it, not the depth of the underwriting or the long-term financial prospects of the home resident. A… Read More

In Friday’s post, I pointed out that unemployment and employment numbers announced by the BLS had apparently been changed greatly by the process of adjusting for typical seasonal changes. These adjustments are meant to account, for example, for the fact that retail business is generally stronger than usual during the holiday season at the end of each year. Friday’s widely reported unemployment drop to 9.0 percent in January from 9.4 percent the previous month was a figure that had been seasonally adjusted by the BLS to remove such normal seasonal effects. Also reported by the BLS Friday in the same set of documents were non-seasonally adjusted numbers that showed an increase in unemployment from 9.1 percent in December 2010 to 9.8 percent in January 2011. Few internet news outlets seem to have reported these latter percentages or the underlying raw numbers used to calculate them. On the other hand, many blogs and other news sources mentioned that adjustments had been made to the official numbers to reflect improved estimates of population growth from recent surveys, resulting in a problem with comparing January’s numbers with December’s. Friday morning’s blog post contained a qualifying statement to the effect that these population-related statistical adjustments had probably affected the un-seasonally adjusted numbers that I reported in the same post. Here is what I have been able to figure out about the… Read More

A note on the unemployment figures released earlier this morning by the Bureau of Labor Statistics (BLS), reporting the results of a January survey of U.S. households: The seasonally adjusted unemployment rate fell from 9.4 percent in December to 9.0 percent last month, a healthy improvement. On the other hand, before seasonal adjustment, the unemployment rate rose from 9.1 percent in December to 9.8 percent in January. Raw data that are not seasonally adjusted show that the number of unemployed Americans rose by 940,000, while the number employed fell by 1,560,000. New adjustments for population changes, introduced by the BLS this month, affected these numbers by an amount that is possibly very large and that is not yet known to me. This latter problem probably affects raw numbers more than the overall unemployment rate. The seasonally unadjusted numbers used in this blog post can be found in table A-1 of the recent economic news release from the BLS.

In December, the Levy Institute issued a working paper that asked how the economy might be affected by the seemingly unusual fiscal and monetary policies implemented by the Fed and other central banks since 2008. The authors, Dimitri Papadimitriou and I, used a phrase that is not often spoken in this era by governments and central banks around the world: “monetizing the deficit.” This phrase traditionally describes the practice of financing a government deficit with money that is “printed” rather than borrowed or raised by taxation. We feel perhaps a little more comfortable with our use of these words in light of a recent blog entry on the Financial Times website Alphaville. The blog reports that the Fed has come close to running out of securities to buy in the markets for certain types of government bonds, having bought so many of them already. Hence, it is increasingly resorting to the purchase of recently issued bonds and notes, which it had apparently sought to avoid. This development makes the link between deficit spending and monetary policy initiatives such as the current round of “quantitative easing” in a monetary system like ours easier to grasp. If the Fed buys a Treasury security almost immediately after it is issued, there is less reason than ever to think of the financing process as anything other than the use of the Federal Reserve’s “printing press” to pay for government operations–an essential use of “monetization” to stimulate the economy and avoid drastic fiscal measures during a time of weak tax revenues…. Read More

Reading the back and forth between Brad deLong and David Leonhardt over the structural versus cyclical nature of unemployment during the Great Recession, a question nagged at me, spurred by this quote from Leonhardt: The data that the Bureau of Labor Statistics released on Thursday gives me a chance to explain why I disagree. In short, the relative performance of more educated and less educated workers over the last few years has not been the typical pattern for a recession. Less educated workers, by many measures, are faring worse than they ever have. The ratio of the typical four-year college graduate’s pay to a typical high-school graduate’s pay hit a record in 2010 — 1.56. Since 2007, the inflation-adjusted median weekly pay of college graduates has risen 1.6 percent. The inflation-adjusted pay of every other educational group — high school dropouts, high school graduates and people who attended college but did not get a four-year degree — has fallen since 2007. The same is true over the last decade; amazingly, only college graduates have received a raise.

Last summer, this blogger posted a graph showing the path followed by U.S. long-term interest rates since 1925.  There has been some interest in a new and updated graph, especially in light of concerns that bond markets might soon demand higher yields as the economy expanded. One appears above. Reasons for apprehension about a possible jump in yields vary and include large federal deficits, which increase the amount of bonds that must be absorbed by the market, as well as concerns about a possible resurgence of inflation driven by quantitative easing (QE) and a near-zero Federal Funds rate.  The Financial Times [homepage link] and some other newspapers have been reporting recently on a perhaps greater threat to price stability worldwide: a continuing run-up in the prices of some key agricultural commodities, brought about mostly by factors other than macroeconomic policy.  There has been some discussion of rising yields for long-term government bonds, but the long-term perspective offered by the figure above shows that interest rates remain very low by historical standards, at least for now. Moreover, real yields on federal inflation-indexed securities remain quite low indeed, and in some cases negative, as shown, for example, by the green line in the figure below. Broadly speaking, such yields are what markets expect certain inflation-protected bonds to yield in addition to compensation… Read More

The Economic Policy Institute has produced an interesting analysis on jobs lost and recovered in U.S. post-war recessions. They show how many months were needed, since the beginning of a recession, to get back to the initial employment level. However, the working population is growing over time, so getting back to the employment level of, say, 12 months ago, would not be sufficient to restore the same employment and unemployment rates. In our chart we assume that population grows at its annual average (around 1.4 percent), and calculate how long it took for employment to get “back on track”, i.e. we compare actual employment with what employment should have been, if jobs grew along with active population. With our modified chart, employment got back on track within three years only in the recession which started in 1969. In all other cases, employment was still below its pre-recession path after three years. In the current (last?) recession, employment still has a long way to go before we can talk of a “recovery.”