Month: April 2024

About that NYT Piece

I had the pleasure of providing some background information for a provocative piece that Talmon Joseph Smith recently wrote for the New York Times about some analysts’ and economists’ tentative arguments about the possible end of the business cycle, given the apparent soft landing of the US economy after more than a year of steady rate hikes. I even have a quotation in it, about how I’m sometimes freaked out by how optimistic I feel about things, at least economically.

I’d be lying if I said that reading that line in the paper of record didn’t make my stomach do a flip or two. I’m superstitious on the best day, and I feel baseline uneasy about any positive outlook I might have for the US or world economy at large. My mind may have even flashed to Gob Bluth saying over and over again, “I’ve made a huge mistake” as I saw bemused reactions to the piece on social media: “so … uh… what makes this time different?” “just wait for that Minsky moment!” “these economists really think crises are over?”

So, some clarification. First of all, read the piece! No one thinks the economy is immune from external shocks; I certainly don’t. When economists and analysts discuss the possibility of a softening business cycle, what we’re talking about is what happens after the shock. There’s also nothing saying that business interests won’t somehow bring about a recession of their own volition; I have many ambivalent feelings about crypto and other asset bubbles, and I was on tenterhooks for the duration of the Silicon Valley Bank fiasco (about which more later). Here’s what I feel optimistic about: in contrast with 2008, the US’s federal government and the Federal Reserve together mobilized lots of spending, massive liquidity provision, and novel methods of stabilizing volatile asset markets to prevent fears about the domestic and global economy from bringing about those feared changes. Solidly mainstream economists have discussed how their fears that expanded unemployment insurance might tank labor markets after the pandemic have publicly announced their errors, and recommended that policy makers consider similar measures next time around. Even the fickle Fed, which spent more than a year raising rates and likely helping cause instability for a bunch of mid-size banks continued to provide ample support for banks and international central banks (a selection of them, anyway) worried about their solvency in the days and weeks after SVB’s failure.

If we compare these responses with government and Fed responses to the 2008 Global Financial Crisis, there’s a wide gulf. The scope and the range of the Fed’s responses to crises since 2008 dwarfs that earlier response, which was, itself, remarkable at the time. The federal government’s interventions have supported households, small businesses and banks, and large businesses and banks. As mentioned, mainstream economists that I ‘did not have on my bingo card’ came out, on the record, in support of expanded unemployment insurance, and have levied more than fair criticism of the support that went to firms who did not, um, use the funds for what they said they would. And to anyone smirking about Minsky moments, it would be worthwhile to remember Mike Beggs’s always germane writing about those moments, and the fact that the Minsky Moment is the rescue, rather than the crisis itself.

There’s also the point Talmon Smith makes about the makeup of the US economy, and the sheer mechanics of spending and GDP and what translates as a recession. We all observed the massive decrease in spending in March and April of 2020, and then almost immediately, there was a big rebound in all kinds of spending. Many firms in the service industries – coffee shops, restaurants – and other retailers figured out how to make the remote commerce thing work. Purchase of goods from online retailers boomed past anyone’s imagination. Large swathes of unemployment payments allowed furloughed waitstaff and other workers to keep spending. All of this contributed to the recession being two months. Two months! It took a while for consumption to reach its pre-March trajectory, but it’s incredible that we’ve actually rejoined our pre-2008 trajectory as other sectors of the economy have rebounded. I’m always struck by this when I walk through US GDP data with my macro students, and I do it a bunch of times each semester.

Something that didn’t make it into the piece that I think is really important is that while I think it is excellent that policy makers are quick to use these tools during crises, I wish that policy makers in the government and at the Fed were more sanguine about deploying these tools for the social benefits that would follow outside of crises. Jamie Galbraith is right that we shouldn’t dismiss perceptions that the economy is not perfect for everyone, even if many metrics, like wages for the lowest income brackets, have shown huge improvement since 2020. I’d like the Fed to make dollar swap lines available to way more economies’ central banks. The end of the Child Taxcare Credit was a huge policy failure. I want more targeted credit facilities, and I’d really like the Federal Reserve to do something about liquidity risks likely to flow from climate change. I think that subsidies for housing, education, and more should be constant phenomena. I also think that a uniform and federally administered unemployment insurance system would be a gargantuan improvement over the US’s state-level hodgepodge of systems that range from the overtaxed and slow to the frankly awful, before we can move on to expanding unemployment payments more generously as a baseline. I also think that we should raise corporate taxes and minimum wages, pass more union friendly legislation, increase all manner of social benefits and on and on.

Ultimately, none of this is mutually exclusive with my being more optimistic about the potential for the US government to respond to economic crises in ways that lessen the long-term hardship created by the initial recession. We should have more debt relief for students, and lower tuition levels for public education in any event. We should have more unemployment for people, whether we’re in a once-in-a-century pandemic or not. We should have more policies that have been proven to shrink the poverty rate (which should, itself, be recalculated to better serve households across the country). At the same time, it’s a very good thing to be able to count on a government to do more to support its population. What really freaks me out is the prospect of losing a government that thinks that this is a good thing, on net. But that’s another story!

Revisiting some policy proposals I had in April 2020

Like a lot of people at the moment, I frequently find myself thinking back to what I was doing four years ago as the reality of the Covid-19 pandemic took hold. Everything was moving so quickly! Radical breaks with past crisis responses made anything seem possible! I put a bunch of research on hold to write up some policy proposals and sit in so many Zoom meetings with people talking about the significance of everything! In hindsight, that last was probably a mistake, at least from the two-three month hiatus on ongoing research in the middle of the tenure slog standpoint. But given that everyone — it’s now apparent, after the fact — kind of went off the deep end during that stretch, I’ve forgiven myself.

Nevertheless, I thought I’d share a condensed version of that set of proposals I hammered out early early on. For the full effect, imagine me typing this with a (then) two and a half year old and four and a half year old bouncing around while I was feeling guilty about not being more at all effective as a home-school preschool teacher.

[“April 2020:

A Brief Set of Proposals for Responding to the Covid-19 Crisis:

History has provided lots of lessons, recent and more distant, for paths to take and avoid going forward after the Covid-19 pandemic. All of the following recommendations assume that widespread, quick, repeated, and reliable testing for the Covid-19 virus will be essential to societal containment and eventual mitigation of the social damage it causes for any economy; thus, social coordination among world leaders will be paramount to any global response to the present circumstances. Finally, many of these proposals and conditions were already important to consider before the spread of Covid-19, and before the economic toll from the pandemic could be felt. Thus, sustaining these changes may be essential to broader policy moving forward. Policy-makers must recognize what is exceptional about the present moment – a once in a century pandemic – and the fault lines revealed by the present health, infrastructural, and economic crises unfolding around the world.

I consider three broad categories of policy to maintain and implement after the crisis:

  1. Monetary and Financial – predominantly, the provision of liquidity and credit to banks, central banks, firms, and governments, in industrialized and emerging markets. Current responses by the Fed and the ECB are promising; the IMF’s willingness to expand SDR programs are likewise promising. These programs must be sustained, and the dealer(s) of last resort – the Federal Reserve and ECB and any other structurally important central bank – may need to signal willingness to sustain money creation for as long and to as large an extent as necessary to backstop the global system.
  2. Fiscal and Regulatory – maintenance of governments’ abilities to respond to the health and infrastructural costs of dealing with the Covid-19 pandemic, and support for their populations with special consideration for multiple levels of governance: municipal and state level, national, and supranational; broad latitude for government intervention in economies from the fiscal side going forward; and amplified oversight of banks and firms (with especially stringent oversight for firms and banks that accept bailouts). The 2008 crisis and the Eurozone crisis revealed the consequences of leaving municipal bond issuers and peripheral Eurozone economies at risk of default given linkages that had developed through repo markets; governments must be assured of their ability to spend to whatever degree necessary to address the costs to their economies of both the Pandemic as well as the economic costs of containment. At the same time, while banks have a crucial role to play in providing liquidity and sustaining or jump-starting economic activity when the time comes, they must be kept under strict oversight, to ensure no abuse of vulnerable customers in times of high financial and economic stress.
  3. Economic Planning for Employment and Equity – structural transformation of the American economy before the onset of Covid-19 crisis created bad trajectories for essential sectors that have been thrust into the spotlight during the pandemic: health, public infrastructure, care and journalism; the effects of the Covid-19 pandemic and mandated social isolation will have particularly devastating consequences for the arts, as well. Governments should step in to employ workers in these crucial spheres after the pandemic is successfully contained, to try to reverse market trends that skewed provision of these essential services in perverse ways. In the moment of a downward spiraling shale market, this is also an excellent time for the government to prioritize environmental and energy transformation; a targeted transition that employs workers from the shale industry in green energy provision or transformation of existing energy networks should be attainable given the effects of the crisis for employment and beyond. Finally, any responses to the crisis should prioritize class, racial, and gender equity, in contrast with past relief efforts from New Deal Programs, the GI Bill, TARP and the ARRA, as well as global austerity in the midst of the Great Recession, have left sectors of society at a structural disadvantage that has grown since 2009.”

Despite the grandiose language, there are several things I’m proud of in here:

  1. My understanding that monetary and fiscal powers were linked, and that there should be a greater international expansion of those powers than what was on offer. I was, at the time, getting a handle on complicated technical policy, and on the verge of spending a lot of time looking at balance sheets of Eurozone members, and I didn’t, at the time, appreciate how deeply linked fiscal sustainability and bond market power were.
  2. Also, I’m also still amazed at the scope of the credit facilities that the Fed created, the ECB’s empowerment of fiscal spending in the earlier years of the pandemic, and debt hiatus that G20 economies allowed. (I’ve had some issues with how these programs have fared since 2021, but that’s a subject for a different post.)
  3. The beginnings of a deep dive into SDRs that I was embarking on, in order to understand more about monetary power in global capital markets. I still think we need more SDRs in circulation!
  4. The value of economic planning when markets go haywire – I was (and remain) shocked at the time at the disconnect early in the Pandemic between what firms in markets were doing for rational reasons, the hardship for households who’d lost access to income, and the cruelty on display in many industries deemed essential. I was also appalled at the lack of institutional capacity of government actors, trying their best to mobilize so much money in unemployment aid to households, and how the sclerotic infrastructure of the public sector inhibited that. In the years since, I’ve really appreciated the work Jennifer Pahlka (@pahlkadot on Twitter) has done to bring attention to this.  
  5. I had a longer piece (available here) talking about the need for more funding for industries hollowed by Pandemic era changes in spending – public transport, news media, arts, etc. I think so much of that still holds true!

I’m also planning to write a piece about what I got wrong in my early perceptions of the way that the economy and world were changing in response to Covid. More on that soon!