Friday, December 6, 2013

"Hold a Dollar Bill Up to a Mirror": Slow Growth, No Growth, Inequality and Social Mobility and What Still Needs to Be Done

"Hold a dollar bill up to a mirror/
 And I'll show you something funny/
 It's only a fast buck, but..../
 It's so hard to make that kind of money.."
--Fast Buck Freddy, Jefferson Starship

Following the 2007-2008 financial meltdown, we appear to have reached a new stasis, where the market is booming, unemployment is somewhat stagnant, having not rebounded substantially BEYOND 2008 levels, and household income is shrinking. Wonkblog provides the basis and Larry Summers provides the analysis of why things may not get better without more forceful involvement in monetary and fiscal policy.

As Ezra Klein and Evan Soltas's morning policy news primer Wonkbook/Wonkblog report, in recent speeches, both President Obama and Congressman Paul Ryan have adressed the issues of inequality and social mobility. Both men are quick to say that growth is necessary to reduce both inequality and poverty. But weak growth is no longer the central economic problem obsessing American politics. It's no longer treated as a crisis. No one on either side of the aisle believes new policy is politically possible. Washington has become used to these kinds of numbers and resigned to its inability to do anything about them. 

"Meanwhile, the economic profession is beginning to wonder whether slow growth is, for the United States, the new normal. That was the subject of Larry Summers's searing speech before the International Monetary Fund, and it's the subject of Tyler Cowen's work on "The Great Stagnation," and it's the subject of Brad DeLong's 9,000-word piece on whether "growth is getting harder".

Krugman: Secular Stagnation here

Larry Summers Explains It All – and it ain’t so good
Here’s what Summers said: The Fed’s job, most of the time, is pretty simple. Its main job is to set the federal funds interest rate, which ripples out and raises or lowers other rates on everything from mortgages to credit cards to business loans; economists and journalists tend to refer to the Fed as raising or lowering “the interest rate” rather than just the funds rate to reflect its wider influence on the whole economy. If the Fed wants to know what interest rate we should have at a given time, it can just plug the unemployment rate and the inflation rate* into an equation, which will spit out what the fed funds rate should be. Couldn’t be easier. The problem is that when inflation is low and unemployment is high, the interest rate that equation spits out is sometimes negative.

And the Fed can’t have negative interest rates; that’d mean peoples’ bank accounts would start losing dollars over time. If that were to happen, everyone would just start doing transactions in cash, which doesn’t decay like that over time. So what the Fed can do — and does do — is promise to keep interest rates at 0 for a very long time.

The hope is that doing that has similar effects to having negative rates, and will get the economy back to normal, where we can have positive rates again. But that approach only works if, when times are good, the interest rate we want is positive. For most of history to date, that’s been true. But Summers argues that it could be that the rate we want is negative. If that’s true, then keeping rates at zero indefinitely won’t get us where we need to be. We need to take much more drastic action.

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