Yglesias & neoliberalism
Matthew Yglesias regrets that his original commentary on monetary policy, and my disagreement with it, got hijacked by Henry Farrell and turned into an analysis of the limits of neoliberalism. (I also stand corrected that Yglesias hasn’t written in favor of a jobs program in the past—apparently he has, though there was no evidence of it in the piece I responded to.) I like what Farrell has to say, and agree with him: there’s a kind of liberal, or neoliberal technocratic approach to politics that boils down to, as Adolph Reed once put it, let’s just get all the smart people together on the Vineyard and we can solve everything. As much as I admire John Maynard Keynes, you could say something similar about his approach to politics.
Farrell writes:
I see Doug and others as arguing that successful political change requires large scale organized collective action, and that this in turn requires the correction of major power imbalances (e.g. between labor and capital). They’re also arguing that neo-liberal policies at best tend not to help correct these imbalances, and they seem to me to have a pretty good case. Even if left-leaning neo-liberals are right to claim that technocratic solutions and market mechanisms can work to relieve disparities etc, it’s hard for me to see how left-leaning neo-liberalism can generate any self-sustaining politics.
I dig absolutely, as Leonard Bernstein put it in a somewhat different context (though it was part of a conversation about achieving full employment).
But I want to focus on a smaller point, Yglesias’ strange claim:
I think that better monetary policy, though hardly the solution to all of America’s ills, could do a lot to reduce unemployment. His view seems to be not just that a more thorough economic restructuring would be desirable, but that it’s strictlynecessary to achieve recovery. In my view, that’s factually mistaken. Better monetary policy over the past several years would, I believe, have produced a much shallower and shorter recession….
I really don’t know what he expected the Fed to do. Just before the Lehman crisis, the Fed held about $900 billion in assets. (See first column, here.) Within weeks, it held over $2 trillion. Now, it’s close to $3 trillion. They bought all kinds of stuff, guaranteed trillions more. They cut interest rates to zero and made it clear they’d stay there for a long time. They did it in a secretive and unaccountable way, but they can hardly be accused of passivity. Would it have made a big difference if they’d said, “Gosh, we wish inflation would rise to 3%”?
What would have made a big difference is if we had a bigger, longer-term stimulus and growth package centered around a jobs program and infrastructure spending, without all the tax breaks. I understand that getting that through Congress—even the old, pre-November 2010 model—would have been nearly impossible, but that’s another story. A story that would take us back to Henry Farrell’s point about the need for a self-sustaining movement.
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Federal employees are about 4.5 million right now (including military). Even if the government could employ another 14.1 million (that’s just the official number), most of these would be make-work jobs. In effect, the government would just be paying for the present consumption of the workers rather than investing. It would not pay for itself; rather, it would create enormous waste and much higher taxes. Even if we could do this, it would fail and create a reactionary backlash that would make the Reagan years look like October 1917.
Even die-hard Keynesians like Krugman believe monetary policy can work now. The Fed simply has to do what FDR did and announce that he wanted to return prices to normal levels (NB: he did not “want” inflation, just to return prices, and thus output, to the level they would have been at without a crash).
A big problem, as evidenced above, is that the vast majority of Americans believe government can’t create employment and merely takes money from the private sector and spends it inefficiently.
We should expect the ruling class to be venal, the nature of the system guarantees it. But it’s up to the working class to resist, not buy into stupid philosophies.
Purple: Any organization, public or private, profit or non-profit, would be spending its money inefficiently if it quadrupled its payrolls without a clear sense of what it was trying to do.
I am certainly not one of those who believe government can’t create employment. (Accusing someone of disloyalty when you can’t answer their argument, I thought, was the right’s purview–but no matter [and how many government-hating Americans idolize Roosevelt?]) I think that it’s quite possible for the government to create a lot of jobs. Monetary policy is one thing that the government can do. Therefore I obviously think the government can create jobs.
My point is that just having the government hire people to do whatever, or just having them spend additional money on whatever in the hope that they can create jobs, are very inefficient ways for the government to lower unemployment. I also think a vast increase in infrastructure spending is warranted in general, but we should not rely on it to fix the economy in the short term as it takes time to develop good plans.
During severe recessions, the government can create jobs by doing four things:: 1. monetary stimulus 2. making sure that they are expanding their payrolls, hiring as many workers as they can realistically use 3. front-loading as much spending as they can foresee requiring in the medium and long term 4. using automatic stabilizers such as increases in unemployment, food stamps, medicare, EITC, lower-income tax credits, as well as a holiday form the highly regressive payroll tax (including for employers, which will make it instantly 7.65 percent cheaper to hire workers).
Because of the government’s failure to create jobs, the working class has become incredibly reactionary, and this has set back the goal of class-consciousness for decades.
Shane:
Monetary stimulus only does anything if it goes somewhere. I’ve yet to see much evidence that the Fed’s stimulus (which was enormous – so I really don’t see what Yglesias’ point is there) went anywhere other than financial speculation of various kinds. Quite what further loose money would achieve that hasn’t already been achieved escapes me. Now if it was pushed towards the unemployed, or struggling workers, that could achieve something. But that of course would be redistribution, and we can’t have that.
Currently the big problems are a collapse in demand due to unemployment, and debt overhang. Companies are sitting on huge piles of cash (which incidentally are the inverse of the government’s debts), which they are not investing. Monetary stimulus isn’t going to solve that problem.
Unemployment is high because the economy is weak, so you have to strengthen the economy to solve that. Government spending would help; both directly (any extra economy activity, is by definition a strengthening of the economy), indirectly (all the companies receiving contracts, then sub-contract, buy investment goods) – as well as increasing employment (directly through hires through government contracts; indirectly through their extra spending). Depending upon what you spend it on the multiplier effects vary, but I’ve seen credible estimates of 1.5 being possible. A return of 1.5 on your investment is a pretty good return. Well I’d be happy with that anyway.
Finally, the part which doesn’t get talked about enough is debt restructuring. People aren’t spending, because they’re in debt and are trying to get from under it. Reduce the debts, reduce the demand problem. Inflation would help a bit, but we’d be waiting a long time for it to have a big enough affect to solve it.
“Finally, the part which doesn’t get talked about enough is debt restructuring. People aren’t spending, because they’re in debt and are trying to get from under it. ”
There is just no evidence of this. The US savings rate is 5%, which is completely reasonable and not high by historical standards. PCE have risen during this recovery, despite the weak job market and the negative wealth effect caused by the housing bubble bursting. Debt service costs as a percentage of income are now below where they were in the mid-1990s, and personal consumption as a share of GDP is right where it’s been for a long time — around 70%. There is no reason to think that debt restructuring would make a material difference to demand, unless you want Americans to go back to the days when they saved almost none of their income.
I would just like to encourage you to keep engaging with Yglesias, because I read both of you and I’m relatively dim on this stuff. So it helps to see it argued out.
Cian:
Monetary policy is not loose. The Fed has created a lot of bank reserves, but they have sold that action as “lowering long term interest rates,” not as an attempt to boost output directly through expanding the base. Expectations are the most powerful aspect of monetary policy. It’s about when people expect the Fed to tighten. If they think the Fed will cut off any recovery once inflation rises toward 3% (even for Fiscal policy to return the economy to full employment, the Fed would have to tolerate “catch up” inflation to accommodate a temporary surge in output), those reserves will have no effect. The Fed has to signal that they want them to have an effect. And they aren’t.
Krugman has a paper that is pretty good on the subject of expectations when interest rates are zero: http://web.mit.edu/krugman/www/bpea_jp.pdf