Thursday, October 7, 2010

The Outlook for the US Economy

Here is a panel discussion presented by The Century Foundation on October 5, 2010. The panelists include:
  • Paul Krugman, professor of Economics and International Affairs at Princeton, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times

  • Martin Feldstein, economic professor at Harvard University, and the president emeritus of the National Bureau of Economic Research (NBER)

  • Jan Hatzius, Goldman Sachs′ chief US economist


Skip the first 1:20 which is just the moderator fussing about. Also, put up with the stretch from 4:30 thru 6:40 when Feldstein had a malfunctioning microphone. The rest of the video is extremely good and well worth watching.

More material can be obtained from this post at the EPI site.

Here is a bit from the transcript of the panel discussion:
CALMES: I thought I'd... ask each of our panelists what they see as the trajectory for unemployment through the end of 2011, and when we might start to see something approximating full employment, and what do we need to do to get there. So, with that small little question, I'm going to start with Paul.

KRUGMAN: OK. So on the first half of that question, I only know what Jan tells me.... [W]e're looking for rising unemployment over at least the next few months.... I would have guessed that we probably see unemployment continuing to rise, right up to the end [of 2011].... And as for when we return to something that looks like full employment, I think the maximum likelihood estimate is, basically, never.... [T]here's nothing visible on the horizon that will cause that to happen... no policy... aiming at returning to full employment... no technology that will drive a large amount of business investment. Historically, [in] the aftermath [of large] financial crises countries recover by having a huge exchange rate depreciation, which then leads to an export boom, but since it's basically the whole advanced world that's caught up in this, and there aren't any other planets to export to, that's not going to happen....

[T]he last time we had a global financial crisis, the recovery to full employment was accomplished by a coordinated, large fiscal expansion, known as World War II.... [W]e ought to be doing everything you can. We ought to be having quantitative easing, we ought to be having another round of stimulus.... [Y]ou'd have to have... stimulus big enough to bring capacity utilization back up to a high enough level that business investment really starts going again....

CALMES: Marty?

FELDSTEIN: I don't think Paul and I disagree all that much about the outlook. Certainly about the short term... it's pretty bleak. We have a GDP gap now which is roughly a trillion dollars, that's why we have almost 10 percent unemployment, and the GDP gap was almost as large at the beginning of 2009, and the fiscal stimulus package wasn't close to big enough to fill that hole.... [Y]ou had a whole which was, roughly, $800 billion dollars and they tried to fill it with a $300 billion, $400 billion annual fiscal injection.... [WE]e never got lift off, we never got into a recovery. And various temporary measures that we had, the cash for clunkers, the first-time homebuyers, they're finished.... The rest of the world is not going to help. The dollar relative to the rest of the world is not going to help....

KRUGMAN: [R]egardless of whether the Democrats somehow cling to the House, we're almost certainly heading for political paralysis.... I agree with Jan that there are two main scenarios, one of which is pretty bad and one of which is very bad. But there's probably a third one, which is absolutely catastrophic....

FELDSTEIN: So what can be done? So one thing that can be done is to work on fixing the situation for owner-occupied housing, fixing the mortgage situation. None of these are guaranteed to fill a trillion dollar hole, but they move you in the right direction. If house prices are beginning to go up, consumers are going to have more confidence. They're going to spend more.... Another thing that can be done is to deal with the problem that was just mentioned and that is the commercial real estate.... You don't hear so much about it, but, again, commercial real estate prices are off from the peak by about 40 percent. A lot of that is financed on five-year balloon loans that will start to come due 2011, 2012.... One could go in and work on the capital effects of fixing the impaired loans, impaired commercial real estate loans on the books of these thousands of small banks that we have around the country....

HATZIUS: I think [the] Federal Reserve is definitely an institution to talk about. They are going to do more... it's very likely to come at the next FOMC meeting, the day after the mid-term election.... I think it'll have some effect, but... the numbers that are required to really move the needle a lot are very, very large. And I think there's going to be a natural bias towards caution on more monetary policy makers in this sort of environment. I think that's usually what happens when you're in a liquidity trap, you're at the zero bond for short- term interest rates. You send the staffers away and ask them, you know, try to figure out what's the optimal policy here, and they go away, and they model things, and they come back with some, you know, enormously large number for the amount that needs to be purchased, and the policy makers say, "Oh, you know, are you really sure that you've taken account properly of all the tail risks that are associated with this? I mean, are your models going to be able to pick up the tail risk that, you know, maybe people are going to lose confidence, the financial markets in some diffuse sense are going to lose confidence." And so, policy makers say, you know, what you are saying makes some sense, let's take a small step in that direction. And that's why, I think, in this type of situation, stimulus tends to be, basically, underprovided, relative to what's necessary. And I suspect that that's what we're going to find again....

KRUGMAN: And then there's the trap, the same thing, I think in a milder form, that happened with fiscal stimulus. You do something which is in the right direction, but inadequate. And then people say, "Well, that didn't work."

CALMES: Right.

KRUGMAN: And so instead of increasing the dosage until you get it right, you just -- you give up on the thing altogether... all of this is very familiar, if you... study Japan in the '90s....

FELDSTEIN: Let see if we can find something that might happen that might move us out of this. We saw the Euro fall from 160 to about 120, very quickly. What happens if the U.S. experiences a comparable fall on a trade weighted basis, a 25 percent fall in the value of the dollar?

KRUGMAN: Yes.

FELDSTEIN: That would certainly give a jolt.... [T]he world may, having looked at the problems in the U.S. and elsewhere may say, gosh... the fiscal deficits are enormous.... So if the world looks at all of that, and says, these guys are in trouble, "Why are we holding so many dollars? Why are we continuing to invest in dollar securities?" one of the effects could be a very substantial fall in the dollar. I'm not predicting it, I'm not wishing for it, I'm just saying that if that happened, that would be one of the ways out of this.

KRUGMAN: The problem is that, that leaving aside the renminbi issue, which is something I, obviously, write about, the other currencies against which the dollar would have to fall, are the euro and the yen, and we really are talking about a race between the halt, the lame and the blind here, right? So it is a little hard to tell that story....

HATZIUS: [I]f it happens quickly, then it probably would coincide with instability in... financial markets, so you would probably lose... on [the impact of financial turmoil on] economic activity what you'd gain on the currency side. If it happens more gradually, then, yes, I think it would be helpful, and it wouldn't be as helpful as it was in other countries that went through... large credit boom/busts that were ultimately followed by big currency depreciation.... [T]he U.S. only exports 10 percent of its GDP, so it's not Korea, or Sweden in the 1990s....

FELDSTEIN: And it's not just exports, it's net exports, so if exports go up a bit, and imports come down a bit because foreign goods become more expensive, so American's spend their money buying services here in the United States, that moves the trade balance by 2 percent of GDP. That's a big deal, because as you said, that's what fiscal policy -- that's what we may be losing in the fiscal policy. That's what we need to start bringing down the unemployment rate...

2 comments:

thomas said...

It was fun to watch Krugman try to sit and listen to Feldstein's ideas about extending the tax cuts for two years (around 43.30 or so).. I had a hard time listening to his idea, but at the same time, I had to agree with the political fallout part of what he had to say. The problem is that there is not a way for the administration to be political and win. They must come up with a plan that will be best for America's economic future and their political future be damned.

RYviewpoint said...

Thomas: I agree with you, but when I hear "be political" I think of Neville Chamberlain and his "negotiations" with Hitler. Obama has gone down the Chamberlain path. I would prefer him to be a real leader, a Winston Churchill and get up in front of the American people and tell it like it is as did Churchill in England's time of trial:

Turning once again, and this time more generally, to the question of invasion, I would observe that there has never been a period in all these long centuries of which we boast when an absolute guarantee against invasion, still less against serious raids, could have been given to our people. In the days of Napoleon the same wind which would have carried his transports across the Channel might have driven away the blockading fleet. There was always the chance, and it is that chance which has excited and befooled the imaginations of many Continental tyrants. Many are the tales that are told. We are assured that novel methods will be adopted, and when we see the originality of malice, the ingenuity of aggression, which our enemy displays, we may certainly prepare ourselves for every kind of novel stratagem and every kind of brutal and treacherous maneuver. I think that no idea is so outlandish that it should not be considered and viewed with a searching, but at the same time, I hope, with a steady eye. We must never forget the solid assurances of sea power and those which belong to air power if it can be locally exercised.

I have, myself, full confidence that if all do their duty, if nothing is neglected, and if the best arrangements are made, as they are being made, we shall prove ourselves once again able to defend our Island home, to ride out the storm of war, and to outlive the menace of tyranny, if necessary for years, if necessary alone. At any rate, that is what we are going to try to do. That is the resolve of His Majesty's Government-every man of them. That is the will of Parliament and the nation. The British Empire and the French Republic, linked together in their cause and in their need, will defend to the death their native soil, aiding each other like good comrades to the utmost of their strength. Even though large tracts of Europe and many old and famous States have fallen or may fall into the grip of the Gestapo and all the odious apparatus of Nazi rule, we shall not flag or fail. We shall go on to the end, we shall fight in France, we shall fight on the seas and oceans, we shall fight with growing confidence and growing strength in the air, we shall defend our Island, whatever the cost may be, we shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender, and even if, which I do not for a moment believe, this Island or a large part of it were subjugated and starving, then our Empire beyond the seas, armed and guarded by the British Fleet, would carry on the struggle, until, in God's good time, the New World, with all its power and might, steps forth to the rescue and the liberation of the old.


People rally to a leader. I sure wish Obama was a true leader. So far he has proved himself to a politician of the Chamberlain stripe.