Friday, October 24, 2014

Wealth is growing faster than income, again.

                        Comments due by Nov. 1, 2014

More household wealth in America sounds like good news, but it could also mean economic trouble.

The ratio of wealth to income has hit a recent record, according to Credit Suisse.The last time it was this high was during the Great Depression. And it came close two other times: 1999, the year before the dotcom bubble burst, and leading up to 2007, before the housing market crash.
Wealth has skyrocketed, driven mainly by the soaring stock market, and that has mostly benefited the rich. Income for the average person, meanwhile, hasn't been growing much.
Credit Suisse analysts found that the ratio of wealth to income is 6.5. For more than 100 years, it has typically fallen between 4 and 5.
"This is a worrying signal given that abnormally high wealth income ratios have always signaled recession in the past," the Credit Suisse report said.

wealth to income chart

Wealth per adult in the U.S. has risen every year since 2008. In fact, average wealth is now 19% above the pre-crisis peak hit in 2006, the report stated. And $31.5 trillion household wealth has been added to the U.S. since 2008.
While experts said it's normal for wealth to outpace income, especially after a recession, it becomes a problem when it rises so fast that people feel overly optimistic about their wealth.
Tim Yeager, chair of the Arkansas Bankers Association, said when wealth inequality increases, the likelihood of asset bubbles also rises.
"Stock market and financial industry wealth are always moving around looking for the highest returns and makes bubbles more likely," he said. "When the stock market gets hot, more people pour in and that amplifies the creation of a pending bubble.
Russell Price, senior economist at Ameriprise, is hopeful the income side of the equation will balance out soon. "The pockets of slack in the labor market are evaporating and job growth is very encouraging - both are needed to increase wages."
The fact that there's been three periods of high wealth to income ratios in 15 years has Yeager concerned. "These asset bubbles are becoming more frequent and that causes financial instability."
Federal Reserve Chair Janet Yellen said in a speech Friday the increasing inequality could dampen the economy. "It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority," she said. 

Saturday, October 18, 2014

The Inequality Trifecta

                                              Comments due by Oct. 25 , 2014
– There were quite a few disconnects at the recently concluded Annual Meetings of the International Monetary Fund and World Bank. Among the most striking was the disparity between participants’ interest in discussions of inequality and the ongoing lack of a formal action plan for governments to address it. This represents a profound failure of policy imagination – one that must urgently be addressed.
There is good reason for the spike in interest. While inequality has decreased across countries, it has increased within them, in the advanced and developing worlds alike. The process has been driven by a combination of secular and structural issues – including the changing nature of technological advancement, the rise of “winner-take-all” investment characteristics, and political systems favoring the wealthy – and has been turbocharged by cyclical forces.
In the developed world, the problem is rooted in unprecedented political polarization, which has impeded comprehensive responses and placed an excessive policy burden on central banks. Though monetary authorities enjoy more political autonomy than other policymaking bodies, they lack the needed tools to address effectively the challenges that their countries face.
In normal times, fiscal policy would support monetary policy, including by playing a redistributive role. But these are not normal times. With political gridlock blocking an appropriate fiscal response – after 2008, the United States Congress did not pass an annual budget, a basic component of responsible economic governance, for five years – central banks have been forced to bolster economies artificially. To do so, they have relied on near-zero interest rates and unconventional measures like quantitative easing to stimulate growth and job creation.
Beyond being incomplete, this approach implicitly favors the wealthy, who hold a disproportionately large share of financial assets. Meanwhile, companies have become increasingly aggressive in their efforts to reduce their tax bills, including through so-called inversions, by which they move their headquarters to lower-tax jurisdictions.
As a result, most countries face a trio of inequalities – of income, wealth, and opportunity – which, left unchecked, reinforce one another, with far-reaching consequences. Indeed, beyond this trio’s moral, social, and political implications lies a serious economic concern: instead of creating incentives for hard work and innovation, inequality begins to undermine economic dynamism, investment, employment, and prosperity.
Given that affluent households spend a smaller share of their incomes and wealth, greater inequality translates into lower overall consumption, thereby hindering the recovery of economies already burdened by inadequate aggregate demand. Today’s high levels of inequality also impede the structural reforms needed to boost productivity, while undermining efforts to address residual pockets of excessive indebtedness.
This is a dangerous combination that erodes social cohesion, political effectiveness, current GDP growth, and future economic potential. That is why it is so disappointing that, despite heightened awareness of inequality, the IMF/World Bank meetings – a gathering of thousands of policymakers, private-sector participants, and journalists, which included seminars on inequality in advanced countries and developing regions alike – failed to make a consequential impact on the policy agenda.
Policymakers seem convinced that the time is not right for a meaningful initiative to address inequality of income, wealth, and opportunity. But waiting will only make the problem more difficult to resolve.
In fact, a number of steps can and should be taken to stem the rise in inequality. In the US, for example, sustained political determination would help to close massive loopholes in estate planning and inheritance, as well as in household and corporate taxation, that disproportionately benefit the wealthy.
Likewise, there is scope for removing the antiquated practice of taxing hedge and private-equity funds’ “carried interest” at a preferential rate. The way home ownership is taxed and subsidized could be reformed more significantly, especially at the top price levels. And a strong case has been made for raising the minimum wage.
To be sure, such measures will make only a dent in inequality, albeit an important and visible one. In order to deepen their impact, a more comprehensive macroeconomic policy stance is needed, with the explicit goal of reinvigorating and redesigning structural-reform efforts, boosting aggregate demand, and eliminating debt overhangs. Such an approach would reduce the enormous policy burden currently borne by central banks.
It is time for heightened global attention to inequality to translate into concerted action. Some initiatives would tackle inequality directly; others would defuse some of the forces that drive it. Together, they would go a long way toward mitigating a serious impediment to the economic and social wellbeing of current and future generations.

(Mohamad ElArian)

Saturday, October 04, 2014

The Rise of the Robots

                                                Comments due by Oct. 11, 2014

For decades, people have been predicting how the rise of advanced computing and robotic technologies will affect our lives. On one side, there are warnings that robots will displace humans in the economy, destroying livelihoods, especially for low-skill workers. Others look forward to the vast economic opportunities that robots will present, claiming, for example, that they will improve productivity or take on undesirable jobs. The venture capitalist Peter Thiel, who recently joined the debate, falls into the latter camp, asserting that robots will save us from a future of high prices and low wages.
Figuring out which side is right requires, first and foremost, an understanding of the six ways that humans have historically created value: through our legs, our fingers, our mouths, our brains, our smiles, and our minds. Our legs and other large muscles move things to where we need them to be, so our fingers can rearrange them into useful patterns. Our brains regulate routine activities, keeping the leg- and finger-work on track. Our mouths – indeed, our words, whether spoken or written – enable us to inform and entertain one another. Our smiles help us to connect with others, ensuring that we pull roughly in the same direction. Finally, our minds – our curiosity and creativity – identify and resolve important and interesting challenges.
Thiel, for his part, refutes the argument – often made by robot doomsayers – that the impact of artificial intelligence and advanced robotics on the labor force will mirror globalization’s impact on advanced-country workers. Globalization hurt lower-skill workers in places like the United States, as it enabled people from faraway countries to compete for the leg-and-finger positions in the global division of labor. Given that these new competitors demanded lower wages, they were the obvious choice for many companies.
According to Thiel, the key difference between this phenomenon and the rise of robots lies in consumption. Developing-country workers took advantage of the bargaining power that globalization afforded them to gain resources for their own consumption. Computers and robots, by contrast, do not consume anything except electricity, even as they complete leg, finger, and even brain activities faster and more efficiently than humans would.
Here, Thiel offers an example from his experience as CEO of PayPal. Instead of having humans scrutinize every item in every batch of 1,000,000 transactions for indications of fraud, PayPal’s computers can approve the obviously legitimate transactions, and pass on the 1,000 or so that could be fraudulent for thoughtful consideration by a human. One worker and a computer system can thus do what PayPal would have had to hire 1,000 workers to do a generation ago. Given that the computer system does not need things like food, that thousand-fold increase in productivity will redound entirely to the benefit of the middle class.
Put another way, globalization lowered the wages of low-skill advanced-country workers because others would perform their jobs more cheaply, and then consume the value that they had created. Computers mean that higher-skill workers – and the lower-skill workers who remain to oversee the large robotic factories and warehouses – can spend their time on more valuable activities, assisted by computers that demand little.
Thiel’s argument may be correct. But it is far from airtight.
In fact, Thiel seems to be running into the old diamonds-and-water paradox – water is essential, but costs nothing, whereas diamonds are virtually useless, but extremely expensive – albeit in a sophisticated and subtle way. The paradox exists because, in a market economy, the value of water is set not by the total usefulness of water (infinite) or by the average usefulness of water (very large), but by the marginal value of the last drop of water consumed (very low).
Similarly, the wages and salaries of low- and high-skill workers in the robot-computer economy of the future will not be determined by the (very high) productivity of the one lower-skill worker ensuring that all of the robots are in their places or the one high-skill worker reprogramming the software. Instead, compensation will reflect what workers outside the highly productive computer-robot economy are creating and earning.
The newly industrialized city of Manchester, which horrified Friedrich Engels when he worked there in the 1840s, had the highest level of labor productivity the world had ever seen. But the factory workers’ wages were set not by their extraordinary productivity, but by what they would earn if they returned to the potato fields of pre-famine Ireland.
So the question is not whether robots and computers will make human labor in the goods, high-tech services, and information-producing sectors infinitely more productive. They will. What really matters is whether the jobs outside of the robot-computer economy – jobs involving people’s mouths, smiles, and minds – remain valuable and in high demand.
From 1850 to 1970 or so, rapid technological progress first triggered wage increases in line with productivity gains. Then came the protracted process of income-distribution equalization, as machines, installed to substitute for human legs, and fingers created more jobs in machine-minding, which used human brains and mouths, than it destroyed in sectors requiring routine muscle power or dexterity work. And rising real incomes increased leisure time, thereby boosting demand for smiles and the products of minds.
Will the same occur when machines take over routine brainwork? Maybe. But it is far from being a safe bet on which to rest an entire argument, as Thiel has.
(Bradford De Long)

Friday, September 26, 2014

Income Inequality in the US

                                                       (Comments due by Oct. 4, 2014)
The income disparity between the richest and poorest Americans has grown wider in recent years, according to a report released Thursday by the Federal Reserve, data that should add fuel to the growing political debate over income inequality.
In effect, the report titled the Fed’s Survey of Consumer Finance said what many economists have been saying for years: the richest Americans are getting richer while the poorest are getting poorer. And the middle-classes, meanwhile, are standing still.
The results of the survey are released every three years.
Families with the lowest incomes saw “continued substantial declines” in average real incomes between 2010 and 2013, according to the Fed’s survey, which continues a pattern established between the central bank’s 2007 and 2010 surveys.
Families defined as middle to upper-middle class (which fall between the 40th and 90th income percentiles) “saw little change in average real incomes” between 2010 and 2013 and consequently have failed to recover the losses experienced between 2007 and 2010, the report said.
“Only families at the very top of the income distribution saw widespread income gains between 2010 and 2013, although mean and median incomes were still below 2007 levels,” the Fed survey found.
The political debate over income inequality has led some -- mostly Democrats -- to call for higher taxes on the wealthy, while others -- mostly Republicans -- argue that higher taxes ultimately lead to economic stagnation and could act as another obstacle to the ongoing economic recovery.
The central bank’s report described “substantial disparities in the evolution of income and net worth” since 2010 despite improvements in U.S. labor markets and gradual economic growth since the 2008 financial crisis and recession that followed.
Overall, average income rose 4% from 2010 while median -- the midpoint with half higher and half lower -- income fell 5%, “consistent with increasing income concentration during this period,” according to the Fed’s report.
Meanwhile, the top 3% of families saw their share of U.S. income rise to 30.5% in 2013 from 27.7% in 2010. Fed economists said the data reflect a return to the economy's prerecession trend, after the income distribution narrowed during the recession when top-earning families saw their incomes fall. The top 3% had held 31.4% of all income in 2007.
“Overall, between 2010 and 2013 there was little movement in median and mean net worth, as the median fell a modest 2% and the mean increased slightly. Consistent with income trends and differential holdings of housing and corporate equities, families at the bottom of the income distribution saw continued substantial declines in real net worth between 2010 and 2013, while those in the top half saw, on average, modest gains,” the report found.
In addition, ownership rates of housing and businesses fell substantially between 2010 and 2013.
And retirement plan participation in 2013 continued to decline, following a pattern established between the 2007 and 2010 surveys for families in the lower half of the income percentile. Participation rebounded slightly for upper-middle income families, but it did not move back to the levels observed in 2007, the Fed said.
Ownership rates for most assets -- from stocks to retirement accounts, cars to homes -- fell from 2010 to 2013, which “indicates that while most families continue to hold some type of asset, many more families now hold fewer different types of assets,” the report said. Some 65.2% of families owned their primary residence in 2013, the lowest homeownership rate since 1995.

Saturday, September 20, 2014

Household Networth

The latest released statistics show that finally, the networth of households in the US is above where it was in 2007, but barley. 
THE net worth of American households is now 20 percent higher than it was before it began to decline in 2007, the Federal Reserve reported this week. It said the households together were worth $81.5 trillion at the end of the second quarter, higher than ever and up 10 percent from a year earlier.
By another measure, household net worth is a little short of the record highs reached before the recession. It amounted to 471 percent of the nation’s gross domestic product in the second quarter, just short of the record 473 percent set in early 2007.
Those figures are not adjusted for inflation. But adjusted for the change in the Consumer Price Index, household wealth is also at a record high, 4 percent above the 2007 level.
The recovery in household wealth has come in ways that favor the wealthiest households. The Fed estimated that real estate owned by households is worth $22.9 trillion, 6 percent less than seven years earlier but 27 percent more than at the bottom of the real estate market in 2011.

change fPercentage rom Q2 2007

2Q ’14
Stocks and
Mutual funds
Real Estate

The biggest gains for households came in the equity markets. The Fed said households now owned $21 trillion in stock and mutual fund shares, 37 percent more than seven years earlier and almost 160 percent more than they owned at the bottom of the bear market in 2009.
While many people own stocks and mutual fund shares, by far the largest holdings are among those who are the wealthiest. In 2012, more than a third of dividends reported on tax returns went to taxpayers earning at least $2 million a year. That is more than double the share of dividends that went to those with taxable incomes of $100,000 or less.
During the recession, many households moved into safer fixed-income assets, including bonds issued by companies and governments. But with speculation that interest rates will rise, reducing the value of outstanding bonds, households have reduced their holdings to $3.5 trillion, a few billion less than in 2007. Total debt for households and nonprofit organizations equaled 77 percent of G.D.P., the lowest level since 2002. That figure peaked at 96 percent in early 2009.
Debt has also fallen for other sectors of the economy. The financial sector, including banks, had total debt at the end of the second quarter equal to 81 percent of G.D.P., the lowest level since 2000 and down from a peak of 119 percent. Loans to nonfinancial businesses have been rising in recent quarters, and now equal 67 percent of G.D.P., but that is lower than the peak of 74 percent reached in 2009.
The decline in household debt is largely due to lower mortgage debt, particularly home equity loans. But consumer credit has continued to rise and now equals a record 19 percent of G.D.P.
That is largely because of the continued surge in student loan debt — an obligation concentrated in younger households and among those who are far from wealthy. It has more than doubled since 2007. In 2006, when the Fed began to report on student loan debt as a separate category, the debt totaled $509 billion, or 22 percent of total consumer debt. Now, it equals $1.3 trillion, a 40 percent share of consumer debt.
That is more than Americans owe either on credit card debts ($839 billion) or auto loans ($919 billion).
Auto debt, however, has recovered and is now 17 percent higher than it was before the recession. That is 5.3 percent of G.D.P., well below the 6.5 percent record set in 2003.
While private sector debt has generally declined, at least relative to the size of the economy, government debt has been rising. But with the federal budget deficit falling, the ratio of federal government debt to G.D.P. slipped to 72.9 percent in the second quarter from 73.6 percent three months earlier.

Saturday, September 13, 2014

Student Debt Burden

JANET LEE DUPREE, 72, was surprised when she received her first Social Security benefits seven years ago. About one-fifth of her monthly payment was being withheld and she called the federal government to find out why.
The woman, who is from Citra, Fla., discovered that the deduction from her benefits was to repay $3,000 in loans she took out in the early 1970s to pay for her undergraduate degree.
“I didn’t pay it back, and I’m not saying I shouldn’t,” she said. “I was an alcoholic, and later diagnosed with H.I.V., but I’ve turned my life around. I’ve been paying some of the loan back but that never seems to lower the amount, which is now $15,000 because of interest.
“I don’t know if I can ever pay it back.”
She is among an estimated two million Americans age 60 and older who are in debt from unpaid student loans, according to data from the Federal Reserve Bank of New York. Its August “Household Debt and Credit Report” said the number of aging Americans with outstanding student loans had almost tripled from about 700,000 in 2005, whether from long-ago loans for their own educations or more recent borrowing to pay for college degrees for family members.
The debt among older people is up substantially, to $43 billion from $8 billion in 2005, according to the report, which is based on data from Equifax, the credit reporting agency. As of July 31, money was being deducted from Social Security payments to almost 140,000 individuals to pay down their outstanding student loans, according to Treasury Department data. That is up from just under 38,000 people in 2004. Over the decade, the amounts withheld more than tripled, to nearly $101 million for the first seven months of this year from over $32 million in 2004.
While older debtors account for a small fraction of student loan borrowers, who have accumulated nearly $1 trillion in such debt, the effect of owing a constantly ballooning amount of debt but having a fixed income can be onerous, said Senator Bill Nelson, Democrat of Florida, chairman of the Senate Special Committee on Aging.
“Those in default on their loans can see their Social Security checks garnished, leaving them with retirement income that leaves them well below the poverty line,” he said at a committee hearing this week to examine the issue.
“Some may think of student loan debt as a young person’s problem,” he said, “but, as it turns out, that is increasingly not the case.”
That is the problem that Rosemary Anderson, 57, described to the committee. The woman, who is from Watsonville, Calif., has a home mortgage that is under water, as well as health and other problems, and $64,000 in unpaid student loans. She borrowed the money in her 30s to fund her bachelor’s and master’s degrees, but fell behind on her student loan payments eight years ago.
As a result of compound interest, her debt has risen to $126,000. With her $526 monthly payment, at an 8.25 percent rate, she estimates that she “will be 81” by the time it is paid, and will have laid out $87,487 more than she originally borrowed.
Mrs. Dupree, in a telephone interview, said she, too, needed some relief. As a part-time substance abuse counselor for a nonprofit based in Ocala, she said she could barely afford the $50 each month that she negotiated with the federal government as payment for her growing debt.
She is supporting a measure introduced by Senator Elizabeth Warren, Democrat of Massachusetts, and a committee member, that would allow people who borrowed money for education before July 2013 to refinance at current, lower interest rates.
A person who took out an unsubsidized loan before July of last year “is locked into an interest rate of nearly 7 percent and older loans run 8 percent to 9 percent and even higher,” Ms. Warren said. The measure would lower the interest rate to 3.86 percent for undergraduate loans and a little higher for graduate and parent loans.
But the future of the bill is unclear. It was stalled in the Senate in June by Republican senators, like Lamar Alexander, of Tennessee, who said college students didn’t need a taxpayer subsidy to help pay off a student loan. “They need a good job.”
The measure would help 25 million people refinance their student loans, but impose a tax increase on people making over $1 million — which Senator Mitch McConnell, of Kentucky, the majority leader, labeled a “tax increase bill styled as a student loan bill.”
Adam Brandon, executive vice president of the conservative organization FreedomWorks, which opposed Senator Warren’s bill, said such legislation “only makes the current student loan bubble worse by continuing to encourage people to take out more loans than they can afford.
“The market needs to work out who can afford these loans. We shouldn’t be trying to game the market and have people end up with so much debt they can’t afford their car payments.”
Even though the number of retiree debtors is small, $1,000 deducted from their Social Security payments “can make a real difference for affected senior citizens or disabled adults surviving on Social Security,” said Sandy Baum, a professor at the George Washington University Graduate School of Education and Human Development, and a researcher at the Urban Institute.
For most beneficiaries, she said, “the average monthly payment of $1,200 is the primary source of income.” While the government should be holding student borrowers to account for their debt, “and there may be some who just decide not to pay,” she said “most are people who are not earning money so it doesn’t make sense to ask them to pay.”
As the ranks of retirees grow, more attention is being focused on the education debt incurred by the next group of people approaching retirement, those 50 to 64 years old. A 2013 AARP study of middle-class families found that aging households were carrying increasing amounts of debt.
While mortgages account for most of that debt, education debt levels have been rising for the preretiree group, noted Lori A. Trawinski, a director at the AARP Public Policy Institute.
“As of 2010, 11 percent of preretiree families had education debt with an average balance of $28,000. Growing debt burdens pose a threat to financial security of Americans approaching retirement, since increasing debt threatens their ability to save for retirement or to accumulate other assets, and may end up leading them to delay retirement,” she said.
The Government Accountability Office warned this week about the growth of educational debt among seniors. It released a report that relied on different data from that used by the Federal Reserve Bank of New York, but nonetheless painted an ominous picture of lingering debt burden.
“As the baby boomers continue to move into retirement, the number of older Americans with defaulted loans will only continue to increase,” Charles A. Jeszeck, the G.A.O. director of education, work force and income security, testified at the hearing. “This creates the potential for an unpleasant surprises for some, as their benefits are offset and they face the possibility of a less secure retirement.”
More than 80 percent of the outstanding balances are from seniors who financed their own education, the G.A.O. report concluded, and only 18 percent were attributed to loans used to finance the studies of a spouse, child or grandchild.
But the default rate for these loans is 31 percent — a rate that is double that of the default rate for loans taken out by borrowers between the ages of 25 and 49 years old, according to agency data.
“Such debt reduces net worth and income and can erode retirement security,” Mr. Jeszeck said. “The effect of rising debt can be more profound for those who have accumulated few or no financial assets.”
And such student loan debt “can be especially problematic because unlike other types of debt, it generally cannot be discharged in bankruptcy,” he added.
As a result of unpaid student debt, Social Security payments can be reduced to $750 a month, which is a floor Congress set in 1998. Senator Susan M. Collins, Republican of Maine, and a member of the committee on aging, said she was planning to introduce a measure to adjust the amount for inflation “to make sure garnishment does not force seniors into poverty.”
For people like Ms. Anderson, help cannot come too soon.
“I incurred this debt to improve my life,” she told the committee, “but the debt has become my undoing.”

Sunday, August 31, 2014

Do we need a new economics

Since the 2008 financial crash, our country has been reeling without getting its economic policy right. What we needed then, and need now, is a new kind of macroeconomics; one that aims for investment-led growth, not consumption-led growth. But investment-led growth can't be achieved by a temporary stimulus. It requires a very different kind of strategy and policy. Investment-led recovery requires a clear identification of our society's longer-term needs, needs that can be filled through complementary investments by the public and private sectors. Think of railroads and farms in the late 19th century; highways, cars, and suburbs in the 1950s; and information technology, smart grids, and low-carbon energy for our time. And it requires a set of public policies to spur those investments, in part by using smart public investments to help leverage a private-sector investment boom.
Therefore, it is very frustrating to read Paul Krugman again today write about our current stagnation with so little reflection on his part that his own preferred stimulus policies can't solve the problem. It's of course even worse to hear this from Larry Summers, who Krugman quotes favorably today. Summers was the architect of Obama's economic policies during the first term, and now he tells us that the administration's policies haven't worked.
Both Summers and Krugman subscribed to Keynesianism, the idea that larger budget deficits and short-term stimulus after 2008 would revive the economy. Neither of them reflected on how the macroeconomic policies after 2008 should respond to the causes of the crisis. If they had, they might have recommended a very different strategy. And the debt-to-GDP ratio might not have doubled in the meantime as a result of the reliance on Keynesian stimulus policies.
When the financial crisis broke out in the fall of 2008, I warned against the Keynesian approach to recovery. In 2009, I had this to say about the administration's economic plans:
The White House and Congress are attempting in every way they can -- through tax cuts, rebates on home buying, and cash for clunkers -- to boost total spending. The cash-for-clunkers epitomizes the shortsightedness of it all. We paid billions of dollars for individuals to trash their existing cars and buy new ones. In general, the neo-Keynesians think about "stimulus" -- that is, aggregate demand -- without thinking much about the various needs and uses of public and private spending, or about the longer-term consequences of budget policies... Yet none of this will work. The U.S. economy, and the world economy, cannot recover sustainably by propping up consumers for yet another binge.
Consumption-led recovery was the wrong way to go then and it still is now. The entire crisis of 2008 began with a debt-financed consumption and housing binge that went wrong. By 2009, consumers were broke and exhausted. Wages of median workers had not risen for decades (!). Did the administration and Krugman really believe that a two-year temporary demand stimulus would truly do the job? They sure acted that way. Krugman wanted an even larger stimulus, which would have caused an even greater surge in the debt-to-GDP ratio than we've had. But it would again have been at best a temporary salve, and most likely done little to spur a permanent recovery.
Keynesians like to say that there is a savings glut (an excess of saving over investment). They try to remedy it by spurring consumption. This is a mistake. There is an investment shortfall, because the financial, regulatory, and policy barriers to high-return investments have not been addressed. America urgently needs investments in modernized infrastructure, advanced science and technology, and job skills appropriate for the 21st century. We are sitting on top of an information revolution and nanotechnology revolution that could positively reshape healthcare, education, transportation, low-carbon energy systems, green buildings, water conservation, and environmental safety.
What are we doing about it? Very little, alas. Just look at the paucity of actual investments being made. There is so little dynamism. The wondrous IT revolution, with its potential to remake our economy as a world leader in efficiency and quality of services, needs to be much more than new apps for smartphones and new ways to sell online advertising through social media.
Obama's political advisors were woefully shortsighted in 2009, and the president himself was badly misled by the simplicity of Keynesian stimulus, to the point of believing that "shovel-ready" projects would surge with just a little fiscal pump priming. How sad. What a lost opportunity. There were no such shovel-ready projects, as the president later acknowledged.
Large-scale investments remain impeded because the U.S. lacks basic strategies in all key sectors. We have no national energy strategy other than fracking; no modern transportation strategy; no coastal protection strategy; no jobs-training strategy. The list of "no strategies" goes on. The result is that we have little investment dynamism where we need it, and continue to hope for spending in the old standard-bearers: housing, cars, and consumption goods. In the meantime, competitors like China are shaping their economies for the technological advances of the 21st century.
We need, in short, a new macroeconomics that moves us beyond the tired debates over public debts and short-term stimulus. Here's what I wrote about such a new framework back in 2009:
Macroeconomists trained in the past 30 years believe that demand increases depend mainly on interest rates and deficit or tax levels. Yet increased spending on renewable or nuclear power plants, a robust power grid, carbon-capture and sequestration, wastewater treatment facilities, fast inter-city rail, higher education, urban co-generation of electricity and heat, green buildings, and countless other new sustainable technologies, will depend on establishing a policy framework that harmonizes regulations, land use, public financing, and private investment. Large-scale stimulus, in other words, requires the nitty-gritty of public-private planning, technology assessments, demonstration projects, and complex project financing.
The new tools of macroeconomics, therefore, are quite different from the existing tools. The new tools begin with a medium-term (say, ten-year) budget framework, so that tax policies are not pulled out of thin air or campaign rhetoric, but reflect the calculated needs for public outlays; a medium-term set of income distributional goals and strategies, especially to break the back of child-poverty, rising school drop-out rates, and training for low-skilled workers; structural objectives regarding the rebuilding of infrastructure and the transition to a low-carbon economy; and a new set of institutions to carry out these policies. The new institutions might include a National Infrastructure Bank, as Obama mentioned during the campaign, to help finance public-private partnerships in energy, water, and transport. The Energy Department might be reconstituted as the Department of Energy and Climate Change, to bring the requisite expertise and financing for the low-carbon economy under one roof.
Many progressives will no doubt say that I'm being unfair to the Keynesians, and that they too would favor an investment strategy if the Republicans didn't block them. I hope that's true. Yet Keynesian stimulus repeatedly takes our eyes off the long term. We need a new approach to growth, not another quick fix. And if the time is not right politically for an investment-led approach, it will become right the more we prepare and advocate for it.