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  • Mark Thoma Calls for More Attention to Automatic Stabilizers

    Mark Thoma stresses the importance of automatic stabilizers--food stamps and other "taxes and transfers" that "automatically change with changes in economic conditions in a way that dampens economic cycles." Over at Moneywatch , Thoma writes that these stabilizers are key in mitigating the impact of economic downturns. And yet we have spent so little time discussing them during the past two years, largely because, Thoma writes "automatic stabilizers bypass this difficulty by doing exactly what their name implies, they kick in automatically without the need for Congressional action." We need to do a careful and thorough assessment of the strengths and weaknesses of existing automatic stabilizers, to identify missing pieces and extraneous parts, and we need to design new stabilizers that can improve our ability to smooth fluctuations in the economy (e.g. payroll taxes that decline automatically when conditions deteriorate, investment tax credits that vary countercyclically, or a continuously updated list of infrastructure projects that can be started ahead of schedule or brought online anew if the economy goes into recession). Then we need to begin the difficult political process of getting the needed change through Congress and signed into law before the next crisis hits. Read The Importance of Automatic Stabilizers here .

  • Long-Run Debt and The Intersection of Fiscal and Monetary Policy

    Mark Thoma thinks Alan Greenspan and Ben Bernanke were wrong to give their opinions about fiscal policy during Congressional testimony. But he does think that the Fed chair should address the effect of fiscal policy on monetary policy: That is, while I don’t think the Fed chair should give advice on the specifics of fiscal policy, the chair should make clear how fiscal policy choices will affect or constrain monetary policy. Let me try to explain how monetary and fiscal policy are connected through the budget deficit. There are two different government budget issues to think about. The first concerns the long-run trajectory for the debt, and the projections are that the debt will expand to unsustainable levels if we don’t do something to stop it. That means, above all else, reducing the growth in health care costs. The second issue concerns the short-run debt created in an attempt to stimulate the economy. This is a small amount compared to the long-run debt problem, but it is still a lot of money and we will need to pay this back when things are back to normal (but not before then, since paying it back too soon could undermine a recovery). And Thoma goes on, in his Money Watch column, to look at "the long-run debt problems" as a way of exploring the potential challenges of the Fed moving forward. Read The Relationship Between Budget Deficits, Fed Independence, and Inflation .

  • Reconsidering 'Normal' Unemployment Levels

    Mark Thoma has become one of the key members of the Econoblogosphere. His Economist's View blog is a must read for anyone tracking developments in the US economy and economic thinking in general. Now he's also writing for CBS's Moneywatch.com . In a recent post at his new spot, Thoma takes a look at unemployment and whether we will have to accept a "new normal" for the percentage of Americans out of work: Prior to the current recession, the target rate of unemployment — the sum of the frictional and structural components — was somewhere near 4 percent. Will it be the same after the recession ends? That depends upon what happens to the frictional and structural components of overall unemployment. Frictional unemployment falls during recessions. People are afraid to leave their jobs, even jobs they dislike quite a bit, because the prospects for finding new employment aren’t very good. And searching for a new job while still employed is less likely to be successful than during boom times. But as the economy recovers and confidence in job prospects recovers along with it, the level of frictional unemployment should go back close to where it was. Thus, I don’t expect this component to change very much. The change in the structural component could, however, be significant. I expect structural unemployment to be higher than it was, particularly in the next few years. We had too many resources in housing, finance, and automobile production, and it will take time for the economy to make the necessary structural adjustments. When this is combined with continuing globalization, as well as the higher savings rate and correspondingly lower consumption expected from households in the future, both of which cause structural change within the economy, the expectation is that the new target rate of unemployment will rise above the 4 percent level it was at before the recession. Read the full post here .

  • Closer Look at GDP Numbers, Stimulus Effect, and Consumption Details

    The rise in GDP during the third quarter prompted the Room for Debate blog of the New York Times to ask whether the Obama Administration's $787 billion stimulus plan worked. MIT and Baseline Scenario 's Simon Johnson says the stimulus package worked on both an economic front and a political front (which then led to larger stimulus effects globally). Harvard University Economist Jeffrey Miron says no, look to monetary policy. Russell Roberts , economist at George Mason University, is sekptical of the stimulus plans power and suggests the growth might have occurred without it. And Mark Thoma says that "the stimulus programs in place now are probably too small." Read the full "debate" here . Meanwhile, James Hamilton had one of the most instructive pieces on the GDP numbers at the Econbrowser blog. Hamilton feels very positive about the GDP growth, and he neatly breaks down, and illustrates, the various contributors to the growth: Consumption spending is the biggest component of GDP and the main contributor to third quarter growth, accounting by itself for 2.4 percentage points out of the 3.5% total, and with consumer purchases of motor vehicles and parts alone 3/5 of the contribution of consumption. Next in importance was inventory rebuilding, which added 0.9 percentage points to the total and could make a significant further contribution in the quarters ahead. Housing is finally making a positive rather than a negative contribution, and nonresidential fixed investment was a smaller drag than I had been expecting. Imports grew faster than exports, though I'm relieved that trade overall is coming back. The government sector made a smaller contribution than one might have thought given the fiscal stimulus, in part because lower state and local spending offset some of the increased federal spending. For a healthier long-run growth path I'd prefer to see business fixed investment and net exports adding rather than subtracting. But, compared with what we've been seeing recently, this overall is a quite welcome report. Hamilton and Menzie Chin n track recessions through their Econbrowser Recession Indicator Index --a pattern recognition algorithm for identifying recessions that waits one quarter for data revisions and clear trend identification before making an assessment. With the third quarter GDP numbers out they looked at the revised second quarter figures. And they conclude that the recession did not end during the second quarter. Read the full GDP analysis here .

  • Growing Percentage of Americans Unemployed for 27 Weeks or Longer

    The scariest graph of the Halloween weekend came from Mark Thoma at Economist's View : Please share your thoughts on the striking percentage of long-term-unemployed Americans and what it means for the economy going forward by clicking on comments .

  • Mark Thoma on Recovery Watch

    Mark Thoma writes that he will know the economy has turned a corner when the private sector is "the primary driver of new economic activity." And he has certian things he's watching for, among them: First, though not necessarily foremost, that banks are being recapitalized with private sector funds, and that this is happening without the aid of government guarantees or other such programs that encourage capital infusions (which is hard to determine while the government programs are in place). Second, I will want to see private sector non-residential investment improving, another sign that private sector funds are moving back into circulation. Presently, this hasn't even started heading back upward, though there are signs the decline is slowing: Read How Will We Know when the Economy Turns the Corner ? here . And weigh in. What are you watching for?

  • Bernanke and the Fed's Independence

    Ben Bernanke delivered his Semiannual Monetary Policy Report to the Congress yesterday before the House Financial Services Committee , and he expressed a relatively upbeat view of the economy . He also defended the need for the Federal Reserve to hold onto independence in the face of proposals to give the General Accounting Office more auditing powers, saying "a perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability." Here is his opening statement, from Bloomberg : Bernanke will continue his testimony later today. Mark Thoma 's concern with the Fed these days has less to do with its independence as a whole, and more, it seems, with the independence of the district banks as currently structured: As it stands, the Board of Governors in Washington has considerable influence over who is appointed to key positions such as the President of the district banks, and those Presidents represent five of the twelve votes at the meetings where monetary policy is set. More independence of the district bank Presidents and other district bank personnel from the Board of Governors would be a healthy change (there is also a question of whether geographic representation through district banks is the best way to capture the public interest, but I'll leave that aside for now). Read Fed Independence here .

  • Bernanke on Growth in 2009, and The Fed's Reaction to the Crisis

    Federal Reserve Chair Ben Bernanke testified on the federal budget before the House Budget Committee today. He told the committee that he expects the US economy to grow later this year, and that, while recovery will be slow, he believes the federal government's overall response--and the Fed's approach specifically--has been effective in keeping the financial crisis for doing more damage. Here are three ways to catch his statement. 1) You can read his full statement, provided by the Fed here ; 2) You can watch an excerpt, thanks to the Wall Street Journal ; 3) You can watch some of the question and answer with Wyoming Rep. Cynthia Lummis (R), thanks to Cynthia Lummis; 4) Or you can read a fake interview from Mark Thoma , in which Thoma injects his own questions into Bernanke's prepared statement, and in the process provides some helpful context for the remarks. It's available here .

  • Toxic Cars: Mark Thoma Explains the Geithner Plan

    This morning Treasury Secretary Geithner will hold a briefing to lay out the details of the government's plan to deal with the toxic assets problem of American banks. He provided an overview of the plan in the Wall Street Journal . He writes that the new Public-Private Investment Program is designed to "increase the flow of credit and expand liquidity ." The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government. The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate. Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets. Mark Thoma provides a useful way of understanding Geithner's plan. In Thoma's explanation, the toxic assets are cars, and he uses the toxic car problem to demonstrate three possible goverment responses: 1) The government purchases the toxic cars; 2) Subsidies and private partnerships (the Geithner plan); and 3) Nationalization. Read Government Intervention in the Market for Toxic Cars here .