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In a thought-provoking piece for the January issue of Vanity Fair , Joseph Stiglitz urges us to consider an important element of the Great Depression that has not received as much attention in the media as monetary policy, a troubled banking system, or political battling. Stiglitz points us to the shift away from agriculture in the late 1920s through the early 1930s as cause of the Depression. If we are to look more closely at that piece of history, then we may be able to extract important lessons for today, as we see so many Americans going through revolutionary changes in their work and in their workplaces. Citing resebarch that he has been doing with Bruce Greenwald , Stiglitz writes: The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers. The consequences for consumer spending, and for the fundamental health of the economy—not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor. Mainstream macro-economists argue that the true bogeyman in a downturn is not falling wages but rigid wages—if only wages were more flexible (that is, lower), downturns would correct themselves! But this wasn’t true during the Depression, and it isn’t true now. On the contrary, lower wages and incomes would simply reduce demand, weakening the economy further. Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—that is, the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole. Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be. Read The Book of Jobs here .

Politicians and policy makers in the US often talk a big game when it comes to the need for a strong dollar. But as Willem Buiter , Chief Economist of Citigroup, and Ebrahim Rahbari , an economist for Citigroup, write at VoxEU , "US strong-dollar rhetoric has contrasted sharply with a weak dollar reality." Buiter and Rahbari argue that current policy will keep the dollar relatively weak against other currencies. But they also see no viable alternative to the dollar as the key currency in global business. Stepping away from the rhetoric about the dollar, Buiter and Rahbari remind us of some of the reasons policymakers may be okay with the dollar not getting to strong too quickly: [A] low actual dollar exchange rate may be seen as a net benefit for the US, because, in the presence of nominal rigidities, a depreciation of the nominal dollar exchange rate implies a real depreciation and therefore an increase in the international competitiveness of the US tradables sectors. The US is quite an open economy today, with the ratio of trade (the sum of imports and exports) to GDP at around 30%, comparable to Japan (Figure 3). Net exports have also played a significant part in the slowly solidifying recent cyclical recovery in the US, though it is, of course, true that many factors affect the evolution of net exports besides the level of the (nominal or real) exchange rate. Read The ‘strong dollar’ policy of the US: Alice-in-Wonderland semantics vs. economic reality here .

In his latest Fed Watch post, Tim Duy prepares us for what he expects is the next debate. With agreement among Fed officials that we are in for roughly 3.7% growth this year, one question is whether and when the Fed needs to adjust policies to moderate inflation. And decision, it seems will come down to how the Fed reads job figures. Duy writes: Whatever you think of the nature of the recovery, there appears to be general agreement that some recovery is in place, what the Fed describes as “firmer footing.” The pace of job creation in the last six months appears consistent growth a little above trend. I think we can consider this improvement as a general increase in aggregate demand. Note what occurs once demand rises sufficiently to pull output past the “kink” in the short run aggregate supply curve – there is suddenly room for upward pressure on prices. This appears consistnet with the general shift in risk away from deflation toward inflation. The situation could be somewhat more complicated if supply issues, particularly for oil, are putting upward pressure on the long run aggregate supply curve at the same time, but for the reasons given below this also does not need to impact our long run inflation story. Importantly, we need to expect such pressure to continue as the price level rises until output reaches its potential. In short, the rising prices can coexist with large output gaps. How does this translate into likely the likely path of inflation? The way I think about it is that prices return to their prerecession trend: This implies that reestablishing long-run equilibrium entails a period of relatively higher inflation. And that inflation will create significant unease among a certain group of policymakers (and investors, for that matter). Read Fed Watch:Back to Basics here .

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 .