Gerald Epstein on Deconstructing Fischer's Grim Economic Forecast

Gerald Epstein discusses how Fed Vice Chair Stanley Fischer's has ignored real solutions to improve the economy, like increasing wages.

Josh Bivens With Another Reminder About the Stupidity of Austerity

By Josh Bivens

[...] there are multiplier effects, so if actual federal government spending was $118 billion higher today (that’s the gap between actual and “should be” spending identified), then overall GDP would be roughly $180 billion higher. So, the policy decision to pursue austerity is costlier (in GDP terms) than just the difference between government spending levels [...] Government transfers—Social Security, unemployment insurance, food stamps, Medicaid, Medicare—are not classified as government consumption and investment spending in the GDP accounts. Instead, they show up as increased consumption spending [...] Most of the political argument has centered on the recovery phase of this cycle, simply because the actual recession began before the Obama administration took office. Further, it’s really only been since 2011 that government spending has been a truly significant drag on growth. Before then, between the Recovery Act and what we have called “ad hoc stimulus measures” (like the payroll tax cut in 2010), we didn’t have real austerity until the fallout from 2011’s Budget Control Act (passed in the wake of Republican debt ceiling brinksmanship in summer 2011) began.

Read rest here.

Mark Blyth's book Austerity: The History of a Dangerous Idea is highly recommended.

Dean Baker - Housing & The Downturn: It's Really Not That Complicated

By Dean Baker

Neil Irwin has a piece noting housing's importance in the downturn, which gets things half right. First, housing is typically important in economic cycles, as he says, but the picture is quite different than Irwin implies. In a typical recession housing construction falls because it is very sensitive to interest rates. Most recessions are brought on by the Fed raising interest rates to slow the economy. In these cases the decline in housing is a deliberate outcome of Fed policy, not an accidental outcome to be avoided. In contrast, the most recent downturn was brought on by a collapse of a housing bubble. This made it qualitatively different from most prior downturns (the 2001 recession was also bubble induced) in several different ways. First, construction was proceeding at an extraordinary rate of more than 6.0 percent of GDP before the collapse, compared to an average rate of just over 4.0 percent of GDP. This meant that housing contracted far more than it would in a typical downturn. Furthermore, because of the overbuilding of the bubble years, housing fell further than normal, hitting levels just above 2.0 percent of GDP. And, because the downturn was not brought on by a rise of interest rates it could not be reversed by a drop in interest rates.

Read rest here.

The End of Endless Growth?

In my assigned role as the (anti) Thomas Robert Bannister (Malthus), I thought I would return to the blog after a far-too-long hiatus with this post to share recent work. Note that this work is the other main area of research beyond my dissertation interest of the role of energy revolutions in economic history. I'll return to that one given recent posts here, but for now:

This work asks many questions, the fundamental one being do we really need to radically change behaviours to attain zero growth, or, what do we really mean by zero growth?

The conditional answer is that our world can achieve zero total growth (in the expected lifetimes of some of us) while still having per-capita GDP growth. The key, wearing my anti-Malthus hat, is population-conditional. To introduce the topic, here is a figure from my model that shows GDP levels peak at about 2080. I think that is a very radical outcome, with many implications. It is based on several forecasts, including the current UN low population forecast.

The only other forecast I'll mention for now is that the per-capita real GDP increases through the forecast period. The second-largest caveat is the large forecast error bands; I'll simply note that at least I show them. Most climate models (of which this is a member) eschew error estimates. I can do so because I use empirical forecasting methods.

So, peak GDP levels in 2080 with continuing real per-capita output growth (forever). A surprising result certainly to me. The largest caveat in this method is the population curve you believe we are on. I'll discuss that in a future post. For now, just enjoy that a (credible?) model exists that allows the zero-gowth crowd and the lift-the-poor crowd to coexist on the same model path.

I will monitor questions. This will be my EEA talk; just a heads-up for those who wish to stockpile (potatoes and other) ammunition.