"If the new president had a target of full employment, and if Americans believed that he could reach it the confidence problem could be quickly solved

Robert J. Shiller has a post in the NY Times:

"IN the current crisis, discussions of economic policy have often centered on uninspiring, short-term goals. To restore confidence in our economic future, we need appropriate, firm targets that will clearly put us where we want to be."

I think that we can be excused for dwelling upon the immediate danger in these circumstances.

"For example, President-elect Barack Obama has framed his economic stimulus package in terms of the number of jobs he will create. The goal is to add 2.5 million jobs, he says, by hiring people to improve our highways, fix up our schools and do other infrastructure work around the country. All of that is fine, but it does not represent a commitment to full employment — providing a job for everyone who is willing to work. As a result, confidence remains abysmal.If the new president had a target of full employment, and if Americans believed that he could reach it, the confidence problem could be quickly solved."

I have spent years, ever since reading "The Share Economy", in trying to devise ways to get to full employment. Let me also remind readers that I favor, if I had my druthers, a Guaranteed Income with Health Care being provided within the bounds of that income. In doing this, I am following ideas first propounded by Milton Friedman, and most lately developed by Charles Murray. Within that guarantee, it would obviously be better to find ways for full employment.

"The Great Depression provides an analogy. Presidents Herbert Hoover and Franklin D. Roosevelt had at least a vague idea that economic stimulus would help the situation, but even Roosevelt lacked clear targets for such policies during the New Deal. The economic stimulus applied was inconsistent and inadequate. Confidence waned, and the depression was longer and deeper than it needed to be."

I don't agree with this. I believe that in many ways Roosevelt was more Conservative than Hoover, and found that, in the necessity of dealing with the Depression, he had to alter those beliefs as he went along. I would say that he was Pragmatic, and the fact that we survived is proof of his effectiveness. I've also tried reminding people of the context of the 30s, which is not our context, which was that many people believed that Capitalism was dead, and that Totalitarianism, namely Communism and Socialism, were the only choices. You simply cannot denude any decisions of that time, even Economic ones, of that context. His targets were necessitated by massive threats to our very survival.

"People still remember aspects of that depression history. The Works Progress Administration and the Civilian Conservation Corps tackled infrastructure projects, much as Mr. Obama proposes — but these New Deal programs were not enough to restore full employment. That history reduces the current credibility of Mr. Obama’s target of 2.5 million jobs."

That's because they were experimental, and were being tried out in order to assess their effectiveness.

"On the other hand, there have been some worthwhile targets in monetary policy in recent years. A number of central banks have adopted firm inflation targets, which has helped to contain inflation expectations. Those expectations have tended to coincide roughly with the targets."

I agree.

"At the moment, of course, inflation is no longer the fundamental risk. Our current problems are deflation and recession — possibly even depression — and so we must rethink our targets."

I agree.

"An immediate shift to a full employment target may not be possible, simply because there is no confidence right now that we can hit it. While people seem to believe that central banks can control inflation, there is little consensus that central banks can prevent a depression under circumstances like this."

Here's where I believe that I differ from him and most everybody else. I believe that, prior to Lehman, and even after for a time, people did in fact still believe that the government could avert and deal with this crisis effectively. There has been an ongoing deterioration in that belief throughout this year, with it being almost completely shattered by the performance and effectiveness of recent government policies. A large part of this deterioration, I believe, has to do with a general feeling that the Bush Administration will manage to make things worse. However, because this belief was so widespread and endemic to our actual system of governance and finance, there was no Plan B. Consequently, when the crisis hit, everybody had placed their bets on the government.

From a philosophical perspective, these assumptions limited and limit our possible responses, in the same way that a sentence's meaning is limited by its context and presuppositions. That's why, contrary to what many Kantians believe, you simply cannot toss in any theoretical plan that you can come up with and expect it to work in this context. In fact, it will be as effective as gibberish is in a conversation.

"In a forthcoming book I’ve written with Professor George A. Akerlof of the University of California, Berkeley, we argue that current circumstances call for a couple of intermediate targets. If we can hit them, we may credibly be expected to hit the ultimate target of full employment — and keep inflation at bay. The intermediate targets should be announced forcefully, with an immediate effort to achieve them."

Yes Sir. On the double, Sir.

"First, there should be an intermediate target for conventional fiscal and monetary policy, one ambitious enough to restore full employment in a typical recession. (Fiscal policy is the taxation and expenditure proposed by the president and voted by Congress; monetary policy is the province of the Federal Reserve Board.) "

What's the target?

"This target may be inadequate, however, because we are not in a typical recession. Conventional fiscal and monetary methods may fizzle, as they did in the 1990s in post-bubble Japan. After its stock market and real estate debacle early in the decade, the government of Japan moved its budget into deficit and brought interest rates down to zero. But the economy never entirely recovered, and in due course the government debt rose to 1.71 times the annual gross domestic product, versus a current multiple of 0.74 in the United States."

Does that mean that we might hit the target and yet that not prove target enough? Yes, we don't want to end in Japan's pickle. But we might.

"Similarly, we just do not know whether these measures will work in this country. That is why we also need a second intermediate target, for credit. The ability to borrow should be restored to an appropriate level for a normal economy at full employment."

I think that's what I've been calling a Credit Stimulus. I dimly remember expecting TARP to be that. Well, not really expecting. Praying, more like it.

"This is crucial because the most salient problem in our institutions is the drying up of credit. Without credit, companies that count on outside finance will go bankrupt, requiring an impossibly large fiscal and monetary policy stimulus to achieve full employment."

And your remedy is? Give us the most salient solution, friend.

"Furthermore, as long as the credit crisis continues, the economy’s response to conventional fiscal and monetary policy may be drastically reduced. A person who cannot borrow, for example, is unlikely to buy a car, even if a generous fiscal policy has provided him with the needed down payment. Under the current circumstances, the Keynesian “multiplier,” the economy’s response to fiscal policy, may be unusually low. Our best econometric models just won’t tell us how low."

Chuck them, mate.

"FOR months, the Fed has been working to expand credit, and has invented some good methods for doing so. On Nov. 25, it announced a smart method to jump-start credit, called the Term Asset-Backed Securities Loan Facility, which would issue loans, using securities backed by newly issued consumer and small-business loans as collateral. The Fed has started paying interest on reserves to control the inflationary impact of such a policy."

I think that paying interest on reserves was more like an incentive to save, rather than lend. But that's just me.

"This plan and others like it are promising. But all the government loan programs announced so far represent only a tiny fraction of the $52 trillion of total credit market instruments outstanding. We will need to go much further and extend credit to households and businesses that would otherwise be ignored."

Fine. How do we do that?

"Along with fiscal and monetary policy, credit needs to be targeted on a scale that would get us out of our current economic mess. That’s what Washington should do now."

It's fine to want full employment, but, unless he's arguing that the government just up and guarantee everybody a job, I'm not sure how to get it. If that's what he's saying, why not just say that the government should guarantee everybody a job?

The one point I definitely agree with him on is that this is a Crisis Of Confidence, and policies must address it.

"whether the New Deal and World War II are good examples of Keynesian stimuli."

He sounds like a Wodehouse character, but Freakonomics vouches for his credentials:

"Economic historian Price Fishback, who recently guest blogged about the original Home Owners’ Loan Corporation, is back for an encore. This time, he tackles the issue of whether the New Deal and World War II are good examples of Keynesian stimuli.

I always thought they were; but using data, Fishback makes a simple and compelling case that they are not.

I learned a lot from his piece, and I suspect many of you will as well. In my opinion, this sort of writing is exactly what academic economists should be doing to help shape the public debate."

Where's it being held?

"What Do the New Deal and World War II Tell Us About the Prospects for a Stimulus Package?
By Price Fishback
A Guest Post

Everybody is talking about the stimulus package, and many are citing the New Deal and World War II as classic examples of successful stimulus programs. In punditry history, the federal government spent large amounts of money on works projects in the 1930’s and munitions in the 1940’s, and these were important stimuli to the American economy. Readers should beware, because the history is more complicated than the two-line descriptions."

Readers should also beware of long winded descriptions. They often signal that the author doesn't know what they're talking about.

"The New Deal

Federal spending rose from 4 percent to 8 percent of G.D.P. during the New Deal in the largest peacetime expansion in federal outlays in U.S. history. Yet this was not an example of Keynesian stimulus to the economy. Economists and economic historians have known this for the past 70 years, yet the myth lives on. The accompanying chart, which measures everything in real 1958 dollars for the 1930’s, shows why. The definitive analysis is more complicated, but the figure is a good shorthand way to show this.

The chart shows federal-government outlays, the budget deficit, and the difference between G.N.P. in that year and G.N.P. in 1929. The problem to be resolved was to reduce the huge gap in annual real G.N.P., which had fallen 33 percent below the 1929 level.

The graph shows that federal spending comes nowhere close to replacing that gap. Once we take into account the taxation during the 1930’s, we can see that the budget deficits of the 1930’s and one balanced budget were tiny relative to the size of the problem."

I love graphs. He's right. Nowhere close.

"John Maynard Keynes published an open letter to Franklin Roosevelt in major American newspapers saying more spending was not enough; the government needed to run larger deficits. As Keynes’s arguments were fleshed out after the 1930’s, various scholars ranging from Abba Lerner to E. Cary Brown to Claude Pepper have re-examined the New Deal budgets. They all agree that the New Deal cannot be described as a Keynesian stimulus program. We can only hope that the word will finally spread widely enough now to correct the myth."

Excuse me, there are still people who don't even know who shot Liberty Valence. So, it wasn't big enough to be called a Keynesian stimulus program. How about a John Mayn stimulus program?

"If not Keynesian policy, what was the New Deal? It was a broad-ranging mix of spending, regulation, lending, taxation, and monetary policies that can best be described as “See a problem and try to fix it.” In many situations the fix for one problem exacerbated other problems."

Brilliant. You've discovered government action in the real world. I commend you. Most people can't seem to find it.

"As people invoke the W.P.A. and F.E.R.A. work relief projects as templates for modern stimulus programs, they do not really understand how they worked.

While it’s true that the F.E.R.A. and W.P.A. built many roads, buildings, and public works, they were designed as “relief” programs with work requirements. The goal was to help families reach a minimum level of income, and the average payment per hour on these programs was roughly 40 percent of the wage being paid on the non-relief public works projects described below.

The pay was so low because the unemployment rates between 1933 and 1939 ranged between 14 percent and 25 percent, Roosevelt was trying to keep budget deficits in check, and the administration was trying to help as many people as possible reach a basic standard of living.

This focus on providing a basic standard of living contributed to an improved situation on several socio-economic dimensions. Recent studies of the relief programs in the largest cities suggest that spending an additional $2.5 million in year-2008 dollars (about $200,000 in 1935) on relief was associated with a reduction of 1 infant death, 1 suicide, 2.5 deaths from infectious and parasitic diseases, 1 death from diarrhea, and 21 property crimes.

Despite this success, my sense is that most people are not interested in recreating a system where people are paid such low wages to contribute to building public works for the rest of the society. The modern social-insurance structures of unemployment insurance and a wide variety of health, nutrition, and welfare programs are already in place to help resolve these types of problems."

I sure don't. Can I ask if you could document some of these people you're talking about? That's got to be easier than figuring out the Depression.

"The New Deal programs that better fit what the stimulus proponents have in mind are less well known and include the Public Works Administration (P.W.A.), the Public Roads Administration (P.R.A.), and the Public Buildings Administration (P.B.A.). There was also the Civil Works Administration (C.W.A.) that paid full wages but ran as a relief program employing 4 million people during four months of the winter of 1933/1934.

These programs built dams, sewers, bridges, roads, and buildings, as did the W.P.A. and F.E.R.A. The difference was that the programs contracted with private contractors, who then hired workers at the typical wages paid in the construction industry.

How successful were they at stimulating the economy? As yet, the only estimates we have are for the combined effects of the public works and relief programs. Studies that examine their success at the county level suggest that an additional grant dollar per person distributed to a county for public works and relief during the period of 1933 to 1939 contributed to a rise in in-migration and an increase in income per person in the county of about 80 cents in 1939. We should remember, however, that this was during a period when there were huge numbers of unemployed workers available for work. Even during this period, some studies find evidence of crowding out of private employment. Today, with unemployment rates below 7 percent, it is likely that such public-works spending would crowd out a significant amount of private construction."

As yet. What are we waiting for? Androids to help us?

"My own recommendation would be to evaluate the modern public-works programs more on the basis of the specific productivity of the programs rather than as stimuli to the economy. We know that we have an aging infrastructure of roads, bridges, and dams. The costs and benefits of the replacements would be my focus in evaluating whether to spend the money or not."

Sorry for being a smartass. It turns out I agree with you.

"One sign that Keynesian budget deficits were not the key to bringing the U.S. out of the Great Depression is what happened after the war. Every Keynesian predicted that the private economy would go into a recession because the large government budget deficits would be eliminated and so many men would be returning from the war jobless. Instead, as government deficits receded, private consumption and investment boomed. Resources were no longer allocated to producing munitions and instead were devoted to production of typical consumer goods and services.

Some people might misconstrue this discussion as saying that the U.S. should not have fought the war. The point here is that World War II was a period of sacrifice when many Americans experienced deprivation on par with what they experienced in the latter stages of the Great Depression. Vast budget deficits were not a stimulus in the normal sense of the word because the U.S. was a command economy devoted to an all-out war effort. William Tecumseh Sherman famously stated, “War is hell.” We should add the phrase, “even when financed by large budget deficits.”

That seems like a more complicated story, but I don't like the war brought us out of the Depression explanation anyway.

As for Keynesian budget deficits, I certainly can't see them as a positive in normal circumstances.