Bernanke is truly amazing!

He “confessed” he knows both the cause and the solution to the “problem”:

“We lack a source of demand to keep the economy growing,” said Federal Reserve Chairman Ben Bernanke at a recent GWU lecture. The economic recovery will be slow and unemployment will remain high as long as consumers are not spending and businesses are not investing. And, businesses will not invest as long as there isn’t enough demand to warrant it. To strengthen the recovery as much as possible, we must first realize that demand is both the cause and solution to the economic crisis. 

And it REALLY is, as depicted in the chart below:

But Bernanke gets into the “in” theme that focuses attention on the 1%:

People often wrongly suggest that the economic problems we face are due to a lack of competitiveness, leading to outsourcing of jobs; they’ll blame taxes (especially corporate income taxes), regulation, education, skills of the workforce, and labor costs, among other things. But, this fails to explain the situation because these things don’t happen overnight to cause such economic problems, nor can they result in a global recession. In addition, the U.S. has been dealing with outsourcing for decades, yet still has been perfectly capable of having full employment for most of that time. Instead, the more obvious cause of the economic malaise is the sudden Great Recession, a severe global reduction in economic output (GDP) due to a loss of demand for goods and services.

So why did demand fall in the first place? People often point to the global financial crisis as the cause of the Great Recession. However, this was only a trigger. The economy was already on an unsustainable path before the financial crisis. The crisis was simply a bubble that delayed the recession, making the recession more severe when it suddenly burst. The real root cause was the insufficient growth of middle and lower class incomes to sustain the levels of demand needed to keep full employment. Income growth went increasingly to the wealthiest among us at disparity levels not seen since the Gilded Age that preceded the Great Depression of the 1930’s. That is no coincidence.

Wealthier people save a greater proportion of their incomes compared to other income groups that spend a greater portion. As more money is shifted to the wealthiest, there is less consumption, but more money available for investment or consumer loans. However, investment opportunities depend on the existence of sufficient consumer demand. This created lots of investment money competing for fewer investment opportunities and at lower rates of return.

And puts part of the “blame” on Wall Street:

Normally, this situation would lead to a recession as businesses downsize due to insufficient demand, and the risk of investment starts to outweigh the returns. Instead, what happened was Wall Street managed to create a new huge investment opportunity in the form of mortgages, using various techniques that hid the real risk from the investors and even themselves. This boom in housing demand propped up consumption in the economy. But of course, this level of consumption wasn’t backed up by enough personal income to be sustainable and would lead to a severe economic crash.

Conveniently forgetting that the Fed has close control of the nominal quantity called NGDP (PY) through its ability to determine MV. In “normal” times the Fed should offset, via M, changes in V. In times like the present it should more than offset the fall in V, getting MV to rise so that PY will get a boost!

4 thoughts on “Bernanke is truly amazing!

  1. The Fundamental Proposition of Monetary Policy–It is always the economy’s fault.

    Apparently, those with high incomes earn so much that they are willing to pay to accumulate wealth. The Fed’s standard operating procedure runs into problems when people are willing to pay more than 2% to hold wealth in a riskless form. So, the income distrubution needs to change so that those sorts of people earn less income.

  2. To be clear, Nick was being sarcastic. Saving is good. Bernanke is talking about changing the income distribution as a means of deflecting attention from the need to change the operating procedure (more precisely, its stated target).

  3. Bernanke: “[T]he U.S. has been dealing with outsourcing for decades, yet still has been perfectly capable of having full employment for most of that time.”

    I disagree. I recall Ross Perot with his flow charts trying though he might in the 1990s to break down “abstracts” such as GATT and NAFTA to share his view of what the economic outcome would be. And he wasn’t the only one who questioned where such trade policies would take us. The late Sir Richard Goldsmith expressed similar reservations. Americans, however, listened to our best and brightest economic experts who assured us that the laid off millworkers, steelworkers and autoworkers was an aberration. And yet the Great Recession showed us that even skilled professionals should take little for granted. And that’s something that a lot of people didn’t expect. Unemployment was always the other fellow’s problem — typically the plight of the semi-skilled or blue collar — and the answer was always conveniently trite: go back to school and retrain. Never mind that schools with their ever-increasing debt-loads are not low-cost options for low income people and the unemployed or that not all people are cut out for academic excellence and still have to find a way to support themselves! It wasn’t supposed to be the case, either, that a newly-minted college grad who had done everything right would end up in an Occupy Wall Street protest rather than an entry-level career job — precisely because there are few entry-level positions now that so many of them are outsourced and even insourced to H-1B visa holders! By now most of our major assumptions have been turned on their heads. And still relatively few people appear to have connected the dots to the great economic tipping point.

    My response to Bernanke’s statement, above, is this: Not so fast. Just as sowing a crop does not result in an immediate harvest nor the scattering of seed yield a ready-made forest, adopting poorly conceived international trade policy does not result in immediate economic crisis. (Clearly it produced promising initial gains but long-term sustainability is the bigger question.) Consider the encroaching phenomena of coastal erosion. Conceivably, by the time the water is lapping at the doorstep, the homeowner has had plenty of time to watch it inch ever closer and to prepare accordingly. In the same way, this lingering worldwide economic malaise was not entirely unpredictable.

    Enter the great human capacity to rationalize. The initial and most sweeping of the free trade agreements (FTAs), as best I can tell, were paternalistic in nature, believing that nations like China had many decades to go before they might catch up, let alone overtake us competitively. Whether of paternalism or hubris we have largely ignored — in peril to our own economic well-being — currency manipulation, tariffs and chronic trade deficits. To the contrary, we have bestowed upon a number of abusive or opportunist partners privileges such as most favored nation status (NTR) and WTO membership. Policymakers tacitly cling to the belief that with opportunity and wealth comes equity and fair play — modernization and Western-style assimilation — and yet such assumptions have not borne out. Western naivety knows no bounds, apparently. Consider the Arab Spring and how it has opened the door not to freedom but to more extreme and radicalized forms of repression!

    What seems to be missing from these early “flat earth” policy assumptions was an appreciation for the fact that few developing nations would start from scratch in the way the West was limited prior to the Industrial Revolution. Because we in the US and Europe had the ability to convey and transmit progress that took over a hundred years to develop and master, our newly-minted Third World trade partners were more akin to blank slates ripe for an onslaught of Western capital, intellectual property and more. In less than 30 years — in some cases less than 20 — these nations have made unprecedented strides thanks to wealthy trading partners that have brought them up to speed in order to produce what Western consumers need and want. And yet, to go on consuming at the rate Western people do it takes domestic jobs — decent paying jobs — and it is that engine that appears to be running out of fuel.

    Perhaps I am a fool but I do not think the “why” of this crisis is the great mystery so many people in high places make it out to be. It’s simple, frankly: If we can only buy and they can only sell — because we’ve encouraged a worldwide economy that is overly specialized and inadequately diversified — this is precisely where we in the First World shall find ourselves: hollowed out. We are at a crossroads: make the continent of Africa the new South America or Southeast Asia in order to repeat the cycle — without addressing the deficits that remain at home — or watch our Asian and Indian trading partners abandon a less profitable Western consumer in favor of imitating our model in Africa and elsewhere — at least until they experience a hollowing out of their own.

    Must we here in the United States resign ourselves to post-colonialism obscurity? Personally, I do not think American decline is inevitable. And yet there is this issue of face-saving. Politicians’ willingness to tackle the problem are, in my view, linked to their almost universal bipartisan support in the Clinton and Bush years for the lopsided FTAs that got us here. Policymakers aren’t about to admit that we may need not a bailout but a massive Federal jobs or infrastructure initiative to offset the wrong of converting us to a consumer-debtor economy increasingly devoid of productive manufacturing capacity and middle-skill, middle class jobs. And so they cling to their pride, the hope that this recession was largely a fluke, and they cast the matter in rather narrow terms — it was a subprime mortgage, credit or European debt crisis. Meanwhile, they come up with new formulas to calculate unemployment statistics, among other economic indicators, that might otherwise serve to open voters’ eyes.

    Make no mistake: Just as much as anyone I want more people to enjoy the opportunity to thrive as a result of increased economic opportunity here and abroad. Having said that, I think the time is long overdue to acknowledge the proverbial elephant in the globalized living room: poorly negotiated FTAs and/or the lack of enforcement of existing provisions to ensure that Perot’s “giant sucking sound” didn’t become a deal breaker. I hope we come to appreciate that our “comparative advantage” is not nearly strong enough to protect a large enough percentage of the working-age population here and in Europe against the economic ravages brought about when lesser-accountable trading partners play by their own set of rules with near impunity. (It only takes one bad apple with the economic weight to do so to launch a currency/trade war and I believe we are reaping the results of having ignored one for far too long.) If we are going to abide by a globally enmeshed model in which we who rise together also fall together the participants must have the stomach to ensure that each trade partner abides by a uniform set of tax, trade and currency policies in order to minimize what I call the “biopolarity of markets” (increasingly high, highs, increasingly low, lows). Persistently high unemployment and a growing wealth gap are symptomatic of a parasitical, manipulated, abused and poorly conceived or enforced global trade policy!

    We can talk about the ancillary “symptoms” such as the looming specter of structural unemployment. Alternately, we can shut down public dialog with a single accusation — the great trade taboo of “protectionism”. Yet in my view unsustainable trade and finance policy is chiefly what ails us. No amount of lowering corporate or personal taxes or the like will be stimulative or substantial enough until we revisit the arcane architecture of global trade law and the cultural and economic assumptions on which those policies and practices rest.

    Bernanke may have the answer as to why demand has slipped and thus hindered growth, but he stops short of acknowledging why lower and middle class mobility and American buying power, in general, has eroded in the first place. My advice? Take a hard, honest look, Mr. Bernanke.

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