“The big cannon should be fiscal policy [more deficit spending].” — Peter Diamond, Nobel Prize Economist and New Fed Member
Every year I attend (and sometimes speak) at the American Economic Association (AEA) meetings, where the top economists meet and present papers on current issues. In the past, I’ve confronted Fed chairman Ben Bernanke, government officials, and Nobel laureates with tough questions.
This year’s conference was held in Chicago, home of the famed free-market Chicago School of Economics. After the financial crisis of 2008, the Chicago school has been under assault, and there was a session on “Has the Chicago School Emerged from the Crisis Unscathed?” Clearly not, the panelists concluded.
Peter Diamond’s Solution to the Unemployment Problem: Tax (the Rich) and Spend!
Panels are always the most provocative, and usually involved famous people. This year the panels were dominated by Keynesian Nobel Prize winners such as Paul Krugman and Peter Diamond. Diamond was just appointed by President Obama to be a new Fed member. A major topic at this year’s conference was the lousy employment numbers. The unemployment rate is 8.5%, and more importantly, job openings are falling. Apparently the unemployed are dropping out of the labor force and giving up.
In a popular session, “What Happened to the US Employment Miracle,” the panelists agreed that the employment miracle ended around 2000, even before the 2008 crisis. And 10.6 million jobs will be needed just to get back to 2007 levels. Chicago economist Steven Davis said that despite the clear benefits of a college education, men are not responding and going to college.
What to do? “The big cannon is now fiscal policy,” Diamond said. He recommended that Washington spend more and run even deeper deficits, preferably on education, R&D, and infrastructure, not foreign wars. And he meant “now is the time to act to get people back to work.”
More than $1.7 trillion a year? Aren’t we risking default like Europe? Apparently not. “There is no imminent debt problem in the United States as there is in Europe,” he responded.
Since he was headed to the Fed, I asked him what he would recommend Bernanke do to stimulate the economy. “Should we inflate our way out?”
“There is no inflation problem today,” he said. Meaning: Get the printing presses going 24/7!
I asked Diamond and other experts on why the employment market was so stagnant. Was it due to excessive regulation (ObamaCare, Sarbanes-Oxley, Dodd-Frank, minimum wage)? They said “no” to all these reasons. But higher taxes and unpredictable monetary policy could hamper the recovery in the jobs market.
Diamond recommended that now is time to reform Social Security, before all the baby boomers start getting benefits. I suspect that means higher taxes on the wealthy and raising the retirement age — not privatization — but he didn’t go into particulars.
Diamond is an advocate of a sharp increase in the marginal tax rate on wealthy individuals — to as high as 73%, according to the latest issue of the Journal of Economic Perspectives — and without any loopholes. He says the studies show this high rate won’t hurt incentives. Really?
Krugman Sings the Same Tune
Paul Krugman (see photo) echoed Diamond. He told me that the only option left open now is “more massive deficit spending.”
What about the fear that we are headed toward default European style?
“Not a chance,” he replied. “We’re years away.” He pointed out that Treasury bonds are still rising, so there’s no worry. (10 year bond yield is under 2%!)
I pointed to numerous examples of developed countries (Canada, Sweden, New Zealand) that had cut spending and reduced their deficits, and their economies flourished. “Not relevant!” he exclaimed. “None of these countries were suffering from a severe recession.”
Would he favor a cut in the corporate tax rate, as advocated even by Democrats? “No,” he said emphatically. In fact, he supports a tax increase on wealthy Americans, up to 50% without loopholes.
Sadly, these are the kind of economists who President Obama is listening to. Can we afford another four years of tax and spend? It’s scary.
Robert Shiller and the Real Estate Market
Yale economist Robert Shiller is more cordial and open-minded. He was on the platform at an AEA luncheon, along with a dozen or more other economists (why is it that only ivy-league economists are so honored?).
He is famous for his book Irrational Exuberance, wherein he predicted the tops of both the stock market in 2001 and the real estate market in 2006. He is also co-inventor of the Case-Shiller Real Estate Index. I asked him if the index suggested a bottoming pattern. He didn’t know, but the futures market for real estate looked promising.
In fact, a new report states that “the number of improving housing markets nearly doubled,” including Dallas, Denver, and Philadelphia. I’m bullish and have been recommending housing stocks.
Interestingly, Paul Krugman told me that Nouriel Roubini, the notoriously bearish economist from NYU, recently bought a house in the New York area. “That’s a clear sign of a bottom,” Krugman said with some glee.
Bob was kind enough to ask me about my new book. I told him about The Maxims of Wall Street and shared with him some of the Wall Street sayings.
Robert Mundell on the Euro and EU Crisis
I also had a chance to interview free-market economist and Nobel Prize winner Robert Mundell. We were on the same flight together to and from New York. He was appalled by the “crude” Keynesians at the AEA meeting who advocated all-out inflationary policies.
“What about the future of the euro and the Euro zone?” I asked. Mundell is considered the father of the euro.
“Some countries like Greece will have to default on their debt, but the euro is here to stay and the EU will survive,” he predicted. He no doubt would reject out of hand Robert Barro’s op ed in the Wall Street Journal (January 9) that the euro be disbanded. Such an event would undoubtedly cause a stock market crash.
I interviewed Larry Summers, former president of Harvard and recently President Obama’s top economist. (See photo.) I asked if he it was true that no president has ever been re-elected with an unemployment rate over 8%, and he said, “It’s not so much the rate as the direction of the unemployment rate.” If it’s headed down, that’s positive for Obama.
China: Threat to the West?
Summers participated in an high-powered panel on “The United States and China” with Robert Mundell, Gary Becker, and Robert Zoellick, the new president of the World Bank. It was a lively session moderated by Fordham professor Dominick Salvatore. Gary Becker said that China is surpassing us rapidly in education. While our graduation rates are declining, theirs is increasing. Our immigration policy is biased against skilled workers.
Robert Mundell and Larry Summers agreed that the rise of China is “the greatest fact of the 21st century,” and China’s GDP could surpass ours in ten years or less. But both Summers and Becker warned not to extrapolate too much, recalling that pundits predicted in the 1960s that the Soviet Union would bury us economically, and in the 1980s Japan would dominate the world. Neither prediction came true.
Robert Zoellick noted that when he visited China, the Chinese officials were concerned not to develop into an excessive welfare state like Europe. But he warned that there is little dialog between the US and China on China’s growing political/military side — a real danger.
I was the only one who was given the opportunity to ask a question at the end of the two hour session. I asked them what their reaction was to the China bashing that Mitt Romney, Donald Trump and other Republicans are doing, especially Trump’s advocacy of a 25% tariff on all Chinese imports?
All four panelists responded. Robert Mundell said it would be a financial disaster, like an atomic bomb hitting the world. “Besides,” he said, “It would be illegal under GATT rules.” The other panelists agreed that the China bashing was “bad rhetoric” that hopefully would not carry over if they won the presidency.
Tour of the Exhibit Hall and Book Publishers
It’s always fun to tour the exhibit hall and meet with all the publishers here in the States and from the UK. My publisher, ME Sharpe, was there, and told me that my books, The Making of Modern Economics and The Big Three in Economics continue to sell well around the country.
Usually the Cato Institute has a booth at the AEA meetings, but not this year. However, I did see Liberty Fund and the Ayn Rand Institute there. The Institute for Humane Studies (IHS) has a reception Friday night for friends of IHS. It was crowded and a nice opportunity to meet like-minded economists.