CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Are Republicans Really Worried That The Economy Is Creating Too Many Jobs?

Are Republicans Really Worried That The Economy Is Creating Too Many Jobs?

Print
Wednesday, 02 March 2011 05:47

That's what the NYT told readers this morning. The NYT said that:

"Republicans worry that the Fed is overstimulating the economy."

For those not familiar with the word "overstimulate," it means that the Fed is causing the economy to grow too rapidly and create too many jobs. This is an interesting position to hold at a time when the economy is experiencing 9.0 percent unemployment. It probably would have been better to just report what the Republicans said rather than directly attribute such an extreme view to them.

The article also quoted Alabama Senator Richard Shelby saying that: "Once price stability has been lost, it’s difficult and very costly to regain," adding that Shelby then invoked the 80s. It would have been useful to point out to readers that the recession brought on by Paul Volcker in 1981 to tame inflation was far milder than the one we are now experiencing.

The unemployment rate rose by 3.6 percentage points from its low in the summer of 1981 to its peak in December of 1982. This compares with a trough to peak increase of 5.7 percentage points in this downturn. Three years after the start of the 1981 recession the unemployment rate was back to its pre-recession level. By contrast, three years after the start of the current recession the unemployment rate stands 4.5 percentage points above its pre-recession level.

In other words, Senator Shelby is warning that if we take stronger steps to reduce the unemployment rate we risk a higher rate of inflation. And, the cost of bringing down this inflation may be less than the costs in unemployment that we are currently experiencing.

This article also presents Federal Reserve Board chairman Ben Bernanke's assessment on a range of issues. It would have been worth reminding readers that Mr. Bernanke did not see the $8 trillion housing bubble, the collapse of which brought on the worst downturn since the Great Depression.

Comments (7)Add Comment
Senator Shelby Understands Sunk Prices and Cost
written by izzatzo, March 02, 2011 6:57
Once price stability has been lost, it’s difficult and very costly to regain


Any economist is familiar with the famous Shelby Effect, more commonly known as the Sunk Price Effect.

Sunk prices, unlike unlike marginal prices, are not avoidable and therefore do not represent economic cost. For example in the health care sector, most prices and cost are not avoidable and therefore sunk.

Senator Shelby became famous by creating price stability in health care after convincing economists that sunk prices and costs have nothing to do with economic rents, the absence of competition or exploding government debt.

If Shelby continues to be ignored by stupid liberal economists like Baker, the same price stability that saved the health care sector and reduced the deficit cannot be applied to other sectors of the economy to enable recovery and full employment.
...
written by Matt, March 02, 2011 8:28
Of course they're worried about the economy creating too many jobs - if things improve, what are they going to run on in 2012? "We demand that insurers be allowed to drop you if you're sick, and that all unions disband immediately" may get the neo-Confederates and the fascists currently prancing around in tricorn hats excited, but it doesn't work for the non-crazy parts of the population.
...
written by skeptonomist, March 02, 2011 9:26
Actually, the Fed really did "print money" during WW II and held interests rates low and constant during three inflation spikes in the 40's and early 50's. These episodes came to an end quickly and were in no way "difficult and very costly" to reverse. This was one of the most prosperous times in US history, when inequality decreased.

In contrast, the Fed attempted to "tame" inflation by raising interest rates episodically from 1970 to 1982, and this led to the peak unemployment rate of 10.8% in 1982 in a stair-step progression:

http://research.stlouisfed.org/fred2/series/UNRATE?cid=12

Volcker's increases after 1979 were only the last step. There is certainly no empirical evidence that the activist policy followed by the Fed 1965-1989 led to better results than that followed 1933-1955 - at least as far as most people are concerned. Of course if you are a major employer whose is concerned about wage costs, the tremendous reduction in wages during this time

http://www.skeptometrics.org/WeeklyWages/WeeklyWages.htm

was a great boon (eventually, after the economy recovered from the recession of 1982).
Don't put words in Bernanke's mouth.
written by Aditya Savara, March 02, 2011 10:45
"It would have been worth reminding readers that Mr. Bernanke did not see the $8 trillion housing bubble,"

It is fair to say Bernanke did not prevent it, it is not fair to say he did not see it unless you have evidence. He may have seen it and not attempted to prevent it due to ideological differences, for example.

"the collapse of which brought on the worst downturn since the Great Depression."

This is kind of a philosophical question too isn't it? Whether the downturn already existed beneath a bandaid? We should not quibble about it too much, but my point is, such language is misleading. To the layman, what you said sounds like real GDP suddenly dropped (which it did) but the bigger issue was a loss of "false" equity and thereby "false" liquidity. I do not know what the technical terms are, but am happy to learn them if someone points them out.
Interesting definition.
written by Bill H, March 02, 2011 1:28
"it means that the Fed is causing the economy to grow too rapidly and create too many jobs."

Or it could mean that it is overheating the stock market, creating a bubble.

Or it could mean that it is raising commodity prices world wide, threatening "stagflation," inflation, or collapsing margins.

Or it could mean, who knows what? Maybe even global warming. We are not all as adept at reading minds as you are.
Of course Bernanke was down the hall from Krugman....
written by pete, March 02, 2011 9:56
who was begging for a housing bubble in his August 02, 2002 NYT column, while our illustrious host was joining Shiller and shouting that we already had a housing bubble....

The problem is not knowing that you are in a bubble, its knowing when the bubble will burst, and how low it will go. Even in 2005 Krugman just opines that housing prices will stop rising. Only Roubini spoke of a crash in prices. So, in 1996 when Shiller said there was an equity bubble, people laughed. If you bought puts in 1996, 1997, 1998, 1999, I see you pushing a shopping cart full of your possessions. If you shorted Wamu or Countrywide in 2001, 2002, 2003, 2004, 2005...you are broke. The Tao is like a mighty river, do not try to swim against it.

...
written by liberal, March 03, 2011 8:04
pete wrote,
The Tao is like a mighty river, do not try to swim against it.


Or, as commonly put, "Markets can remain irrational longer than you can remain solvent."

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives