Remember That Petition Against Larry Summers? I Regret Signing It | Janet Yellen & The Fed on Blog#42

Remember That Petition Against Larry .@LHSummers? I Regret Signing It

A long, long time ago, in July 2013, President Obama, to our collective horror, put forth Lawrence H. Summers’ nomination to replace Ben Bernanke as Fed chair. Several hundreds of thousands of Americans signed petitions demanding that the White House withdraw Summers’ nomination. Public Citizen was one of many groups that collected signatures. As the voices of dissent grew louder, Summers withdrew and Janet Yellen became the new nominee. That was just three years ago.

As a reminder, here is a great graphic by Jen Sorensen, comparing the two:

fedchair comparison

There has been no change in the political and legislative environment since Yellen took over as Fed chair. While crises have come and gone in Europe and Asia, the activities of the Fed have largely remained much as they were during Bernanke’s tenure, post-Great Recession: keeping the flow of money at a constant, in order to prevent another wave of unemployment.

Not much has changed about how our economy is working.  The recovery has been slow and partial. There have been no new rounds of quantitative easing, nor were there any further rounds of stimulus. While there’s been sporadic talk of trying to get an infrastructure bill going to stimulate growth, the House of Representative hasn’t remained steadfast in its inaction. Budget bills have been minimal and no effort has been made to enact any of the essential fiscal measures we’ve needed since 2010, in order to get the economy back to where it needs to be. Republicans have successfully obstructed the Obama presidency, as was promised by GOP congressional leadership.

By the end of Ben Bernanke’s tenure, it was clear to economic and political observers alike that any significant economic progress the nation might make is tied inexorably to a break in the political stalemate. Under the new political reality, it also became clear that the function of the Fed, though it wasn’t intended that way, was to focus its resources on keeping the employment picture stable. That took any intention of raising interest rates completely off the table, even as the economy began to add jobs consistently.

During her first year, Chair Yellen remained faithful to her predecessor’s mission. Rates weren’t raised. That ended in December of 2015, when the Fed raised rates slightly. By the start of 2016, once the end of year figures were in, it was clear that it would be imprudent to raise rates again any time soon. Fast forward to Summer 2016 and Chair Yellen has resumed talk of raising rates, going against conventional wisdom and raising much consternation as to her long-range plans.

In, “Will the Federal Reserve really have what it takes to fight off the next recession?” Jared Bernstein writes:

“No one knows when the next recession is going to hit, there are no obvious destabilizing bubbles of which I’m aware, and the job market is percolating along at a good clip. We’re not at full employment, but we’re getting closer. As you know, the Fed is thinking about tightening. Bad idea, I’d argue, but not a sign of impending recession. The key point, though, is that we just can’t accurately call these things.

But I think I did succeed in getting her equally nervous about a different point: There is, of course, a recession out there somewhere. The problem isn’t that we don’t know where; it’s that we’re not ready for it.

There are two broad reasons why that’s true. One, you simply cannot trust our Congress to act quickly and forcefully on countercyclical, discretionary fiscal policy (“discretionary” meaning the stuff aside from the automatic stabilizers). Two, the Federal Reserve’s likely limited-firepower problem. The main countercyclical tool at the Fed’s disposal is the interest rate they control, the federal funds rate (FFR), a benchmark for borrowing costs throughout the economy.”

The first quoted paragraph is essentially correct, though one should also consider the qualitative aspects of employment in addition to the quantitative, which I will remind readers here, is imprecise, to say the least. The official unemployment rate of nearly 5% underestimates actual unemployment by virtue of the populations that are omitted from the count. Real unemployment is estimated at anywhere between 6-7% to 12%, depending on who you ask. On the quantitative level, one must consider that among those who are found employment at the hundreds of thousands of jobs that were created during the recovery, whether full or part-time, many are earning wages well-below what they should be earning and, as a consequence, are also still looking for work. Add in older workers who lost their jobs at the start of the Great Recession, were never hired at comparable jobs and are a part of the new “gig economy,” and the quantitative portion of the employment picture changes the rosier, much more limited descriptions of what full employment looks and feels like. Those caveats, nevertheless, don’t change the fact that in and of themselves, they do not constitute a sign that we are nearing another recession.

The second paragraph of Bernstein’s quote is best expanded on by bringing in the writings of Larry Summers, particularly in the past couple of years. Summers has been talking about a particular kind of bubble economy, called “secular stagnation.” Under the secular stagnation scenario, employment remains depressed and recoveries weak as the economy goes through cycles of increasingly deep recessions. In that kind of cycle, a recession is expected, but the timing cannot be anticipated. In any case, there is the expectation that the Fed, Congress, and the executive branch work together to prepare for the worst. Clearly, in the current political climate, there is no preparation for what is sure to be an eventual down-cycle of some kind. That we aren’t ready for the next recession is an understatement, not only from the standpoint of what the executive and Congress should have been doing, but also what direction the Fed is choosing to go in.

While economists’ comments are what gets the most bandwidth in the discussion about the economy in the media, there are grassroots organizations that are active in this arena. In “Liberals fought for Janet Yellen to lead the Fed. Now they hope she’s ‘more ally than adversary,’” Ylan Q. Mui writes:

“So activists at the Center for Popular Democracy, a coalition of liberal groups, organized workers to protest in Washington and at the central bank’s regional branches across the country, then reached out to lawmakers and liberal economists to amplify their message. Seeded with money from Silicon Valley, the two-year-old organization has turned the effort, known as Fed Up, into a powerful vehicle for the liberal critique of the central bank.

Nobel Prize-winning economist Joseph Stiglitz, one of Yellen’s friends and boosters, joined the group’s demonstration here in Wyoming last year. Fed Up is also taking aim at the lack of diversity in the top rungs of the central bank and is pushing to remove bankers from the Fed’s boards of directors — a proposal backed by Democratic presidential nominee Hillary Clinton. Activists worked with Rep. John Conyers, a Democrat from Michigan, to create a “Full Employment” caucus within the House, urging the central bank not to raise rates until the unemployment rate falls to 4 percent for all races.

During Yellen’s appearances on Capitol Hill, Fed Up members donned green shirts with the slogan “Whose Recovery?” and filled the seats behind her. Democratic lawmakers echoed their dissatisfaction from the dais.”

Just a few days before this year’s Jackson Hole meeting, Larry Summers wrote a very thoughtful piece reflecting on a paper by John Williams of the San Francisco Fed, in which he concludes:

“Nowhere is there room to cut rates by anything like the normal 400 basis points in response to potential recession. This is the primary monetary and indeed macroeconomic policy challenge of our generation. I hope it will be very much in focus at the Fed conference in Wyoming’s Jackson Hole next week.”

As Reuters reports from this year’s Jackson Hole meeting:

“Although U.S. government data earlier on Friday showed the economy growing only sluggishly in the second quarter, Yellen said a lot of new jobs were being created and economic growth would likely continue at a moderate pace.

“I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said in a speech at the Fed’s annual monetary policy conference in Jackson Hole, Wyoming.

Yellen said the Fed already thinks it is close to meeting its goals of maximum employment and stable prices, and she described consumer spending as “solid” while noting business investment was weak and exports had been hurt by a strong U.S. dollar.”

Obviously, Summers’ wishes did not come true. Paul Krugman’s “Slow Learners” commentary on that same piece by Larry Summers is of particular import in understanding the dynamics:

“And the sheer persistence both of depressed economies and of low inflation/interest rates should by now have led to a big rethinking. Depression economics redux has now gone on as long as stagflation did.

Yet rethinking has been glacial at best. People who warned about the coming inflation in 2009 are warning about the coming inflation in 2016. Orthodox fears of budget deficits still dominate a lot of discourse. And the Fed still clings to an inflation target originally devised in the belief that the kind of thing that has happened to our economy would never happen.”

If rethinking is glacial in the economic community, as Krugman put it, Yellen was the one who was supposed to be attuned, prescient even, when it comes to having a finger on the pulse. Not only has her finger strayed from the main artery it is supposed to monitor, based on her Jackson Hole statement, it is clear that she has become blind to the fact that there are still tens of millions of people who’ve yet to see any sign of recovery. Whether it is the rarefied air at the Fed or a desire to depart from the continuity of the last eight years and establish her own legacy, Yellen and Summers have switched places. Whereas, of the two, she was supposed to be the progressive choice, she is turning out to be the neoliberal as, when she surveys the employment landscape, she sees America at near full employment.

In “How the Middle Class Lost the Election,” for Real Clear Politics, Joel Kotkin writes:

“A Trump administration would be unlikely to reflect blue-collar interests, but rather those of his inner circle, which includes some of the most ravenous Wall Street operators. The same is true of his general election opponent.

Hillary Clinton: Matriarch of Oligarchy

By elevating this disingenuous demagogue, Trump voters have assisted in the further ascendency of the oligarch class. The forces coalescing around Hillary Clinton — mainstream Wall Street, particularly hedge funds, beltway lobbyists, the big media, Silicon Valley, Hollywood, and green capitalists  — do not share the priorities of Middle America. Bernie Sanders made an issue of Clinton’s Wall Street support, but the Vermont socialist was always too marginal, cranky and, ultimately, too doctrinaire to win even in today’s Democratic Party.

With Sanders conveniently dispatched, the crony-capitalist class is assured its worldview prevails. They can check all the boxes that Rob Atkinson has labeled as“the Davos application” of open immigration, greater globalization, free trade, and higher carbon prices.”

Key here, is “with Sanders conveniently dispatched.” The DNC has been working at a furious pace to undo everything the Sanders revolution achieved, ahead of the November election, even as economic thinking, in terms of policy prescriptions, has swung left.

As I’ve previously written, the change in thinking in the economic community has come in large part, thanks to a speech Summers gave almost three years ago, in which he outlined the role of secular stagnation in the slow recovery of the economy. Since then, the liberal economic community has been united as a bloc in its view that interest rates must remain as they are and now, that the inflation target raised, for as long as the political stalemate remains in force.

So, Yellen’s statement about raising rates could not come at a more crucial and unfortunate time. The way this crazy election cycle is shaping up, Democrats will most likely retake the Senate but not the House of Representatives, meaning that the political stalemate will continue. What’s more, internal Democratic politics have taken on a different dynamic, with the liberal wing waging open warfare on progressives. Several key progressives have been targeted by the DNC for replacement with more establishment candidates. In Florida, where primaries will take place on Tuesday, former DNC chair, Debbie Wasserman Schultz appears to be on track to win against her progressive opponent and, alarmingly, for progressives, former Republican Tim Murphy is projected to win against Alan Grayson, against whom a campaign to tarnish his reputation has been waged both by his ex-spouse and the DNC:

“The controversy prompted outgoing Senate Minority Leader Harry Reid the following day to urge Grayson to drop out of the race, citing allegations he violated House rules in running the hedge fund. That feud escalated in May when Reid visited a Congressional Progressive Caucus meeting and Grayson confronted the Nevada Democrat.

“Shame on you. It’s not true,” Grayson said about the allegations in a fiery exchange. Reid shot back, “It is true, and I want you to lose.”

Even with the hedge fund scrutiny, Grayson led Murphy in polls by double-digits at the time. But Murphy received a jolt of momentum in March with an endorsement from President Obama and campaign appearances with Vice President Biden.”

These Florida contests are hardly an exception, when it comes to the DNC’s involvement in replacing long-time progressive Democrats with establishment candidates.

This rebalancing of the internal power structure in the Democratic party’s congressional representation is sure to have long-lasting repercussions when it comes to making what are sure to be compromises between the House and Senate come budget time. In the event of another recession, how much is done when it is most needed, is sure to be impacted as well, just as it was in 2008-2010, during the worst of the recession, with liberals pushing for doing less.

This time, however, eight years after the Great Recession, the middle class is restless and the ruling class is ignoring the rumblings from below. In “The Original Underclass: Poor white Americans’ current crisis shouldn’t have caught the rest of the country as off guard as it has,” Pro-Publica’s Alex McGillis writes:

“Analysis on the left has been less gratuitously nasty but similarly harsh in its insinuation. Several prominent liberals have theorized that what’s driving rising mortality and drug and alcohol abuse among white Americans is, quite simply, despair over the loss of their perch in the country’s pecking order. “So what is happening?” asked Josh Marshall on his “Talking Points Memo” blog in December. “Let’s put this clearly,” he said in wrapping up his analysis of the dismal health data. “The stressor at work here is the perceived and real loss of the social and economic advantages of being white.”

The barely veiled implication, whichever version you consider, is that the people undergoing these travails deserve relatively little sympathy—that they maybe, kinda had this reckoning coming. Either they are layabouts drenched in self-pity or they are sad cases consumed with racial status anxiety and animus toward the nonwhites passing them on the ladder. Both interpretations are, in their own ways, strikingly ungenerous toward a huge number of fellow Americans.

Indeed, I’ve spent most of the past year reporting about what’s been happening to those who’ve fallen out of the middle class, both whites and minorities, using facts and figures published by such powerhouses as Pew Research, Gallup, and others. Much to my consternation, those breakthrough reports on what Pew and others published have gone, for the most part, without any mention from the nation’s top economists, even as voter anger has become more strident. Disillusionment with government institutions and the media is high, and it isn’t undeserved. In “The wealthy have nearly healed from recession. The poor haven’t even started,” the Chicago Tribune reports:

“The wealthiest Americans, meanwhile, appear close to regaining all their losses over the same period, according to a new analysis released Thursday by the Congressional Budget Office.

The analysis shows the wealthiest 10 percent of Americans now hold three-quarters of the nation’s wealth, up from two-thirds in 1989, and a three percentage-point increase from the start of the recession. Most Americans found themselves with less wealth in 2013 than Americans of a similar age had in 1989; the only age group doing better than its counterparts from a quarter-century ago was senior citizens.”

Without a change in who it is Democrats target in their campaigns at the national and state level, voter backlash is sure to follow. The consequences of the 2012 election were expressed in even more of a shellacking in 2014. The Democrats, unwisely, decided to forego the post-mortem process that usually accompanies major losses. After a contention primary in 2016, Democrats, again, are choosing to run roughshod over its voter base. Depending on how the Fed handles the interest rate issue, as well as what happens to economic conditions, the midterm election may prove to be a watershed event, especially if progressives split to form their own party.

As I’ve written many times over the past year, this election has been and will continue to be about trade and jobs. Whether or not middle class Americans of all races and both genders are assured that their concerns have been taken to heart and the focus will be on returning the middle and working classes to their former glory, will dictate the outcome of this political season. Any change, no matter how small and at a time when trust is at an all-time low, could have unforeseen adverse effects.

So, I’ll come out and publicly apologize to Larry Summers now. I regret opposing you as Fed chair. It has been clear, for some time, that your analysis of the economy and your overall vision for its repair has been the correct one all along.