And financial markets are, in effect, betting that the Fed is going to offer another such example. Long-term interest rates, which mainly reflect expectations about future short-term rates, shot up after Friday’s job report — a report that, to repeat, was at best just O.K. Housing may be trying to bounce back, but that bounce now has to contend with sharply rising financing costs: 30-year mortgage rates have risen by a third since the Fed started talking about relaxing its efforts about two months ago. Why is this happening? Part of the reason is that the Fed is constantly under pressure from monetary hawks, who always want to see tighter money and higher interest rates. These hawks spent years warning that soaring inflation was just around the corner. They were wrong, of course, but rather than change their position they have simply invented new reasons — financial stability, whatever — to advocate higher rates. At this point it’s clear that monetary hawkery is mainly a form of Puritanism in H. L. Mencken’s sense — “the haunting fear that someone, somewhere may be happy.” But it remains dangerously influential. Unfortunately, there’s also a technical issue that plays into the prejudices of the monetary hawks. The statistical techniques policy makers often use to estimate the economy’s “potential” — the maximum level of output and employment it can achieve without inflationary overheating — turn out to be badly flawed: they interpret any sustained economic slump as a decline in potential, so that the hawks can point to charts and spreadsheets supposedly showing that there’s not much room for growth. In short, there’s a real risk that bad policy will choke off our already inadequate recovery. But won’t voters eventually demand more? Well, that’s where I get especially pessimistic. You might think that a persistently poor economy — an economy in which millions of people who could and should be productively employed are jobless, and in many cases have been without work for a very long time — would eventually spark public outrage. But the political science evidence on economics and elections is unambiguous: what matters is the rate of change, not the level. Put it this way: If unemployment rises from 6 to 7 percent during an election year, the incumbent will probably lose. But if it stays flat at 8 percent through the incumbent’s whole term, he or she will probably be returned to power. And this means that there’s remarkably little political pressure to end our continuing, if low-grade, depression. Someday, I suppose, something will turn up that finally gets us back to full employment. But I can’t help recalling that the last time we were in this kind of situation, the thing that eventually turned up was World War II.
Posted on: Mon, 08 Jul 2013 14:20:41 +0000
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