To combat the continuing recession in the U.S. and to move toward full employment, the clearly optimal policy is for the federal government to increase spending now on programs that contribute to economic growth while improving the quality of life, such as education, infrastructure, research & development, and – not least – reduction of emissions of heat-trapping gases. President Obama as well as Federal Reserve Bank Chairman Bernanke appear to be well aware of this.
Michal Kalecki’s (1943) classic paper, “Political Aspects of Full Employment” remains surprisingly modern, and its message still is worth revising. If you read and/or watch the current debates on economic policy in the mainstream media you would think that public deficits and debt are the main economic problem ahead. Further, if you look at Obama’s budget proposal, with the offer of reducing payments to social security recipients, you would think that entitlement programs are unsustainable and must be overhauled. On the other hand, the mainstream media is not as vocal on the unemployment problem, and in some quarters the current rate of unemployment, 7.6%, is seen as not too high, and only slightly above full employment, which is put by some at 5.5% (the so-called natural rate).
On Wednesday, April 24, an 8-story building outside of Dhaka, Bangladesh collapsed. Over 600 people were killed, and over 1,000 injured – but the death toll may rise as rescue crews continue their search.
The building housed a variety of businesses, including a bank and five garment factories that employed over 3,100 garment workers – mostly young women. Observers noticed a large crack develop on in the building on Tuesday, and the bank on the second floor told its workers not to come in the next day. The garment factories decided to stay open for business, and the result was tragedy.
Many economists and market participants applauded the Federal Reserve’s decision in September 2012 to make monthly purchases of $85 billion in Treasury and mortgage-backed securities, and hold short-term interest rates at near zero until unemployment fell to 6.5 percent. Now, however, the issue of when to end bond buying is being debated both within and outside the Fed. Some think the central bank isn’t doing enough to deal with the still-fragile economy, while others argue that its actions will result in future price inflation. There is also growing concern that the rapid run-up in prices of stocks and other capital market assets reflects greater risk taking and more leverage and may be signs of yet another bubble.
There have been an extraordinary number of reactions to the paper we wrote with Thomas Herndon that critiqued the highly influential 2010 Reinhart and Rogoff paper “Growth in a Time of Debt.” Not surprisingly, these reactions have run the gamut. It is obviously impossible for us to respond to all the points raised. One of the most thoughtful critical responses was from Prof. James Hamilton of UC San Diego. Prof. Hamilton is an eminent econometrician. He posted his critique on his own blog site Econbrowser here. We are reposting here his critique of our work along with our response, below. Prof. Hamilton was kind enough to post our response on his site as well.
