Tuesday, June 21, 2011

Edward Harrison Clears Up An Apparent Contradiction By Bill Gross

Edward Harrison of Credit Writedowns has an explanation for Bill Gross's seemingly contradictory views about the need to reduce the deficit and his call for instituting a job guarantee, which would increase the deficit — and Ed credits MMTer Marshall Auerback for it. BTW, Marshal is a consultant to PIMCO, so it is possible that he is the source of Gross's position.

Jobs have to come first. We are already seeing cyclical unemployment turn into structural unemployment – and that permanently lowers output and increases deficits. [MMT economist] Stephanie Kelton is right when she says that “as long as unemployment remains high, the deficit will remain high.”

When the private sector is not willing or able to step up to the plate, then government has to.

Ed points out that, moreover, just increasing aggregate demand through stimulus is generally politically co-opted, channeling the stimulus to the influential rather than toward creating effective demand.

Trader's Crucible pointed out in a recent post that MMT economist Pavlina Tcherneva observed:

“As already noted, for Keynes, the principal goal of fiscal policy was to secure true full employment and the principle measure for adjudicating among different policy responses was their employment-creation effects (Kregel 2008). Unfortunately, what is considered to be Keynesian policy today is largely a misinterpretation of the Keynesian prescriptions, which largely stems from a fundamental misidentification of Keynes’s theory of effective demand with the theory of aggregate demand (Tcherneva 2011). In the General Theory, Keynes carefully articulated that employment determination depended not on the volume of aggregate demand but on the point of effective demand which was very hard to stabilize and fix at full employment.”
(emphasis added)


senexx said...

I've read all the posts involved and I'm still not clear on how railing against the deficit & supporting a JG (which will increase the deficit).

Unless he is just stating the obvious, by increasing the deficit and targeting it correctly at employment, the deficit itself will self-correct with the automatic stabilisers.

Is that correct?

Matt Franko said...

You also have to address the external deficit also, I dont see Gross or Edward either mention the (X-M) problem for US employment.

And also, at core the (X-M) problem is what is causing all the problems in Greece as they are a net importer within the EZ, with no ability to make appropriate levels of Greek fiscal adjustments.

Any solution to this is going to have to address the US trade deficit if what we want is for people to be back at "real" work.

Or otherwise, people will be in the JG for ever. If the US trade deficit is going to be allowed to expand uncontrollably, then instead of a JG, were are going to need massive expansion of transfer payments or a permanent expansion of the public sector employment base.


Matt Franko said...

And another thing, this is a moron statement by Rosenberg that Gross endorses if you think about it:

"“I’d have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I’d have them studying algebra, physics, and geometry.”

Shovel? That's nice you gd moron! Like we need "ditchdiggers"... how DO these people get in these positions of influence?

If the demand isnt there, we could have EVERYONE in the USA with some sort of PhD and STILL we could have high unemployment and an output gap with the current fiscal policy and associated sectoral balances...

Tom Hickey said...

"Unless he is just stating the obvious, by increasing the deficit and targeting it correctly at employment, the deficit itself will self-correct with the automatic stabilisers."

Yes, and more. Gross is also concerned with rising structural unemployment due to the US becoming uncompetitive wrt its work force. That's what his screed about education is about in the newsletter from which the above quote is taken. He doesn't think that the US is training its youth for the world that they will inherit.

School Daze, School Daze, Good Old Golden Rule Days

I agree with the outlines of the analysis of the problem but not so much with the solution, other than instituting the JG. I think he is a bit bonkers on his rant about the declining worth of a college education.

I am an educator by profession and have been a university professor, so it is natural I will see things from a different angle than Gross. But I have seen things from close up, and I don't think that he has. He is shooting from the hip on this.

However, my views of education are pretty radical and I would agree that the present educational system should largely be scrapped as ill-designed and badly administered. The US needs to spend vastly more on education, not less, but it has to do this smartly instead of throwing money at a problem.

The greatest problem is that most professional educators don't have a clue about education because they have been trained in the traditional system, which is failing today's youth. This makes the problem somewhat intractable, so I don't completely disagree with Gross's idea to cut kids loose from it. But the idea of just leaving them on their own and hoping they will become entrepreneurs is daft. It doesn't work like that.

Ryan Harris said...
This comment has been removed by the author.
Anonymous said...

In Canada, colleges provide trade and technical training - most of these programs range from a few months to two years in duration. I don't know how successful these programs are - I do know that course content is regularly vetted by local industry to ensure that it responds to their needs. What more can be done?
The quote about shovels in the morning and algebra in the afternoon is an old one. Despite hi-tech, most jobs require shoveling skills and very little algebra.

Anonymous said...


Ten occupations accounted for more than 1 out of every 5 U.S. jobs in May 2010. Retail salespersons and cashiers were the two largest occupations, with employment of 4.2 and 3.4 million, respectively. The largest occupations also included registered nurses; janitors; and laborers and hand freight, stock, and material movers.

...The smallest occupational groups included legal occupations and life, physical, and social science occupations, each making up less than 1 percent of total employment.

...In 2010, computer hardware engineers made up about .5 jobs per 1,000 in the United States as a whole. San Jose-Sunnyvale-Santa Clara, CA, had the highest employment concentration of computer hardware engineers—over 9 jobs per thousand—as well as relatively high total employment; both of these factors helped give San Jose the highest employment of this occupation.

So there may be shortages in high-tech fields and those fields may grow more than others, but they represent a job base that is small compared to the overall labour market. The vast majority of workers will not end up in occupations specifically requiring math and science skills, the numbers do not support it.

Paul Krugman has written about structural unemployment as an excuse for government to do nothing. Or to allow policy makers to pretend that we are facing a difficult, if not intractable problem.

The following article by Richard Rothstein is dated, but perhaps still relevent:

Matt Franko said...


Krugman is way overrated imo.

His blog should be titled: "The Incompetence of a Liberal"

Anonymous said...

If I knew of other bloggers who were critical of structural unemployment I would mention them.

Matt Franko said...

Perhaps I mis-interpreted, is K saying that 'there's nothing we can do about it'? or is he saying 'it's not correct to think in these terms', the terms being so-called "structural unemployment".. iow I do not believe in so-called 'structural unemployment' rather all unemployment is ultimately caused by the govt policies.


Anonymous said...


But now, as then, powerful forces are ideologically opposed to the whole idea of government action on a sufficient scale to jump-start the economy. And that, fundamentally, is why claims that we face huge structural problems have been proliferating: they offer a reason to do nothing about the mass unemployment that is crippling our economy and our society.

Anonymous said...

Sorry for paraphrasing instead of providing a link, I just assumed everyone knew that PK had taken this issue to task.