The Slack Wire

At Barron’s: The Cost of Living and the Cost of Money

(I write a monthlyish opinion piece for Barron’s. This one was published there in September. My previous pieces are here.)

A lingering puzzle about inflation is why the public still seems so unhappy about it, even though it has, by conventional measures, returned to normal. 

One explanation is that people are simply confused, or misled by the media. But another possibility is that what people think of as the cost of living doesn’t match up with the way that economists measure inflation. Maybe people aren’t wrong or confused, they are just paying attention to something different.

Inflation means a rise in the cost of goods and services. But not all your bills are for goods and services. Things like interest payments are also costs. And last fall’s election followed three years of steeply rising interest rates. The average mortgage rate, for example, was over 7%, compared with less than 3% in 2021

That is the explanation for the mismatch between official statistics and public perceptions offered in a fascinating recent paper by former Treasury Secretary Lawrence Summers and several co-authors, titled “The Cost of Money is Part of the Cost of Living.” In one especially dramatic finding, they suggest that if we take interest into account, year-over-year inflation peaked to 18% in 2022, rather than the official 9%, and was still 8% at the end of 2023, when the official rate was 3.3%. 

I think the paper overstates its case. But it is still pointing to something real.

Conventional measures of inflation are supposed to reflect the prices of currently produced goods and services, but not asset purchases or financial transactions. But it isn’t always easy to know which payments are which. As a homeowner, you are buying both a place to live for the month, and an asset. In principle, the first should be counted in inflation, the second should not. But your single mortgage check includes both.

Today, the Bureau of Labor Statistics, which produces the country’s main inflation indicator, deals with this problem by imputing “owners equivalent rent.” In effect, we ask how much a homeowner would pay for their home, if they were renting it.

Before 1983, the BLS did things differently. Instead, it counted the full cost of home purchases, but only for houses bought in that period. Today’s measure estimates one month’s rent for all owner-occupied homes; the older method looks at the total cost of those homes purchased this month. Since houses are normally paid for with mortgages, that meant including interest payments that would be paid over many future years as part of this month’s price level. (To be exact, the BLS included future interest payments over half the length of the mortgage.)

Houses are a big part of consumption, so this difference isn’t a small detail. Summers and co-authors are absolutely right that when we compare inflation today to inflation in the 1970s, we aren’t comparing apples to apples. “Inflation” then meant something different than it does today. 

An earlier paper by three of the same economists looked at historic inflation using the modern definition. They concluded that, when we measure consistently, the late-1970s inflation was no higher than the inflation during the pandemic. 

The new article takes the opposite approach, and applies the pre-1983 definition to the recent inflation. This is a bit odd, given the strong and convincing criticism of the old methodology in the earlier article. Nonetheless, the results are striking. If people were experiencing inflation at double the official rate, no wonder they were upset!

In my opinion, the authors had it right the first time. There are good reasons the BLS abandoned its old approach. By including future interest payments on homes purchased in the current month, the old methodology greatly exaggerates the impact of interest rate changes. You can reasonably say that the mortgage payments you will make a decade from now are part of the price of your house, but they are not in any meaningful sense part of your cost of living today. 

That said, it does make sense that interest payments contribute to people’s experience of price increases. But how much? As a back of the envelope guess, we can observe that household interest payments grew from an annualized $600 billion in the last quarter of 2020 to over $1 trillion by the end of 2023. Those payments grew twice as fast as nominal consumer spending. If we add these interest payments to the cost of the consumption basket, then we find that the 2021-2022 increase in inflation was as much as two points greater, and inflation in 2024 remained about half a point higher than by conventional measures.

It seems to me that if you take seriously the idea that financing is part of the cost of goods and services, you can plausibly conclude that people were experiencing an inflation rate of 3% to 3.5% last fall, rather than the 2.5% to 3% percent reported by the BLS. That isn’t trivial. But I’m not sure it’s the sort of difference that elections turn on.

Still, Summers and his co-authors are pointing to something real and important. The cost of money is part of the cost of living. When the Federal Reserve aggressively raised rates over 2022-2023, it may – or may not! – have helped bring down inflation. But it definitely made it harder for families, and businesses, to service their debts. Monetary policymakers would do well to keep that second impact in mind in the future, along with the first. 

Negative Nowcast

In recent days, there has been a good deal of discussion in the business press and on economics Bluesky about the Atlanta Federal Reserve Bank’s “nowcast” of GDP for the first quarter of 2025. The suggestion is that the US may already be entering a recession.

The first quarter of 2025 is, of course, ongoing; strictly speaking, 2025Q1 GDP has not happened yet. But the Atlanta Fed’s GDPNow series tries to estimate what GDP for the quarter will turn out to be, based on data that is available before the official first release of GDP numbers at the start of the following month.

The Atlanta Fed has been producing these estimates since 2011. The reason this one got so much notice is that it shows “real” (inflation-adjusted) GDP this quarter declining at an annual rate of -2.8 percent, the second lowest value its shown since they started producing it. (The lowest, of course, was for 2020Q2.)

This is obviously significant as an indicator. I think that it does incorporate genuine information about what’s going in the world, and means broadly what it seems to mean. But I want to point out an important caveat, which both suggests we shouldn’t take this number at face value and raises some interesting questions about how we measure the economy.

The Atlanta Fed’s forecast implies a decline in growth of 5.1 points relative to the 2.3 points of inflation-adjusted growth in the fourth quarter of 2024.1 If you dig into the Atlanta Fed’s numbers a bit, you’ll find that a large part of this is consumption spending, which is projected to be essentially flat this quarter, after contributing 1.5-2 points of growth in each recent quarter. An even larger contribution, however, comes from imports, which added 0.17 points to GDP growth last quarter but are projected to subtract 3.27 points this quarter.

You can see this below, showing the contribution of each component to “real” growth in recent quarters. The last column is the Atlanta Fed’s estimate for the current quarter.

Annualized contributions to real GDP growth

The fall in consumption spending, and the zero real growth in investment spending, represent, I think genuine developments in the world. But I find it impossible to take the imports number at face value.

By the conventions of the national accounts, imports are a subtraction from GDP. So the big negative bar on the right of the figure represents a rapid growth in imports – close to the fastest import growth, in fact, in US history. But in real economies, imports almost always rise when GDP growth is strong, and fall when GDP growth is weak. The prediction that we will have an almost-unprecedented slowdown in growth alongside and almost-unprecedented rise in imports doesn’t fit the historical experience.

Here, for example, is another version of Figure 1, but covering the period of the last major recession in the US, in 2008-2009. Notice how when investment spending (and GDP, though it’s not shown) fall through the floor in the second half of 2008, the contribution of imports turns sharply positive, indicating lower imports. Then when consumption and investment spending begin to rise again, making a positive contribution to growth, the import contribution turns negative. This is the usual historical pattern.

Annualized contributions to real GDP growth

The strong relationship between expenditure growth and imports is, I think, one of the most basic and reliable Keynesian facts about the world. Countries import more when they grow faster, and import less when they grow more slowly or shrink. In the long run, yes, relative prices and competitiveness more broadly may be important. But in the short run of a few years or quarters, income is what matters.

Given this strong Keynesian prior, I have a lot of trouble accepting the Atlanta Fed’s nowcast that we are seeing very weak GDP growth but very rapid import growth. It’s not impossible, but it’s certainly very strange.

Here’s a figure, going back to 1947, showing annualized quarterly “real” GDP growth rates and the contribution of imports. The Atlanta Fed’s estimate for the current quarter is the large red dot in the lower left.  As you can see, it’s not entirely out of line with the historical experience. But it would certainly be an outlier. The great majority of quarters with import growth even close to this saw exceptionally strong GDP growth.

An accounting point: When we teach the national income identity — Y = C + I + G + X – M — we present it as if M was a distinct category of spending. But it really isn’t. Final spending by every unit in the economy falls into one of the other four categories. -M is there to subtract the imported component of the other spending categories. This matters here, because it means it is impossible for anyone to simply import more, without also doing more of one of the other categories. Even if imported materials are just stockpiled in a warehouse, that is inventory investment, at least from the point of view of the national accounts.

Over time, of course, imports might rise independently of other components, if the fraction of imported inputs used to produce consumption or investment or export goods changed. But these are changes that happen only gradually. In the short run, it’s impossible for anyone to spend more on imports without also spending more on something else. And in practice, again, import spending reliably rises when total spending rises, and falls when total spending falls. (The relationship in the figure would look much closer if I used annual data.) A deep recession with a dramatic rise in import spending — what the Atlanta Fed’s numbers imply — is well outside the historic experience.

So what is really going on?

The Atlanta Fed is looking at genuine data. The high import numbers reflect more stuff being declared at US ports; the consumption numbers reflect lower grocery store receipts.

One natural way to make sense of it is that this is a surge of imports as businesses try to get ahead of Trump’s tariffs. Normally, imports are a reasonably stable share of current spending. But in this case, the imported part of future spending has been moved forward to this quarter.

Now, in principle, if this what’s going on, then the higher imports should be balanced by an increase in inventory investment — accumulation of raw materials and goods in process — with no effect on GDP. But the Atlanta Fed is assembling its data from a  variety of different sources; there’s no reason to expect it to conform to the accounting relationships that final GDP has to. If, let’s say, trade data comes in sooner than inventory data — which seems very plausible — then it will look instead like the import share of other categories of spending is increasing. Which would be a subtraction from GDP.

To be clear: I think this is fine. Consistency and transparency are very valuable qualities in public data; they shouldn’t be lightly sacrificed even where some one-off adjustment will clearly yield a better point estimate. I think the Atlanta Fed is right to apply their methods consistently, even if they result in implausible  results in this particular case.

There is, though, another intriguing possibility.

A research report from Goldman Sachs2 suggests that the apparent rise in imports is to some significant extent due to a rise in imports of monetary gold. The Goldman Sachs analysts write:

most of the widening in the trade deficit since November has been driven by higher gold imports … as participants in the gold market sought to insure themselves against potential tariffs on gold. Although this may seem like a frontloading effect ahead of potential tariffs, these imports are for the most part … being shipped to the US on the off-chance that physical delivery of the gold is required,…  Importantly, the Bureau of Economic Analysis (BEA) excludes most gold imports when calculating the imports component of GDP.  ….

The same reasoning applies more generally to front-loading by retailers, wholesalers, and producers ahead of tariff increases. Because these developments are unrelated to US production, they should have little net effect on US GDP. In the case of non-gold goods, higher imports should be offset by higher inventories in the national accounts. In practice, it is possible that front-loading exerts a modest drag on reported GDP because imports… tend to be measured more accurately than inventories. We suspect this dynamic is playing out now to some extent… But because front-loading these imports now implies fewer imports later, we think the net effect on 2025 GDP growth should be small.

Again: in the conventions of the national accounts, if businesses buy extra foreign inputs today in order to avoid higher costs later, that should, in principle, be recorded in the national accounts as equal increases in imports and inventory investment, with no net effect on GDP. But if the rise in imports is observed earlier or more accurately that the rise in inventory investment, we will see a spurious decline in GDP.

But what about the point about gold specifically, that the BEA excludes gold imports when calculating the import component of GDP? This is not something I’d ever really thought about or even been aware of. But having now poked around a bit, yes, this is correct. Gold imports show up in the trade data because, of course they do. It’s a good crossing the international border. But monetary gold, gold held as an asset, does not show up in the imports (M) shown in the National Income and Product Accounts, because the NIPAs are organized to track production, and gold held as an asset is not being used in production.

This is a very interesting accounting issue — in fact it’s what motivated me to write this post.

National accounting always faces the fundamental question of the production boundary. Which activities are part of production, and which ones aren’t? GDP (and its subsidiary components, like M) is supposed to be a sum of payments for new production. It’s not supposed to include payments for transfer of ownership of existing assets. But this is not always a clean distinction.

Gold is a weird commodity in this context, because it is both an important input to production (of both industrial equipment and jewelry) and an asset held for its own sake. In principle, when gold is unloaded from a ship and put into a warehouse, there’s no way to know whether it is destined to be an input to the production of some consumption good or piece of industrial equipment, or if it is being held as an asset. Maybe at that moment it hasn’t even been determined.Gold is gold.3

What the BEA does — this is interesting — is to take the difference between US use of gold as a production input and US production of gold, and call that imports of gold for purposes of the NIPAs. The difference between the actual net imports of gold and this number is assumed to be monetary gold. In practice, domestic production and use seem to be pretty close, so NIPA gold imports stay close to zero regardless of what the trade figures show. This procedure seems reasonable enough.

It’s not clear to me if monetary gold imports explain the whole story of the Atlanta Fed’s strange rise in imports, or just a part of it. The way the data is presented the Goldman Sachs report makes it hard to compare magnitudes. But it is true, on the one hand, that a surge in imports ahead of the tariffs not informative about GDP growth this quarter. And on the other hand, the treatment of gold imports in the national accounts raises some profound issues, whether or not it fully explains the apparent import surge.

The fundamental challenge with gold is that is both an important input to production, and an important asset in its own right. This is a challenge for our accounting framework that relies on a sharp line between payments related to production and asset sales.  Gold is hardly unique in that respect.

A very analogous and more generally important case is housing. When a family buys a home, they are buying both a flow of consumption (the use value of living in that house) and an asset (the exchange value they can receive by selling the house, or borrowing against it).

Conceptually, these are two different purchase. But in reality, the homeowner is writing only one check. This is a big problem both substantively and for data. Substantively — well, this goes beyond the scope of this post, but  the fact that people’s providing for their own housing needs also involves taking a position in a speculative asset has some pretty far-reaching effects on our society. From a data standpoint: How are we going to split the one payment of the homeowner into the part that is paying for the use of the hoser right now, and the part that is paying for the chance to profit from the appreciation of the house? It’s not an easy question.

Returning to the Atlanta Fed GDPNow estimates. It’s worth emphasizing that the estimate of zero real growth inc consumption spending, which doesn’t have any practical or conceptual problems as far as I can tell. So even if we set aside the import question, there is reason to say that real-time economic data suggest a sharp slowdown in spending — and therefore output, income and employment — relative to the recent trend. I think we should take that forecast seriously directionally, even if there is reason to be skeptical of the dramatic fall in GDP that they forecast.

If we set aside the import numbers, the estimate is real growth for the quarter of close to zero. Which would still be a sharp slowdown, and lead us to expect a significant rise in unemployment.

At the same time, we should keep in mind — always, and perhaps even more now — that numbers like GDP are not material facts existing out there in he world. They are the result of aggregating an enormous number of private payments in a specific way, which involve a great number of more or less arbitrary choices. If we don’t understand how the numbers are constructed, we will not be able to say much about what they mean.

ETA: Thanks to David Rosnick for helping me think through this.

Democratizing Finance

(This is the text of a talk I gave for a workshop organized by the International Network for Democratic Economic Planning. The video of the conference is here.)

The starting point for this conversation, it seems to me, is that planning is everywhere in the economy we already live in.

There’s a widespread idea that production today is largely or entirely coordinated by markets. This idea  is ubiquitous in economics textbooks, of course; it also forms a major part of unspoken economic common sense, even for many socialists and others on the left politically. But it seems to me that when you look at things more critically, the role of market coordination in the economies that we live in is in fact rather limited.

Within the enterprise, markets are almost nonexistent. Production is organized through various forms of hierarchy and command, as well as through intrinsic motivation — what David Graeber calls everyday communism or what we might call the professional conscience — the desire to do one’s job well for its own sake.

The formation, growth and extinction of enterprises, meanwhile, is organized through finance. People sometimes talk about firms growing and dying through some kind of Darwinian process, but the function of finance is precisely to prevent that. By redistributing surplus between firms, finance breaks the link between the profits a firm earned yesterday and the funds available for it to invest today.

The whole elaborate structure of banks, stock markets, venture capital and so on exists precisely to make funds available for new firms, or firms that have not yet been profitable. We see this very clearly in Silicon Valley, as in the current boom in “AI” investment — this is as far as you can get from a world where growth is the result of past profits.

On the other side, institutions like private equity, and the market for corporate control, ensure that that the surplus generated in one firm need  not be reinvested there. It can be extracted — consensually or otherwise — and used somewhere else.

In both cases, this is not happening through any kind of automatic market logic, but through someone’s conscious choice.

Once we think of finance as a system of planning , it is natural to ask if it can be redirected to meet social needs, such as addressing climate change. I want to make four suggestions about how we can pursue this idea most effectively.

First. We need to think about where financing constraints matter, and where they don’t.

Many firms do fund investment largely from their own profits; in others, investment spending is modest relative to current costs. In both these cases — where investment is internally financed, and where investment requirements are low relative to costs of production — finance will have limited effects on real activity.

Where finance is most powerful is in new or rapidly growing, capital-intensive sectors, especially where firms are relatively small. Green energy is an important example — for wind or solar power, almost all the costs are upfront. Housing is also an area where finance is clearly important – while this is of course, a very old sector, firms are relatively small, capital costs are large, assets are very long-lived, and there is a significant lag between outlays and income. It is clear that booms and busts in housing construction have a great deal to do with credit conditions.

Labor intensive sectors like care work, on the other hand, are poor targets for credit policy, since costs and revenues occur more or less simultaneously, and capital needs are minimal. Subsidies or other “real” interventions are needed here.

Large, established firms are also likely to be fairly insensitive to credit policy. There’s a great deal of evidence that the internal discount rates corporations use to evaluate investment projects are not tightly linked to interest rates. At best, financing may relax an external constraint where decision makers already operate with long horizons. But what we know about corporate investment decisions suggests that they are not much affected by credit conditions — something that thoughtful central bankers have long understood.

Second. Channeling credit to constrained areas will have a bigger impact than penalizing credit to unwanted areas.

This seems like an important limitation on the types of green policies adopted by the ECB, for example. For firms that issue bonds, the interest rate they face is not likely to be a major factor in their investment decisions. Where credit matters most is for smaller, bank-dependent firms and households, which face hard limits on how much they can borrow.

This is even more the case for the stock market. Firms for which stock issuance is a significant form of financing make up a very, very small group. In general, changes in stock ownership will have no effect on real investment at all.

Related to this is the question of rules vs discretion. It is relatively easy to write rules for what not to invest in. Targeting finance-constrained sectors requires more strategic choices. So this is an instrument that is state-capacity intensive. In a setting of limited capacity, credit policy is unlikely to work well.

Similarly, if we want to see across-the-board changes, as opposed to fostering new growth in particular areas,  credit is not the right tool. In that case it is better to directly regulate the outcomes we are interested in. If you want higher wages, write a minimum wage law. Don’t tell your central bank to penalize holdings of shares in low-wage firms.

Third. We need to think carefully about what parts of finance we want to socialize, and where new institutions are needed and where they aren’t.

Various financial institutions offer funding to real activity (directly or indirectly) on their asset side, while issuing liabilities that some particular group of wealth owners wants to hold. In the case of many institutions — banks, insurance companies, pension funds — their social value comes as much or more from the distinctive liabilities they issue, as from the activities that they finance.

It’s natural to imagine public finance in similar terms, and think of a public investment authority, say, issuing distinctive liabilities that are somehow connected to the activities that it finances. I think we need to tread very cautiously here. The connections between the two sides of private balance sheets are largely irrelevant for the public sector.

The public sector already finances itself on the most favorable terms of any entity in the economy. The private sector’s need for retirement security and other forms of insurance can be addressed by the public sector directly. Public provision of new assets for retirement saving would be a step backward from current systems of public provision.

There is a case for a larger public role in the payments system, and in the direct provision of banking services to those who currently lack access to them. But there is no reason to link this service provision to public credit provision, and a number of good reasons not to.

The stronger arguments for socializing finance, it seems to me, lie on the asset side of the public-sector balance sheet. We don’t need to find new ways of financing things the public already does. We do need to bring public criteria into the financing of private activity.

It’s worth emphasizing that what matters is what gets financed, and on what terms. Who owns the assets has no importance in itself. Setting up a sovereign wealth fund does nothing to socialize investment, if the fund is operated on the same principles as a private fund would be.

I observed this first-hand some years ago, when I worked in the AFL-CIO’s Office of Investment. The idea was to use the substantial assets of union-affiliated pension funds to support labor in conflicts with employers. But in practice, the funds were so constrained both by legal restrictions and by the culture of professional asset management that it was effectively impossible to depart from the conventional framework of maximizing shareholder value.

Fourth. We need to link proposals for socializing finance to a critique of conventional monetary policy. We need to challenge the sharp lines between planning, prudential regulation, and monetary policy proper. In reality, every action taken by the central bank channels credit towards some activities, and away from others.

One important lesson of the past 15 years is the limits of conventional monetary policy as a tool for stabilizing aggregate demand. But central banks do have immense power over the prices of various financial assets, and monetary policy actions have outsized effects on credit-sensitive sectors of the economy. A program of using credit policy for what it can do — fostering the growth of particular new sectors and activities — goes hand in hand with not using credit policy for what it cannot do — stabilizing inflation and employment. In this sense, socializing finance and developing alternative tools for demand management are complementary programs. Or perhaps, they are the same program.

It’s worth noting that Keynes was very skeptical of the sort of fiscal policy that has come to be associated with his name. He did not believe in running large fiscal deficits, or boosting demand via payments to individuals. For him, stabilizing demand meant stabilizing investment spending. And this meant, above all, reorienting it way from future profitability, which is inherently unknowable, and beliefs about which are therefore ungrounded.

This is a key element in the Keynesian vision that is often overlooked: Our inability to know the future matters less when we are focused on providing concrete social goods. It may be very hard, even impossible, to know how much the apartments in a given building will rent for in thirty years, depending as it does on factors like the desirability of the neighborhood, how much housing is built elsewhere, and the overall state of the economy. But how long the building will stand up for, and how many people it can comfortably house, are questions we can answer with reasonable confidence.

Wouldn’t it be simpler, then, to stabilize private demand in the first place, rather than try to offset its fluctuations with changes in the interest rate or public budget position? From this point of view, our current apparatus of monetary policy would be rendered unnecessary by a program of reorienting investment to meet real human needs.

UPDATE: I have added a link to the video of the conference.

Political Parties Are Illegal in the United States

This is a guest post by Michael Kinnucan. 

A longstanding concern on the US electoral left is the issue of “candidate accountability” – if we elect a left-wing candidate, how can we be sure that he or she will stay true to our politics while in office? It’s a big problem. One solution regularly proposed is that the left needs to break with the Democrats and build a third party. Rather than continuing to run candidates on the Democratic ballot line, the left should create its own party; such a party could endorse only candidates fully vetted by and accountable to the party membership, and could discipline candidates–even revoke their party membership–if they moved right in office.

This is an appealing idea. Unfortunately, here in the United States, creating a formal political party which exerts this kind of control over candidates is illegal. 

I want to be clear that I don’t mean building such a party is merely difficult. Many opponents of third-party strategies point to various aspects of the US political system that make it hard to get a third party off the ground: first-past-the-post elections, the presidential system, ballot access laws, Duverger’s Law, etc. These points are well-taken, but if our goal is to create an ideologically unified and accountable party, they’re simply beside the point. Building a party that can enforce candidate accountability to the collective political judgment of party members isn’t merely difficult in the US, it’s impossible. US election law simply forbids such parties.

What do I mean by this? Well, let’s say you and I and our friends feel like we have a good idea for doing Socialism, and we form the Socialism Party together, and we write some bylaws and create an endorsement process and jump through the hoops of getting ourselves a ballot line. (This process varies by state but usually involves collecting a lot of signatures and so forth. In most states the barrier isn’t insuperably high; even PSL often manages it.) Our idea is that we, the dues-paying members of the Socialism Party, will vote on who to endorse, and then whoever we endorse for any office will appear on the Socialism ballot line and voters who like Socialism can vote for them. The Socialism Party will never endorse milquetoast liberals, and if some of its elected officials stray from the fold, the Socialism Party will drop them from its line. When voters vote the Socialist ticket they’ll be sure they’re voting for genuine Socialists.

Procedural Regulation Makes Candidate Accountability Impossible

At this point many moderate progressives will raise pragmatic objections; they’ll ask whether we have enough of a base to launch a party, worry about the spoiler effect, and so forth. But these objections are irrelevant, because what I just described is illegal in the US. You just can’t do it! Because, in the US, the state will come in the moment we’ve won a ballot line, and it will say “hold up, wait a minute, you want to just have some self-selecting party insiders endorse candidates based on whatever made-up system is in your bylaws? Well, we won’t stand for that. We make the rules. The only way you’re legally allowed to select candidates is through a state-sponsored formal election (a “primary”) run according to state rules and administered by state and local boards of elections.”

What are the state’s rules? Well, they’re things like:

  • Maybe the Socialism Party wants to select candidates at its annual convention after a rich and edifying political debate. Too bad, that’s illegal. The state doesn’t care for these smoke-filled room candidate selection processes, it got rid of them back in the Progressive Era. Candidates will be selected inside a state-sponsored ballot box by individual voters.
  • Maybe the Socialism Party wants to select candidates on a statewide basis–deciding strategically which districts to run candidates in, strategically targeting resources to those races, and ensuring ideological unity across the slate. Too bad, that’s illegal. The state thinks local voters should have a voice in who runs locally. Candidates will be selected by party members in whatever district they want to run in. If the six party members in some random rural county want to run one of themselves for mayor, the rest of the party will just have to live with it.
  • Maybe the Socialism Party wants to make sure that only dues-paying party members can vote in elections; they don’t want random people who joined because they heard about the Socialism Party on Twitter determining endorsements, and they especially don’t want some grifter stealing the party’s ballot line by persuading all his friends to join and vote in the primary. Too bad, that’s illegal. The Socialism Party is welcome to collect dues and require political education courses to its heart’s content, but the state says it can’t set up arbitrary barriers so that only insiders get to vote in primaries. The state says that the only thing you need to do to vote in the Socialism Party primary is check the appropriate box on a voter registration form.

And so on and so forth, for trivial matters and major ones. Do members of the Socialism Party want to pick candidates through RCV? Too bad, that’s illegal  (except for the few places where it is mandatory). Do members of the Socialism Party want to strip SP elected officials of party membership if they support a war or genocide? Too bad, the state says those elected officials will still be eligible to run and vote in SP primaries.

At this point we in the Socialism Party are really in a bad way. We created a party specifically so that we could escape corruption by the liberals and impose party discipline and so forth, but instead we’ve created a system where any state rep candidate who can get a couple dozen people to check a box on a form in any district in the state can run as an official candidate of the Socialism Party and we can’t do a thing about it.

The Practical Consequences of Procedural Illegalities

Would this really happen? It very much would. To take the most obvious example, in states where the Green Party has a ballot line, Republican candidates can and do pick up the Green line, figuring to get a few votes out of leftists who vote straight-ticket without doing much research.

Some may think this is just an edge case and not a fundamental objection. Sure, tiny and pointless parties like the Greens may not be able to use a ballot line effectively, but a true mass-base socialist party will be a different matter. A Socialism Party candidate running in a primary where only Socialism-registered voters can vote will still be accountable to Socialism.

This is an illusion. Candidates of the Socialism Party in local constituencies will become rooted in those constituencies; they’ll develop a strong base of local support among local Socialism-registered voters by tailoring their message to the views of those voters. They will also work (as they certainly should) to develop strong roots in their district and help build the Socialism Party’s base in their district, and will naturally encourage more people to register as Socialism Party voters. Many of those new registrants will have a much stronger connection to their local rep than they do to the party as a whole. An extremely successful Socialism Party, one that really came to dominate specific demographics and constituencies, would find itself in such a dominant position in some districts that many people would register Socialism just to vote in the primary—just as we do now.

In these conditions, there’s simply no reason to think that the Socialism Party as such could exercise meaningful control over its candidates. When the Party demanded that its elected officials take unpopular votes, many candidates would respond that they didn’t think those votes were right for their district, and that Socialism voters in their district agreed with them—and they’d be proven right in the next Socialism Party primary, which they would win hands-down.

Socialists who doubt me on this would do well to consider the case of Alexandria Ocasio-Cortez and the Democratic Socialists of America. Many people in DSA have spent an enormous amount of time worrying about AOC’s accountability to DSA. These concerns came to a head last year when DSA’s 18-member national leadership body voted not to endorse her last year (although New York City DSA chose to endorse anyway). But it has always been pretty clear that AOC would win a referendum vote of DSA members on endorsement at either the national or the local level. The average DSA member doesn’t know much about the complex concerns some DSA leaders have with her position-taking, they just know her as a prominent, charismatic and successful socialist elected official, and they like her. And no one can doubt that a poll of DSA members in AOC’s district would go overwhelmingly in her favor: Many of those people joined DSA because of AOC’s campaigns, many of them know her personally, and they are overwhelmingly aligned with her politics. If DSA were a formal political party, the only body empowered to make endorsement decisions about AOC would be those in-district members—and all it would take to become a member would be to check a box on a voter registration form. A DSA non-endorsement of AOC would become inconceivable.

Some people on the left wing of DSA argue that we need to form our own party so we can avoid candidate accountability issues like the ones they perceive in our relationship with AOC. But, as I have shown, this is exactly wrong: DSA can address candidate accountability issues only to the extent that it is not a formal political party. A formal political party would have no way of unendorsing someone like AOC.

Why is the US like this?

To be clear, this isn’t some special feature of left-wing third parties in the US; it applies to all ballot-line political parties, including the Democrats and the Republicans. That’s why AOC was able to win a Democratic primary in the first place, taking out one of the most powerful Democrats in Congress against the entire weight of the state and national Democratic Party structure. If the Democrats had been able to disqualify AOC from running as a Democrat, or disqualify left-wing voters from voting in primaries, or overturned her primary win at a higher level of government, no doubt they would have. But they can’t.

It’s a bit of an odd situation, when you think about it. If you and I and our friends decided to start some other kind of organization–a cat fanciers’ club, or a soup kitchen, or the National Rifle Association, or the Democratic Socialists of America–we could set whatever rules for membership and office-seeking we thought best and the state wouldn’t say a thing about it. Indeed, it would be seen as grossly intrusive and perhaps a First Amendment violation if the state were attempt to dictate the bylaws of civil society organizations. But the case is different with political parties. In the US, all the most significant decisions of a ballot-line political party are determined by state law.

This isn’t true in most countries. In the UK, for example, the national elected leadership of the Labour Party is perfectly capable of forbidding an individual from running for office as a Labour candidate; that’s what they did to Jeremy Corbyn. The Labour Party didn’t have to go to Corbyn’s district and door-knock, or drop a million-dollar independent expenditure on him, to knock him off the Labour line; they simply voted him off, as they had a perfect right to do. In most countries the idea that the elected leadership of a party can decide who runs on that party’s line seems quite natural–what else could it mean to have a political party?

But in the US, parties just aren’t allowed to do that—not the Democratic Party and not the Socialism Party. The Democratic Party can’t stop AOC (or Joe Lieberman, or Kyrsten Sinema, or Ilhan Omar) from running as a Democrat.

The question of why the US regulates political party selection of candidates down to the last detail would take us beyond the scope of this essay. Briefly, though, state regulation of parties is best seen as a reformist compromise ameliorating the anti-democratic effects of the two-party duopoly. In most countries, parties can choose candidates in any way they see fit, including in ways that exclude ordinary voters from having a voice. But the potentially undemocratic effects of these selection processes are mitigated by the fact that voters who don’t like the outcomes can split and form another party. In the US, our law on political parties reflects a judgment that voters can’t (as a practical matter) form a separate (viable) party, and so as a consolation prize we have the legal right to influence the candidate selection processes of the parties we’re stuck with.

This compromise means that US political parties are strange institutions, quite unlike political parties in other democratic countries. It would be barely overstating the case to say that the US simply doesn’t have political parties. The two major US political parties are perhaps best viewed not as civil society organizations but as features of the US electoral system; in this interpretation, the US effectively has a two-stage “runoff” electoral system like the French presidential election system, where anyone can run in the first round and the top two vote-getters then run head to head. But unlike in France, the first stage of this runoff is organized on roughly ideological lines, where candidates who choose to label themselves as vaguely left-of-center run in a separate first-round election from candidates who choose to label themselves as vaguely right-of-center.  In this analysis, becoming a “member” of a major party means no more than deciding which first-round election to vote in. The parties aren’t so much civil society organizations that have their major internal decisions shaped by electoral law, as features of the electoral law that for historical reasons are named after formerly significant institutions in civil society.

That may be going too far, but it’s very important emphasize the enormous gap between the major parties in the US and what the rest of the world understands by the term “political party.” If you went to the leadership bodies of political parties in other countries and said “we are forbidding you to choose which candidates run for election as candidates of your party,” they would be justified in asking “good lord, what’s left to us? What does it mean to be a party without that? How can we meaningfully advance a political program in the legislature if we can’t even determine in any organized way which candidates we elect to office?”

In the US, we know what’s left: Moribund and irrelevant state committee structures that serve as the replaceable appendages of wealthy donors and powerful individual politicians, plus a vague brand with which voters can vaguely identify. It’s really not very much.

The Objections

It is difficult for many Americans to grasp this point because Americans simply don’t have any experience of a “real” political party. They’ll say “how can you say that the Democratic Party doesn’t exist as a real political party? Democratic Party powerbrokers, including shadowy donors and prominent politicians, screwed Bernie Sanders and Jamaal Bowman, for example; the party exerted real power.”

The objection itself is telling. For Americans, a “party” is a vague and nebulous constellation of wealthy donors, prominent politicians and political brand identifications whose power consists in their ability to coordinate to influence primary voters. That nebulous constellation certainly exists, and it’s not tied to a particular ballot line—many interest groups, like AIPAC and the charter school lobby, coordinate to influence primary voters in both major parties (and could do so in the Socialism Party, too). But Americans tend to miss the glaringly obvious fact that “the Democratic Party,” as a formally constituted institution in civil society—as the DNC and state Democratic committees and so on—is utterly powerless to decide who runs as a Democrat, while the UK Labour Party can ban a prominent and popular former party leader by a simple vote at a scheduled meeting. Americans miss this because they’re barely aware of the formally constituted Democratic Party bodies, and they’re barely aware because these bodies mostly don’t matter. Because, again, having formal party bodies that matter in the way that the Labour Party’s leadership committee does is illegal in the US.

Finally, some will argue that this legal regime shouldn’t be an obstacle to the left. They’ll say “come on, Michael, you say that it’s illegal to form political parties in the US, but Socialists formed independent political parties even in tsarist Russia. Surely the legal regime is less hostile here, and in any case, surely it’s our job to overcome it.”

And what I’d say is–well, yes, if by “political party” you mean an organized group of socialists who make collective decisions on the basis of their shared politics and contest elections, we certainly can build such an organization–and not only that, but we already have done so. It’s called DSA!

But if you mean “an organization like DSA, and also we control a ballot line” – no, I’m sorry. Ballot lines are creatures of the state. The state gets to set the rules on who gets to use one and under what circumstances, and the state has set rules such that it is ILLEGAL for us to have an organized group of socialists who make collective decisions and have those decisions be binding on an electoral US party. It’s not merely hard or impractical – it’s impossible.

Conclusion

In DSA and on the US left more broadly, when we argue about whether to use the Democratic Party ballot line or create our own ballot line so we can have a disciplined party, the debate is often over whether our own ballot line is a necessary condition for party discipline and coherence (“can we build a caucus of elected socialists if they’re elected on the Democratic line, or do we need our own line?”) That’s the wrong question. The right question is whether our own ballot line is even compatible with discipline and coherence (“can we maintain electoral unity when our decision-making process on who to back electorally is taken out of our hands, broken up across hundreds of districts and opened to anyone who wants to participate?”) and the answer is, obviously, no we can’t.

This is a double-edged sword for the left. On the one hand, we can’t build our own ballot-line party that enforces candidate discipline through collective decisions. But on the other hand, neither can “the” Democratic Party. “The” Democratic Party is legally bound to let us run on “their” ballot line in “their” internal (primary) elections. If they weren’t – if the laws were different – then we’d find it both necessary and also possible to form a ballot-line third party. As things stand, it is not necessary and also not possible.

None of this is to say that we can stop worrying about candidate accountability and party discipline. The absence of real, disciplined political parties is a colossal problem in US politics; not only does it confront the socialist left with the constant threat of political co-optation, but the very same issue makes it enormously difficult for even moderate Democrats to enact their political agenda. One need think only of the fate of Biden’s very progressive domestic agenda in 2021-22 at the hands of Joe Manchin and Kyrsten Sinema. The lack of a framework for meaningfully accountable electoral representation in the US is a huge barrier to enacting not only radical but even moderate reforms.

But the left is deluded if it believes that forming a new ballot-line political party will help overcome this barrier. Realistic efforts to address the problem of party accountability and discipline must begin from the observation that these characteristics, which are intrinsic features of formal political parties in most democracies, are incompatible with formal political partyhood in the US.

Writing about Policy in the Trump Era

Policy writing is a particular kind of writing. It’s defined not just by its topic but by its orientation: What should government do, to address some agreed-on problem, or achieve some agreed-on goal? It is premised on a public debate, in which ideas are adopted based on their merits. It is addressed to no one in particular; it assumes we all have a say in the decision, and a stake in the outcome. It posits some shared values or ends, so that particular actions can be compared on a rational basis. It implies a vision of politics as conversation.

Is that sort of thing worth doing? Is it worth doing now?

Some people might not think this kind of writing is ever worthwhile. (One can imagine various reasons.) Obviously I am not one of them. I have written many policy pieces of this sort, mostly for the Roosevelt Institute. (For example here, here, here, and here.) I would like to keep doing it. The premise of shared problems and a political authority that is both attempting to solve them and responsive to the public, has always been false in some important ways, and effaced important dimensions of politics that are about organized conflict rather than rational debate. But it nonetheless seemed to me that, within its limits, “policy” was a useful framework for asking some important questions. (For example, the links above.)

But one might say: The US government is now in the hands of a clique whose defining purpose seems to be precisely the rejection of collective solutions to common problems and a public of equal citizens. Their immediate project is dismantling the systems through which any kind of rational policymaking operates. So hasn’t, now, the gap between the imagined world of policy writing and the real political world gotten unbridgeably wide? When the people in authority are actively ripping up all the efforts to, say, expand renewable energy, does it still make sense to propose helpful ideas about how to decarbonize? Or is that simply an exercise in denial? Or worse, does it legitimate a project that’s fundamentally hostile to that goal, and should be approached instead as an enemy to be defeated?

One doesn’t have to write about policy. There are plenty of other kinds of politically oriented writing. You can write poems, or fiction. You can write about books. You can write about history — perhaps especially valuable right now, as long as one approaches the past on its own terms and not simply as a negative space for whatever one wants to say about the present. You can do journalism. You can do practical work — write speeches, press releases, technical reports — provided you are part of an organization.

Most obviously, for someone who might otherwise be doing policy writing, there’s descriptive work, trying to understand and explain what’s going on in a clear and precise way. In this moment, simply documenting what is happening is extremely valuable. As time goes on, we will also want to understand the consequences of what’s happening. If a big increase in tariffs happens, say, we’ll want to be able to describe what happens to prices and trade flows and production in the US. This kind of work doesn’t require one to be proposing anything, in the way that policy writing does.

But let’s say we do want to do policy writing. How should we approach it?

That’s what I started writing this post to try to clarify for myself. The post got quite long as I was writing it. I wrote down 10 points in an outline, and I’ve only gotten through four of them. So this should be the first of a couple posts. In this one I’m writing about general principles; hopefully in the next I’ll move toward more specific questions.

These thoughts, I should emphasize, are not intended as directives for anyone to follow. They’re preliminary notes rather than developed arguments. They’re an effort to put down on paper some things that I have been thinking about, as I think about how to be useful.

1. There’s only a very loose connection between policy substance and electoral outcomes. It’s tempting to argue that a better program will help the Dems or whoever win elections, but I think we need to accept that this isn’t something one can say with any confidence. I don’t think people voted for Trump because of his platform, whatever that is. I’m not sure that a better or stronger position on climate or immigration or labor would reliably help win elections. The problem isn’t that voters don’t want that; the problem, from my point of view, is the implicit model in which voters have well-established presences on the whole range of issues, and pick the candidate who best matches them. You can win an election as strong opponent of immigration (obviously); I think you can also win an election as a strong supporter of immigration. What matters  is having some substantive position, and connecting it to a larger vision and persona and program. It’s not a question of checking the right item off on a list.

Conversely, I am not sure that better substantive outcomes are mainly a function of better electoral outcomes. (There’s some connection, of course.) To take the immigration example again, Trump’s biggest impact so far has not been anything he’s done (so far!), but the extent to which leading Democrats have adopted his position. It’s not so many years ago that some of the most prominent Republicans were supporting legislation to legalize millions of undocumented people. Here in New York, we have a lot of horrible people in charge – I’m not sure if, considering them strictly as individuals, there is much to prefer about Andrew Cuomo or Eric Adams over Donald Trump. Nonetheless we do get some nice things here from time to time, because the environment they operate in is so different from the national one.

Admittedly, this doesn’t make a big difference right at this moment. I put it first mainly to make a negative point, that “how will this help win the next election” is not a very helpful question as a guide to writing about policy right now (or ever, perhaps, unless you are actually working for a campaign.)

2. Good ideas are worth arguing for on the merits. This is the converse of the previous point. The reason to argue for good ideas is because good ideas do not get adopted, or even come into being, without people arguing for them.

The reason to talk about welcoming migrants rather than driving them away, is because welcoming migrants is better than driving them away, not only for them but for the rest of us as well. Arguments for better regulation of food safety or power plant emissions will, over time, result in safer food and cleaner air.  Defending the rights of trans people expands everyone’s freedom to exist in our bodies in different ways regardless of what sex we’re assigned. Again, I don’t think that one should count on any immediate electoral payoff from preferring good ideas to bad ones. The reason to argue for good ideas is that arguing for good ideas makes good ideas more likely to be adopted. But I do think that, over the long run, organizations and politicians that consistently hold positions on the merits will be more successful than ones that tack to the prevailing winds.

I feel like arguing for good ideas on the merits has gotten a bit undervalued lately. When, let’s say, Ezra Klein says that we should pay less attention to “the groups,” what he’s rejecting is the exact thing he himself used to do — assessing policy ideas on the merits. He’s saying that politicians should listen less to people who have devoted themselves to studying some problem and to coming up with ideas to deal with it.

There’s another reason to focus more on arguing for good ideas because they are good. It’s a useful form of self-discipline. It’s easy to get too clever, and think that something that is bad on the merits will lead to something better down the road, when those further steps are tenuous or uncertain or just assumed. It’s easy to get too angry, and base all your arguments on being against people who are wrong. Wrong they may be! But there are many ways to be wrong, and the opposite of a bad idea is often another bad idea. Focusing on making positive arguments for things you believe in is a way of avoiding these errors. Politics is always a mix of moving toward a distant destination and starting from where you are. But when your immediate surroundings are especially treacherous or confusing, it becomes more important to keep yourself oriented toward that ultimate goal.4

3. Professionalism is worth defending. The disinterested desire to do one’s job well, and the norms and institutions that go with that, are, it seems to me, both essential to the routine functioning of society (more so than, for instance, markets) and an important base for socialist politics.

This is something I’ve thought for a while, and written about occasionally, but it seems especially relevant now. It’s not just that this administration is beginning with an all-out attack on professionals and professional standards in the federal government. (Although that is a central fact about this moment.) It’s also clear that for many of the billionaires who the administration answers to, the labor problem that concerns them most is the relative autonomy of their professional employees. Listen to this from Marc Andreesen:

Companies are basically being hijacked to engines of social change, social revolution. The employee base is going feral. There were cases in the Trump era where multiple companies I know felt like they were hours away from full-blown violent riots on their own campuses by their own employees.

He is not talking about the cleaning staff here. He is talking about technicians, engineers, low-level managers who are using their relative independence and lack of replaceability to assert their own values and priorities, against those of their bosses. A bit later in the same interview, he complains that

you’d get berated at an all-hands meeting as a C.E.O., where you’d have these extremely angry employees show up and they were just completely furious about how there’s way too many white men on the management team. … all of a sudden the C.E.O. experiences, “Oh, my God, 80 percent of my employees have radicalized into a political agenda.” What people say from the outside is, “Well, you should just fire those people.” But as a C.E.O., I can’t fire 80 percent of my team. 

It’s very clear, when you read stuff like this, that complaints about “DEI,” “wokeness” and so on are in part complaints about workers who are not obedient, who reverse the natural order of things by berating the boss, and who can’t be replaced and who’ve been spoiled by a college education.

A purely negative, reactive criticism of these attacks on professional employees is not enough. What’s needed is a positive argument for the values of professionalism — of technical expertise, credentials, the autonomy of the professional to do their work according to their own standards. The post-Luigi controversy about insurance companies limiting anesthesia services was a nice teaching moment for these values. The backlash reflected people’s concerns about being denied care, but it also reflected a broader sense that certain decisions — like how long a patient needs anesthesia for — should be made by the domain expert who is doing the work.

Or think about strikes by teachers or journalists, which are motivated not only by demands for better pay — which god knows they deserve — but also by demands to be able to do their job properly. Something that’s very needed in this moment, I think, is a positive defense of why professional civil-service jobs (and their private sector equivalents) are important. Air traffic controllers, say, need job security not just for fairness, the way all workers do, but even more so because that’s what frees them to focus on doing on their work according to their own professional norms.

There are endless examples around us, which we normally don’t even think about. I watched a video with the kids the other night about postal codes, which talked about Ireland redesigned theirs from the ground up so a single 8-digit code specifies any mailbox in the country.5 That didn’t happen because people voted for it, let alone because there were market incentives. It happened because the people with the responsibility for organizing the postal system, who had the relevant expertise, took their jobs seriously and were given the freedom to do them right.

Attacks on professional norms, it seems to me, are a central part of the Trump project, and defense of those norms are one of the central grounds on which that project is being resisted. When the California Department of Education announces its refusal to comply with Trump’s orders banning LGBTQ materials in the classroom, they are not doing so (just) out of self interest, or even out of concern for the kids it would harm. They are doing it because government is not a monarchy, there are rules that assign certain specific authorities to certain roles, and domain-specific decisions — say, what textbooks to use in the classroom — are assigned to the specialists in that domain. It’s these specifically professional norms that are the organizing principle for collective action here.

And of course there’s another reason why an affirmative defense of professionalism is important now. It’s what allows government to do all the other policies we might want it to. Bhaskar Sunkara has been urging socialists to reject “professional-class” politics and focus on working-class issues like Medicare for All. I also am a big supporter of universal public health insurance. But I am not sure how it is going operate without professionals or managers. I certainly see the appeal of “anti-PMC” politics, and there may be contexts where it is called for. But what we need right now is exactly the opposite. We need a program that moves from the defense of specific groups of professionals (like teachers or air traffic controllers) to a broader argument in favor of professional norms and civil service protections in general.

4. Our program needs to be argued for in a principled, positive way. Many of the actions this administration is taking will make the lives of many people much worse. But is that the best grounds to oppose them on? I am not sure it is. I think that in most cases, in both the short and long term, we are better off arguing for what we think is right, rather than that what they are doing is wrong.

Take the case of deportations. A negative critique can just as well be that he is deporting too few people as that he is deporting too many. The only solid footing from which one can oppose the administration’s actions on immigration is a clear principled position on what immigration policy should look like. The same goes for trade policy: 25% tariffs on Canada seems very crazy! But is the counterargument that free trade is the only correct policy, or is it that deglobalization should be a more cautious and gradual process, or is it that steep tariffs should be imposed on enemies but not on allies?

The answers to these questions are not easy, and not everyone on our side (for any reasonable value of “our”) is going to agree on them. But one way or another, opposition to this set of policies is going to require an affirmative case for a different set of policies. And that is going to require articulating some general principles about how society should be organized. If the Trump administration was wrong to put people on planes to Brazil and Colombia, does that mean that those people should have been allowed to stay in the USA? Does it mean they should be allowed to return? Does it mean that other people in those countries should also be allowed to travel to the US, and live and work here? I personally think the answers to these questions are Yes. You don’t have to agree with me. But you are not going to be able to oppose Trump’s actions towards migrants unless you have a substantively different immigration policy to offer in their place.

The problem — or perhaps the opportunity, depending on how you look at it — is that the state of things pre-Trump was not the application of any particular set of principles. It was just the way things had worked out. So any kind of principled argument against what’s happening now, is necessarily going to be an argument for something quite different from what we are used to. Take the very basic principle of one person, one vote. If you are going to oppose current efforts to roll back the franchise on the grounds that every person has an equal right to choose their government, then you are going to have to oppose other long-standing features of American politics, like the malapportioned Senate or felon disfranchisement or Democratic primaries that let some states vote before others, or limiting the franchise to US citizens.  And this goes even more when we are talking about mobilizing people and not just making arguments. If you expect people to fight and bear costs and take risks, it is going to have to be for a positive program.

(A related problem, with immigration particularly, is that almost no one has any idea what the existing policy is. Under what conditions can someone from Mexico legally immigrate to the United States? Unless you are a specialist in immigration law, or you or someone close to you has been in that position, I would bet you don’t have any idea.)

This point is stronger now than it was before Trump was elected. “Trump will be a disaster, better to stick with the safe status quo” obviously was not a winning argument, but at least it was an argument. Now there is no status quo to stick with.6

That’s enough for now. I will put up a second post continuing this discussion in the next week, I hope.

ETA: Michael Kates on Bluesky helpfully points out the passage from the Republic I was trying to remember:

Glaucon and the rest entreated me by all means not to let the question drop, but to proceed in the investigation. They wanted to arrive at the truth, first, about the nature of justice and injustice, and secondly, about their relative advantages. I told them, what I really thought, that the enquiry would be of a serious nature, and would require very good eyes. Seeing then, I said, that we are no great wits, I think that we had better adopt a method which I may illustrate thus; suppose that a short-sighted person had been asked by some one to read small letters from a distance; and it occurred to some one else that they might be found in another place in which the letters were larger—if they were the same and he could read the larger letters first, and then proceed to the lesser—this would have been thought a rare piece of good fortune.

How good an analogy this is for the relationship of long-run goals and immediate tactics I was talking about, you can judge for yourself.

At The International Economy: A Global Debt Crisis?

(I am an occasional contributor to roundtables of economists in the magazine The International Economy. The topic of this month’s roundtable was: Is a serious global debt crisis possible?)

As Hyman Minsky famously described, when market participants believe that crises are possible, they behave in ways that make the system relatively robust. Only when the chance of a crisis is deemed very low, or forgotten entirely, do financial markets accept the degree of leverage and illiquid commitments that make a crisis possible.

This means, among other things, that crises are inherently difficult if not impossible to predict. A predicted crisis is a crisis that does not occur.

So to the question of whether a serious crisis is likely in the near future, the sensible answers range from “maybe” to “I don’t know.”

There are other questions we have a better chance of answering. First, are the authorities able to handle a crisis if one does occur? And second, what kind of spillovers will a financial crisis have for the rest of the economy?

On both questions, the answers would seem to be reasonably encouraging for the rich countries, less so for the developing world.

The 2007-2009 financial crisis and the 2020 pandemic were very different events in many ways. But one thing they had in common, is that both demonstrated the awesome power of a committed central bank to overcome almost any kind of disruption to the financial system. The Fed, in particular, was willing to buy a much wider range of assets, and intervene in a wider range of markets, than almost anyone would have previously predicted. Today there can be little doubt that the Fed can stem the contagion from even the biggest bank failure or sovereign default, if it wishes to.

That last caveat is worth emphasizing. The decade after 2007 saw a sharp divergence between the US and Europe. While the Fed moved aggressively to repair the financial system,  the ECB moved more slowly — in part because of tighter institutional constraints, but also, it’s now clear, because decision makers at the ECB saw the crisis as a chance to push through a broader set of policy changes. Not only Greece but also Spain, Italy and Ireland were in effect held hostage by the ECB, which refused to restore liquidity to their banking systems until they accepted various structural reforms.

This divergence suggests that, in the rich countries, the question may be less what central banks are able to do in response to a banking crisis, and more what they are willing to do.

As for the second question, it’s worth maintaining a bit of skepticism that finance is as important to the rest of us as it appears in its own eyes. In retrospect, it seems clear that the long-term damage to the US economy after the 2007 crash had more to do with the collapse of housing market — a pillar of the real economy — than with the the financial aftershocks that got so much attention at the time. When we think about the dangers of a financial crisis today, we should ask not only what are the chances of bank failures and asset market disruptions, but how important those markets are for real activity. Mortgages and cryptocurrencies are very different in this respect.

For the developing world, unfortunately, such a relatively sanguine view is harder to sustain. Central banks are much less powerful in countries where a large fraction of domestic obligations involve foreign currencies, and where financial conditions are largely determined beyond the borders. Serious spillovers to the real economy are more likely in this case. If there is a crisis in the near future, it may finally teach the lesson that the world has been slowly learning: Outside the core of the world economy, an essential requirement for any kind of macroeconomic management is a degree of financial delinking.

Are We Better Off Than Four Years Ago?

(I write a monthlyish opinion piece for Barron’s. This one was published there in June. My previous pieces are here.)

Are you better off today than you were four years ago?

Ever since President Ronald Reagan first asked that question in 1980, it has summed up a decisive factor in national politics. Those presidents who deliver material improvement in voters’ lives win re-election (for themselves or their parties). Those who don’t, do not.

Was 2024 a confirmation of this conventional wisdom, or a departure from it? It’s a harder question to answer than you might think. Whether or not people are better off depends on what we measure, and what we compare it to.

Many voters certainly expressed unhappiness with the economy. And those voters strongly favored Donald Trump. In 2020, 50% of voters rated the economy as “not good/poor.” Joe Biden got 80% of this group’s vote. In 2024, 68% of voters rated the economy as “not good/poor.” Kamala Harris received just 28% of their vote.

On the face of it, this unhappiness is a puzzle. By the measures economists typically focus on, U.S. economic performance looks exceptionally strong. Postpandemic growth has been stronger than in any other rich country, inflation is back down to normal, unemployment is near historic lows, and strong wage growth, especially for the lowest-paid workers, has reversed decades of rising inequality.

When a senior Biden advisor described the US as experiencing “the best economy ever,” she spoke not just for fellow partisans, but for many economists. With a record like that, shouldn’t the economy have been a selling point for the Democrats, rather than a weakness? What do voters have to complain about?

Commentators have written off voters’ concerns as mere vibes or the result of misleading media coverage. But a more careful look suggests that there is something to voters’ perception that they are worse-off economically. Although wages have more than kept pace with inflation, especially at the bottom, wages are not the only source of income. The withdrawal of pandemic-era welfare policies has left many people materially worse off than in the first year of the Biden administration, even as their paychecks have grown.

Let’s start with the positive case for U.S. economic strength. Compared with other countries in the OECD, the U.S. postpandemic recovery has been exceptionally strong. Real gross domestic product per capita is 10% higher than it was in 2019, the highest growth rate among the G7 group of rich countries. And the U.S. has not paid for this growth with higher inflation—U.S. inflation rates have been no higher than elsewhere.

Wage growth has actually exceeded pre-pandemic trends even after accounting for inflation. This is especially true for those at the bottom of the distribution. As labor economists David Autor, Arin Dube, and Annie McGrew documented in an important paper, the wage compression over 2020-2023 reversed a full third of the past four decades of rising wage inequality. (And as Dean Baker has often noted, the increase in remote work is effectively a raise for millions of workers who no longer have to spend time commuting, one not captured in the data.)

Why, then, did over two-thirds of voters tell pollsters that the economy was not good or poor? Why, according to exit polls, did Trump gain so much support precisely among those lower-income families who seem to have benefited the most from the strong labor markets of the past few years?

There’s no shortage of answers to this question. But one factor must surely have been the withdrawal of pandemic-era income support. During 2020-2021, the federal government did more than ever before in history to support the incomes and living standards of ordinary Americans. And then it took that support away.

One-off stimulus checks were the most obvious component of this extension and withdrawal of support, but it had many other aspects. For a year and a half (from March 2020 to September 2021), America’s threadbare unemployment insurance system briefly reached almost everyone who had lost their jobs. Over roughly the same period, an eviction moratorium protected renters from one of the most disruptive life events. Until April 2023, continuous enrollment in Medicaid maintained access to health insurance for millions of people who would otherwise lose it. SNAP (food stamp) benefits were expanded during the pandemic, by an average of $90 per person per month, under the declaration of public health emergency that lasted until April 2023. Even free school lunches were, temporarily, extended to far more students than had ever received them. And then, all of that was removed.

One striking statistic: Real per-capita income was 6% lower in 2022 than in 2021. This is more than twice as large as the next biggest decline since the data begins in the 1950s.

You might say that this is just another statistic, no more relevant to ordinary people’s lives than the more positive numbers cited by Biden admirers. But the withdrawal of pandemic social assistance also shows up in more direct measures of living standards.

In 2024, there were a million more Americans without health insurance than there were in 2022. The fraction of children without health insurance was higher on Election Day than it was when Biden took office.

Or look at the number of Americans who report each month that they can’t afford enough food for their families. This number is always too high for a country as rich as the United States, and it has historically risen during recessions. But strikingly, this number did not increase during the pandemic. It did rise sharply, though, after 2022, as pandemic-era expansions to unemployment insurance and SNAP were withdrawn. As of 2023, 5.1% of Americans reported being unable to afford enough food to meet their families minimal needs — more than at any point during Trump’s presidency.

Or consider evictions. National statistics on evictions are hard to come by, but in the cities and states tracked by the Eviction Lab, eviction rates were twice as high over the past year as in the last year of Trump’s presidency. This difference is, of course, due in large part to the eviction moratorium put in place by the CDC during the pandemic. But for the people who found themselves with their furniture out on the sidewalk in 2024, exactly which government agency is responsible is probably not so important.

Once we drill down past aggregate measures like GDP, it is clear that a large fraction of Americans were materially better off a few years ago than they are today.

An obvious response is that the biggest fall in income was due to the end of the stimulus, which was always meant to be temporary. That is true as far as it goes—though it’s not clear how much comfort this should give to parents who could afford food for their children thanks to the stimulus checks, and could not once those were taken away. But many other income-support measures, such as the child tax credit, were clearly intended to last. Biden spent much of his first year, and of his political capital, trying to win a permanent expansion of the welfare state in the form of the Build Back Better package.

We can debate how feasible this program was, in retrospect. But certainly the administration and its allies believed, and publicly promised, that they were going to deliver something other than a return to the prepandemic status quo. Are people wrong to be disappointed that these promises were not borne out? When Democrats boasted, in 2021, of the largest-ever reduction in child poverty rates, was there an understanding that it would be followed, a year later, by the largest-ever increase?

If we compare the material conditions faced by American families today to 2019, it’s easy to make a case that most people are better off. If we compare conditions to 2021—and look at more than just wages—it’s equally easy to make a case that people are doing worse.

Of course, as journalist Bryce Covert points out, there’s a strong case that the temporary income supports were essential to the rapid postpandemic recovery. In that sense, the right point of comparison is not actual conditions four years ago, but a deep recession that might otherwise have happened (and that many of us expected.) But one can hardly blame voters for answering Reagan’s question based on what actually occurred, and not based on a counterfactual, plausible though it may be.

It’s hard to say how much the Biden administration could have avoided this whiplash. In hindsight, it’s easy to argue that the unique political space of early 2021 would have been better used to craft a smaller set of permanent programs, rather than the broad but temporary package we actually got. Would that have changed the outcome of this year’s election? I have no idea. Probably historians will be debating these questions for decades to come.

But one thing is clear: When people say they are worse off than they were four years ago, they have good reason to feel that way. If someone says, “Under Trump the government started doing more to help me pay my bills, and under Biden it stopped doing that,” that is not just partisan bias or bad media coverage. It’s a straightforward statement of fact.

Does the Fed Still Believe in the NAIRU?

(I write occasional opinion pieces for Barron’s. This one was published there in October 2024. My previous pieces are here.)

Not long ago, there was widespread agreement on how to think about monetary policy. When the Federal Reserve hikes, this story went, it makes credit more expensive, reducing spending on new housing and other forms of capital expenditure. Less spending means less demand for labor, which means higher unemployment. With unemployment higher, workers accept smaller wage gains, and slower wage growth is in turn passed on as slower growth in prices — that is, lower inflation. 

This story, which you still find in textbooks, has some strong implications. One is that there was a unique level of unemployment consistent with stable 2% inflation — what is often called the “nonaccelerating inflation rate of unemployment,” or NAIRU. 

The textbook story also assumes that  wage- and price-setting depend on expectations of future prices. So it’s critical for central banks to stabilize not only current inflation but beliefs about future inflation; this implies a commitment to head off any inflationary pressures even before prices accelerate. On the other hand, if there is a unique unemployment rate consistent with stable inflation, then the Fed’s mandate is dual only in name. In practice, full employment and price stability come to the same thing.

In the early 21st century, all this seemed sufficiently settled that fundamental debates over monetary policy could be treated as a question for history, not present-day economics.

The worldwide financial crisis of 2007-2009 unsettled the conversation. The crisis, and, even more, the glacial recovery that followed it, opened the door to alternative perspectives on monetary policy and inflation. Jerome Powell, who took office as Federal Open Market Committee chair in 2018, was more open than his predecessors to a broader vision of both the Fed’s goals and the means of achieving them. In the decade after the crisis, the idea of a unique, fundamentals-determined NAIRU came to seem less plausible.

These concerns were crystallized in the strategic review process the Fed launched in 2019. That review resulted, among other things, in a commitment to allow future overshooting of the 2% inflation target to make up for falling short of it. The danger of undershooting seemed greater than in the past, the Fed acknowledged.

One might wonder how much this represents a fundamental shift in the Fed’s thinking, and how much it was simply a response to the new circumstances of the 2010s. Had Fed decision-makers really changed how they thought about the economy?

Many of us try to answer these questions by parsing the publications and public statements of Fed officials. 

A fascinating recent paper by three European political scientists takes this approach and carries it to a new level. The authors—Tobias Arbogast, Hielke Van Doorslaer and Mattias Vermeiern—take 120 speeches by FOMC members from 2012 through 2022, and systematically quantify the use of language associated with defense of the NAIRU perspective, and with various degrees of skepticism toward it. Their work allows us to put numbers on the shift in Fed thinking over the decade. 

The paper substantiates the impression of a move away from the NAIRU framework in the decade after the financial crisis. By 2019-2020, references to the natural rate or to the need to preempt inflation had almost disappeared from the public statements of FOMC members, while expressions of uncertainty about the natural rate, of a wait-and-see attitude toward inflation, and concern about hysteresis (long-term effects of demand shortfalls) had become more common. The mantra of “data dependence,” so often invoked by Powell and others, is also part of the shift away from the NAIRU framework, since it implies less reliance on unobservable parameters of economic models. 

Just as interesting as the paper’s confirmation of a shift in Fed language, is what it says about how the shift took place. It was only in small part the result of changes in the language used by individual FOMC members. A much larger part of the shift is explained by the changing composition of the FOMC, with members more committed to the NAIRU gradually replaced by members more open to alternative perspectives. 

The contrast between 2014-2018 Chair Janet Yellen and Powell is particularly noteworthy in this respect. Yellen, by the paper’s metric, was among the most conservative members of the FOMC, most committed to the idea of a fixed NAIRU and the need to preemptively raise rates in response to a strong labor market. Powell is at the opposite extreme — along with former Vice Chair Lael Brainard, he is the member who has most directly rejected the NAIRU framework, and who is most open to the idea that tight labor markets have long-term benefits for income distribution and productivity growth. The paper’s authors suggest, plausibly, that Powell’s professional training as a lawyer rather than an economist means that he is less influenced by economic models; in any case, the contrast shows how insulated the politics of the Fed are from the larger partisan divide.

Does the difference in conceptual frameworks really matter? The article’s authors argue that it does, and I agree. FOMC members may sincerely believe that they are nonideological technicians, pragmatically responding to the latest data in the interests of society as a whole. But data and interests are always assessed through the lens of some particular worldview. 

To take one important example: In the NAIRU framework, the economy’s productive potential is independent of monetary policy, while inflation expectations are unstable. This implies that missing the full employment target has at worst short-term effects, while missing the inflation target grows more costly over time. NAIRU, in other words, makes a preemptive strike on any sign of inflation seem reasonable. 

On the other hand, if you think that hysteresis is real and important, and that inflation is at least sometimes a question of supply disruptions rather than unanchored expectations, then it may be the other way round. Falling short of the employment target may be the error with more lasting consequences. This is a perspective that some FOMC members, particularly Powell and Brainard, were becoming open to prior to the pandemic.

Perhaps even more consequential: if there is a well-defined NAIRU and we have at least a rough idea of what it is, then it makes sense to raise rates in response to a tight labor market, even if there is no sign, yet, of rising inflation. But if we don’t believe in the NAIRU, or at least don’t feel any confidence about its level, then it makes more sense to focus more on actual inflation, and less on the state of the labor market.

By the close of the 2010s, the Fed seemed to be well along the road away from the NAIRU framework. What about today? Was heterodox language on inflation merely a response to the decade of weak demand following the financial crisis, or did it represent a more lasting shift in how the Fed thinks about its mission?

On this question, the evidence is mixed. After inflation picked up in 2022, we did see some shift back to the older language at the Fed. You will not find, in Powell’s recent press conferences, any mention of the longer-term benefits of a tight labor market that he pointed to a few years ago. Hysteresis seems to have vanished from the lexicon. 

On the other hand, the past few years have also not been kind to those who see a tight link between the unemployment rate and inflation. When inflation began rising at the start of 2021, unemployment was still over 6%; two years later, when high inflation was essentially over, unemployment was below 4%. If the Fed had focused on the unemployment rate, it would have gotten inflation wrong both coming and going.

This is reflected in the language of Powell and other FOMC members. One change in central-bank thinking that seems likely to last, is a move away from the headline unemployment rate as a measure of slack. The core of the NAIRU framework is a tight link between labor-market conditions and inflation. But even if one accepts that link conceptually, there’s no reason to think that the official unemployment rate is the best measure of those conditions. In the future, we are likely to see discussion of a broader set of labor-market indicators.

The bigger question is whether the Fed will return to its old worldview where tight labor markets are seen as in themselves an inflationary threat. Or will it stick with its newer, agnostic and data-driven approach, and remain open to the possibility that labor markets can stay much stronger than we are used to, without triggering rising inflation? Will it return to a single-minded focus on inflation, or has there been a permanent shift to giving more independent weight on the full employment target? As we watch the Fed’s actions in coming months, it will be important to pay attention not just to what they do, but to why they say they are doing it.

 

FURTHER THOUGHTS: I really liked the Arbogast et al. paper, for reasons I couldn’t fully do justice to in the space of a column like this.

First of all, in addition to the new empirical stuff, it does an outstanding job laying out the intellectual framework within which the Fed operates. For better or worse, monetary policy is probably more reliant than most things that government does on a consciously  held set of theories.

Second, it highlights — in a way I have also tried to — the ways that hysteresis is not just a secondary detail, but fundamentally undermines the conceptual foundation on which conventional macroeconomic policy operates. The idea that potential output and long-run growth (two sides of the same coin) are determined prior to, and independent of, current (demand-determined) output, is what allows a basically Keynesian short-run framework to coexist with the the long-run growth models that are the core of modern macro. If demand has lasting effects on the laborforce, productivity growth and potential output, then that separation becomes untenable, and the whole Solow apparatus floats off into the ether. In a world of hysteresis, we no longer have a nice hierarchy of “fast” and “slow” variables; arguably there’s no economically meaningful long run at all.7

Arbogast and co don’t put it exactly like this, but they do emphasize that the existence of hysteresis (and even more reverse hysteresis, where an “overheating” economy permanently raises potential) fundamentally undermine the conventional distinction between the short run and the long run.

This leads to one of the central points of the paper, which I wish I’d been able to highlight more: the difference between what they call “epistemological problematization” of the NAIRU, that is doubts about how precisely we can know it and related “natural” parameters; and “ontological problematization,” or doubts that it is a relevant concept for policy at all. At a day to day operational level, the difference may not always be that great; but I think — as do the authors — that it matters a lot for the evolution of policy over longer horizons or in new conditions.

The difference is also important for those of us thinking and writing about the economy. The idea of some kind of “natural” or “structural” parameters, of a deeper model that abstracts from demand and money, deviations from which are both normatively bad and important only in the short term — this is an incubus that we need to dislodge if we want to move toward any realistic theorizing about capitalist economies. It substitutes an imaginary world with none of the properties of the world that matter for most of the questions we are interested — a toy train set to play with instead of trying to solve the very real engineering problems we face.

I appreciate the paper’s concluding agnosticism about how far the Fed has actually moved away form this framework. As I mentioned in the piece, I was struck by their finding that among the past decade’s FOMC members, Powell has moved the furthest away from NAIRU and the rest of it. If nothing else, it vindicates some of my own kind words about him in the runup to his reappointment.8

This is also, finally, an example of what empirical work in economics ought to look like.9 First, it’s frankly descriptive. Second, it asks a question which has a quantitative answer, with substantively interesting variation (across both time and FOMC members, in this case.) As Deirdre McCloskey stressed in her wonderful pamphlet The Secret Sins of Economics, the difference between answers with quantitative and qualitative answers is the difference between progressive social science and … whatever economics is.

What kind of theory would actually contribute to an … inquiry into the world? Obviously, it would be the kind of theory for which actual numbers can conceivably be assigned. If Force equals Mass times Acceleration then you have a potentially quantitative insight into the flight of cannon balls, say. But the qualitative theorems (explicitly advocated in Samuelson’s great work of 1947, and thenceforth proliferating endlessly in the professional journals of academic economics) don’t have any place for actual numbers.

A qualitative question, in empirical work, is a question of the form “are these statistical results consistent or inconsistent with this theoretical claim?” The answer is yes, or no. The specific numbers — coefficients, p-values, and of course the tables of descriptive statistics people rush through on their way to the good stuff — are not important or even meaningful. All that matters is whether the null has been rejected.

McCloskey, insists, correctly in my view, that this kind of work adds nothing to the stock of human knowledge. And I am sorry to say that it is just as common in heterodox work as in the mainstream.

To add to our knowledge of the world, empirical work must, to begin with, tell you something you didn’t know before you did it. “Successfully” confirming your hypothesis obviously fails this test. You already believed it! It also must yield particular factual claims that other people can make use of. In general, this means some number — it means answer a “how much” question and not jsut a “yes or no” question. And it needs to reveal variation in those quantities along some interesting dimension. Since there are no universal constants to uncover in social science, interesting results will always be about how something is bigger, or more important in one time, one country, one industry, etc. than in another. Which means, of course, that the object of any kind of empirical work should be a concrete historical development, something that happened at a specific time and place.

One sign of good empirical work is that there are lots of incidental facts that are revealed along the way, besides the central claim. As Andrew Gelman observed somewhere, in a good visualization, the observations that depart from the relationship you’re illustrating should be as informative as the ones that fit it.

This paper delivers that. Along with the big question of a long term shift, or not, in the Fed’s thinking, you can see other variation that may or may be relevant to the larger question but are interesting facts about the world in their own right. If, for example, you look at the specific examples of language they coded in each category, then a figure like shows lots of interesting fine-grained variation over time.

Also, in passing, I appreciate the fact that they coded the terms themselves and didn’t outsource the job to ChatGPT. I’ve seen a couple papers doing quantitative analysis of text, that use chatbots to classify it. I really hope that does not become the norm!

Anyway, it’s a great paper, which I highly recommend, both for its content and as a model for what useful empirical work in economics should look like.

 

At Dissent: Industrial Policy without Nationalism

(This piece was published in the Fall 2024 issue of Dissent.)

In the first two years after Biden’s election, there was considerable enthusiasm on the left for the administration’s embrace of a larger, more active economic role for the federal government. I was among those who saw both the ambitions of the Build Back Better bill and the self-conscious embrace of industrial policy as an unexpectedly sharp break with the economic policy consensus of the past thirty years.

Biden squandered that early promise with his embrace of Israel’s campaign of mass murder in Gaza. His legacy will be the piles of shattered buildings and children’s corpses that he, with aides like Antony Blinken, did so much to create.

The administration has also struck a Trumpian note on immigration, promising to shut down the border to desperate asylum seekers. And internationally, it is committed to a Manichean view of the world where the United States is locked into a perpetual struggle for dominance with rivals like Russia and China.

Can industrial policy be salvaged from this wreckage? I am not sure.

There are really two questions here. First, is there an inherent connection between industrial policy and economic nationalism, because support for one country’s industries must comes at the cost of its trade partners? And second, is it possible in practice to pursue industrial policy without militarism? Or does it require the support of the national security establishment as the only sufficiently powerful constituency in favor of a bigger and more active government?

Much of the conversation around industrial policy assumes that one country’s gain must be another’s loss. U.S. officials insist on the need to outcompete China in key markets and constantly complain about how “unfair” Chinese support for its manufacturers disadvantages U.S. producers. European officials make similar complaints about the United States.

This zero-sum view of trade policy is shared by an influential strand of thought on the left, most notably Robert Brenner and his followers. In their view, the world economy faces a permanent condition of overcapacity, in which industrial investment in one country simply depresses production and profits elsewhere. In the uncompromising words of Dylan Riley, “the present period does not hold out even the hope of growth,” allowing only for “a politics of zero-sum redistribution.” Development, in this context, simply means the displacement of manufacturing in the rich countries by lower-cost competitors.

I don’t know if anyone in the Biden administration has read Brenner or been influenced by him. But there is certainly a similarity in language. The same complaints that Chinese investment is exacerbating global overcapacity in manufacturing could come almost verbatim from the State Department or from the pages of New Left Review. More broadly, there is a shared sense that China’s desire to industrialize is fundamentally illegitimate. The problem, Brenner complains, is that China and other developing countries have sought to “export goods that were already being produced” instead of respecting the current “world division of labor along Smithian lines” and focusing on exports complementary to existing industries in the North.

Fortunately, we can be fairly confident that this understanding of world trade is wrong.

The zero-sum vision sees trade flows as driven by relative prices, with lower-cost producers beating out higher-cost ones for a fixed pool of demand. But as Keynesian economists have long understood, the most important factor in trade flows is changes in incomes, not prices. Far from being fixed, demand is the most dynamic element in the system.

A country experiencing an economic boom – perhaps from a upsurge in investment – will see a rapid rise in both production and demand. Some of the additional spending will falls on imports; countries that grow faster therefore tend to develop trade deficits while countries that grow slowly tend to develop trade surpluses. (It is true that some countries manage to combine rapid growth with trade surpluses, while others must throttle back demand to avoid deficits. But as the great Keynesian economist A.P. Thirlwall argued, this is mainly a function of what kinds of goods they produce, rather than lower prices.)

We can see this dynamic clearly in the United States, where the trade deficit consistently falls in recessions and widens when growth resumes. It was even more important, though less immediately obvious, in Europe in the 2000s. During the first decade of the euro, Germany developed large surpluses with other European countries, which were widely attributed to superior competitiveness thanks to wage restraint and faster productivity growth. But this was wrong. While German surpluses with the rest of the European Union rose from 2 percent to 3 percent of German GDP during the 2000s, there was no change in the fraction of income being spent in the rest of the bloc on German exports. Meanwhile, the share of German income spent on EU imports actually rose.

If Germans were buying more from the rest of the European Union, and non-German Europeans were buying the same amount from Germany, how could it be that the German trade surplus with Europe increased? The answer is that total expenditure was rising much faster in the rest of Europe. Rising German surpluses were the result of austerity and stagnation within the country, not greater competitiveness. If Germany had adopted a program to boost green investment during the 2000s, its trade surpluses would have been smaller, not larger. The same thing happened in reverse after the crisis: the countries of Southern Europe rapidly closed their large trade deficits without any improvement in export performance, as deep falls in income and expenditure squeezed their imports. 

Europe’s trade imbalances of a decade ago might seem far afield from current debates over industrial policy. But they illustrate a critical point. When a country adopts policies to boost investment spending, that creates new demand in its economy. And the additional imports drawn in by this demand are likely to outweigh whatever advantages it gains in the particular sector where investment is subsidized. Measures like the Inflation Reduction Act (IRA) or CHIPS and Science Act may eventually boost U.S. net exports in the specific sectors they target. But they also raise demand for everything else. This is why a zero-sum view of industrial policy is wrong. If the US successfully boosts investment in wind turbine production, say, it will probably boost net exports of turbines. But it will also raise imports of other things – not just inputs for turbines, but all the goods purchased by everyone whose income is raised by the new spending. For most US trade partners, the rise in overall demand will matter much more than greater US competitiveness in a few targeted sectors.

China might look like an exception to this pattern. It has combined an investment boom with persistent trade surpluses, thanks to the very rapid qualitative upgrading of its manufacturing base. For most lower- and middle-income countries, rapid income growth leads to a disproportionate rise in demand for more advanced manufactures they can’t make themselves. This has been much less true of China. As economists like Dani Rodrik have shown, what is exceptional about China is the range and sophistication of the goods it produces relative to its income level. This is why it’s been able to maintain trade surpluses while growing rapidly.

While Biden administration officials and their allies like to attribute China’s success to wage repression, the reality is close to the opposite. As scholars of inequality like Branko Milanovic and Thomas Piketty have documented, what stands out about China’s growth is how widely the gains have been shared. Twenty-first-century China, unlike the United States or Western Europe, has seen substantial income growth even for those at the bottom of the income distribution.

More important for the present argument, China has not just added an enormous amount of manufacturing capacity; it has also been an enormous source of demand. This is the critical point missed by those who see a zero-sum competition for markets. Consider automobiles. Already by 2010 China was the world’s largest manufacturer, producing nearly twice as many vehicles as the United States, a position it has held ever since. Yet this surge in auto production was accompanied by an even larger surge in auto consumption, so that China remained a net importer of automobiles until 2022. The tremendous growth of China’s auto industry did not come at the expense of production elsewhere; there were simply more cars being made and sold.

All this applies even more for the green industries that are the focus of today’s industrial policy debate. There has been a huge rise in production—especially but not only in China—but there has been an equally huge growth in expenditure. Globally, solar power generation increased by a factor of 100 over the past fifteen years, wind power by a factor of ten. And there is no sign of this growth slowing. To speak of excess capacity in this sector is bizarre. In a recent speech, Treasury Under Secretary Jay Shambaugh complained that China plans to produce more lithium-ion batteries and solar modules than are required to hit net-zero emissions targets. But if the necessary technologies come online fast enough, there’s no reason we can’t beat those targets. Is Shambaugh worried that the world will decarbonize too fast?

Even in narrow economic terms, there are positive spillovers from China’s big push into green technology. China may gain a larger share of the market for batteries or solar panels — though again, it’s important to stress that this market is anything but fixed in size — but the investment spending in that sector will create demand elsewhere, to the benefit of countries that export to China. Technological improvements are also likely to spread rapidly. One recent study of industrial policy in semiconductors found that when governments adopt policies to support their own industry, they are able to significantly raise productivity – but thanks to international character of chip production, productivity gains are almost as large for the countries they trade with. Ironically, as Tim Sahay and Kate Mackenzie observe, the United States stands to lose out on exactly these benefits thanks to the Biden administration’s hostility to investment by Chinese firms.

None of this is to say that other countries face no disruptions or challenges from China’s growth, or from policies to support particular industries in the United States or elsewhere. The point is that these disruptions can be managed. Lost demand in one sector can be offset by increased demand somewhere else. Subsidies in one country can be matched by subsidies in another. Indeed, in the absence of any global authority to coordinate green investment, a subsidy race may be the best way to hasten decarbonization.

As a matter of economics, then, there is no reason that industrial policy has to involve us-against-them economic nationalism or heightened conflict between the United States and China. As a matter of politics, unfortunately, the link may be tighter.

They are certainly linked in the rhetoric of the Biden administration. Virtually every initiative, it now seems, is justified by the need to meet the threat of foreign rivals. A central goal of the CHIPS Act is to not only reduce U.S. reliance on Chinese imports but to cut China off from technologies where the United States still has the lead. Meanwhile arms deliveries to Ukraine are sold as a form of stimulus. This bellicose posture is deeply written in the DNA of Bidenomics: before becoming Biden’s national security advisor, Jake Sullivan ran a think tank whose vision of “foreign policy for the middle class” was “Russia, Russia, Russia and China, China, China.”

Thea Riofrancos calls this mindset the “security-sustainability nexus.” Is its current dominance in U.S. politics a contingent outcome—the result, perhaps, of the particular people who ended up in top positions in the Biden administration? And if so, can we imagine a U.S. industrial policy where the China hawks are not in the driver’s seat? Or is the political economy of the United States one in which only a Cold War enemy can motivate a public project to reorient the economy?

In a recent paper, Benjamin Braun and Daniela Gabor argue for the second alternative. It is only “the salience of geopolitical competition” with China that has allowed the United States to go as far with industrial policy as it has. In the absence of much more popular pressure and a broader political realignment, they suggest, the only way that “green planners” can overcome the deep-seated resistance to bigger government is through an alliance with the “geopolitical hawks.”

Many of us have pointed to the economic mobilization of the Second World War as a model for a quick decarbonization of the U.S. economy through public investment. Wartime mobilization — the “greatest thing that man has ever done,” in the words of a contemporary Woody Guthrie song — offers an appealing model for decarbonization. It combines both the most rapid expansion and redirection of economic activity in U.S. history, and the closest the country has ever come to a planned economy. But given the already dangerous entanglement of industrial policy with war and empire, it’s a model we may not want to invoke.

On the other hand, the climate crisis is urgent. And the arguments that it calls for a more direct public role in steering investment are as strong as ever. It’s safe to say that neither the historic boom in new factory construction nor the rapid growth in solar energy (which accounts for the majority of new electrical generating capacity added in 2024) would have happened without the IRA. It’s easy to see how climate advocates could be tempted to strike a Faustian bargain with the national security state, if that’s the only way to get these measures passed.

Personally, I would prefer to avoid this particular deal with the devil. I believe we should oppose any policy aimed at strengthening the United States vis-à-vis China and flatly reject the idea that U.S. military supremacy is in the interest of humanity. An all-out war between the United States and China (or Russia) would be perhaps the one outcome worse for humanity than uncontrolled climate change. Even if the new Cold War can be kept to a simmer—and that’s not something to take for granted—the green side of industrial policy is likely to lose ground whenever it conflicts with national security goals, as we’ve recently seen with Biden’s tariffs on Chinese solar cells, batteries, and electric vehicles. The Democratic pollster David Shor recently tweeted that he “would much rather live in a world where we see a 4 degree rise in temperature than live in a world where China is a global hegemon.” Administration officials would not, presumably, spell it out so baldly, but it’s a safe bet that many of them feel the same way.

Adam Tooze observes somewhere that historically socialists often favored strictly balanced budgets — because they expected, not without reason, that the main beneficiary of lax fiscal rules would be the military. The big question about industrial policy today is whether that logic still applies, or whether an expansion of the state’s role in the economic realm can be combined with a diminution of its capacity for war.

At The International Economy: Low Interest Rates Were OK

(I am an occasional contributor to roundtables of economists in the magazine The International Economy. This month’s roundtable was on concerns that ultra-low interest rates after the 2007-2009 financial crisis contributed to rising inequality and asset bubbles, and asked contributors to grade post-2007 monetary policy on a scale of A to F.)

Overall, I give the negative interest rate experiment a grade of B. The costs of negative rates have been greatly exaggerated. But so have the benefits. The main lesson is that conventional monetary policy is surprisingly weak in a depressed economy, even when carried to extremes. The next time we need stimulus, greater weight should be put on fiscal policy.

The case against ultra-low rates on distribution grounds is not very strong, in my view. Yes, low rates do tend to raise asset values,  and it’s the rich who own most of the assets. But we should not make the mistake so many people do, and confuse a change in the present value of future income streams with a change in those streams themselves. Low rates, for example, imply a greater present value of the same future dividend payments, and thus higher stock prices. But that has no effect on income distribution — the owners of the stock are receiving the same payments as they were before.

The bigger criticism of ultra-low rates is that they didn’t have much effect one way or another. Did 20 years of zero nominal rates in Japan significantly boost demand and growth? It doesn’t seem like it.

At the same time, we should be careful of language like “distortion,” which suggests that there is some true, natural level of interest rates and investment. Whether high or low, interest rates are always set by policy. And this always involves tradeoffs between competing social goals.

Whether ultra-low rates contribute to bubbles is debatable. Many of the world’s great bubbles — from the 1920s in the US to the 1990s in Sweden — have occurred in environments of high interest rates. But let’s say for the sake of argument that cryptocurrency is socially useless, and that it would never have taken off if rates were higher. Is this a problem with negative rates? Or is it a problem with the financial system? The reason we have so many well-educated, well-compensated people working in finance is that they are supposed to direct credit to the best opportunities. If cheap money leads them to invest in projects that are worthless, or worse, rather than ones with moderate returns, they’re not doing their jobs.

If jet fuel were free, we would all probably fly more. But if planes kept crashing into the ocean, we’d blame the airlines, not the cheap fuel.

Speaking of airlines, it’s easy in retrospect to see the subsidized loans to them and other pandemic-hit industries as excessive. But we don’t know what the counterfactual is — it’s possible that without public support, they would have collapsed into bankruptcy, leading to a much slower recovery. Certainly we couldn’t be sure at the time. Under the extraordinary circumstances of the pandemic, there was no safe course, only a balance of risks. The high inflation of 2021-2022 was unfortunate; a prolonged depression would have been much worse. Perhaps next time — and climate change ensures that there will be a next time — we will strike a better balance. But it seems to me that under the circumstances, policymakers did pretty well.

*

That’s what I wrote for the symposium. Let me add a couple of things here.

First, this is not a new debate. Many of the same arguments were being made immediately after the global financial crisis, and even before it in the mid-2000s, in the context of the supposed global savings glut. At that time, the idea was that the volume of excess savings in Asia were too great to be absorbed by productive investment in the US and elsewhere, leading to downward pressure on interest rates and an excess of speculative investment, in housing especially.

It’s progress, I suppose, that the more recent period of low interest rates is attributed straightforwardly to central banks, as opposed to an imagined excess of “saving.” (For a critique of the savings-glut story, you can’t do better than Jörg Bibow’s excellent work.) But the more fundamental problem remains that the savings-glut/too-low-for-too-long stories never explain how they coexist with all the other economic stories in which more abundant financing is unambigously a good thing. As I wrote a dozen years ago10:

the savings glut hypothesis fails to answer two central, related questions: Why was there a lack of productive investments available to be financed, and why did the financial system fail to channel the inflow of savings in a sustainable way? From a Keynesian perspective, there is nothing strange about the idea of a world where savings rates are chronically too high, so that output is demand-constrained; but this is not the perspective from which the savings-glut hypothesisers are arguing. In other contexts, they take it for granted that an increase in the savings rate will result in greater investment and faster growth.

In particular, as I pointed out there, many of the same people arguing for these stories also think that it is very desirable to reduce government budget deficits. But if you ask any economist what is the economic benefit of moving the government balance toward surplus, their answer will be that it frees up saving for the private sector; that is, lower interest rates.11

Second. Returning to the International Economy roundtable, it’s striking how many of the contributors shared my basic analysis12 —  ultra-low rates didn’t achieve very much, but they were better than nothing given the failure of the budget authorities to undertake adequate stimulus. It’s interesting is that people with this same analysis — and who also reject the idea that the low rates of the 2010s are to blame for the inflation of the early 2020s — give such different responses on the grading component. I agree with everything that Jamie Galbraith writes, and especially appreciate his points that hardly any private borrowers ever faced zero (let alone negative) rates, and that higher rates do not seem to have done much to curb speculative excess. (Just look at “AI”.) I also agree with everything Heiner Flassbeck says (especially the underappreciated point that we’ve also had a decisive test of the benefits of wage flexibility, with negative results) and with almost everything Brigitte Granville says. Yet two of us give As and Bs, and two give Ds and Fs. It’s the difference between comparing monetary policy’s actual performance to what it reasonably could have accomplished, and to what it promised, perhaps.

Finally. It might seem strange to see me speaking so positively about macroeconomic policy over the past decade. Aren’t I supposed to be a radical of some sort?13 It was even a bit disconcerting to me to see I typed those words a few months ago (there’s a bit of turnaround time with these things), given that my main feelings about Western governments these days tend toward rage and disgust.

But the point here is important. It’s important to remember that the central macroeconomic problem in recent years has been insufficient demand.14 It’s important to remind people of the overwhelming evidence, and the quite broad consensus, that the economic problem over the past 15 years has not been a lack of real resources, but a lack of spending — of demand. (A world in which over-low interest rates could even be a concern, is not a world where the central economic problem is scarcity.) And I think that it’s true, and important, that the institutions — at least in the US and Western Europe — that were consistently trying to address this problem, were the central banks.

Even today, while we can certainly argue that central banks raised rates too aggressively, the main contractionary pressure is coming from elected governments. This is most obvious in Europe, but in the US, it seems to me, the withdrawal of pandemic unemployment benefits and the child tax credit have done more harm than anything the Fed has done. There’s an old idea that elected governments are structurally biased toward deficits and generous social benefits.15 But it’s clear this is no longer true, if it ever was.

Against this background, I think both the broader recognition of hysteresis and chronic demand shortfalls in the 2010s, and the aggressive response to the pandemic in this decade, are positive lessons that need to be preserved and defended and built upon. It’s very challenging to separate this positive record on domestic economic policy from the increasingly horrifying treatment of the rest of the world that we have seen from the same governments. (I make this argument in the context of industrial policy in a forthcoming piece in Dissent.) But I think it’s vitally important, both politically and analytically, that we continue to try to do so.