Month: December 2012

2012 Books, Part 1

Some books I read this year:

Mrs Dalloway, by Virginia Woolf. I didn’t strictly read this, but listened to it, while driving between New York City and western Massachusetts. What a magnificent novel! I don’t feel I have a lot to say about it: It’s brilliant, it’s beautiful, it captures the way one can be committed to one’s life and choices while recognizing that they are ultimately arbitrary and contingent. “No doubt with another throw of the dice, had the black been uppermost and not the white, she would have loved Miss Kilman. But not in this world, no.” (And then the alternative, the poor schizophrenic demobbed soldier, the destruction that awaits you if you insist everything happens for a reason.)
Prosperity Without Growth, by Tim Jackson. I used this in the macro class I taught this past spring — I needed to do a unit on the environment and my old teacher Bob Pollin recommended using Jackson. I would use it for that again, and recommend it to anyone looking for a short, accessible overview of the intersections of macroeconomics and environmental issues. Not with great enthusiasm, though, but only because I don’t know of anything better. (On the other hand the students seemed to like it a lot, so maybe I’m being too critical.) It’s not deep, but it has good solid chapters on environmental critiques of national income accounting; climate change and the question of discount rates; decarbonization and limits to growth; and the importance of thinking of wellbeing in terms of capabilities (there’s a lot of Sen) rather than just income. I particularly like that last bit; though he doesn’t use the term, it’s nice to see a strong argument for the progressive decommodification of social life from such a respectable source.
Hateship, Friendship, Loveship, Courtship, Marriage; Open Secrets; and others, by Alice Munro. Sometime this spring I asked for fiction recommendations on Facebook; Munro was the suggestion of my friend Deidre, who’s from Alberta. Around the same time my mother, visiting Vancouver, happened to read some of the same collections after finding them in the house where she was staying. So it seems that despite all the dozens of Munro stories published in the New Yorker (she’s apparently one of a handful of writers to whom the magazine has committed to print anything she submits), Munro still functions as a Canadian export. It would be hard to overstate how much I admire these stories. They’re not flashy, there’s almost nothing that stands out at the level of the sentence, and the lives they describe are usually (though not always) overtly ordinary. They do the thing that New Yorker stories are traditionally supposed to do, but seldom really achieve — show the emotional depths and high moral stakes in the seemingly small choices of everyday life. The more recent stories I’ve been reading — I don’t know if this is also true of the earlier ones — have a distinct and consistent construction: For the most part they don’t have a narrative moving forward in time, but are static portraits of a particular situation. So you really can’t imagine her writing a novel. Anyway, what’s remarkable is how consistent the artistry is — how thoroughly she works over the same material without its ever becoming less fresh — how she manages to convey such powerful emotions with such careful restraint. When you think that she’s over 80 now and still putting out story after story without ever hitting a wrong note, it’s hard not to feel an almost religious awe.

Chaos and Night, by Henry de Montherlant. This short novel from the 1950s is best known for the line, “I accuse the Americans of being in a continuous state of crime against humanity.” Though it’s spoken by Don Celestino, the book’s central character, it’s almost always attributed to Montherlant himself, which is a little odd since the conservative author hardly shares his protagonist’s curdled leftism. Besides anti-Americanism, Montherlant is also known for — at least it’s where I first encountered him — Simone de Beauvoir’s savage attack on the misogyny of his novels. (“For Montherlant it is first of all the mother who is the great enemy; … it is clearly seen that what he detests in her, is the fact of his own birth.”) It’s true that Celestino’s daughter Pascualita, the novel’s only female character, is vain, superficial and rather stupid. But she comes off much better than the protagonist himself, a delusional, rage-filled and hypocritical Spanish ex-anarchist. Though the book is constantly echoing Don Quixote, Celestino is a rancid parody of Quixote — his fantasies are repulsive as well as unreal. It’s about the least sympathetic portrayal of an old radical I have seen, a brutal travesty of the revolutionary intellectuals of the early 20th century.

So, why read such a thing? Mainly because it’s an very nicely constructed little book, written in a perfect style and with a whole series of brilliant little set pieces. And Don Celestino, vicious and self-pitying, is one of those unignorable personalities who takes over the page, with his rage against the whole world, from America to his few friends down to the pigeons he goes out of his way to drive from their crumbs. Personally, I was hooked from the monologue that opens the book: “To the north, there’s England, an incomprehensible country, and the Scandinavian states, incomprehensible countries. To the south there’s the Vatican. The dome of St. Peter’s is the candle-snuffer of Western thought… To the west there’s the United States. The United States is the canker of the world…”

The American Political Tradition, by Richard Hofstadter. I picked this up after Seth Ackerman — a very smart guy and good comrade, even if I don’t share his political vision — mentioned it here. I can’t believe I hadn’t read it earlier, it should be required reading for any halfway educated USAnian. The central theme is the fundamental conservatism of American political thought: With the partial exception of the abolitionists (represented here by Wendell Phillips), there’s never been a popular anti-systemic politics with any real access to state power. At the highest levels it’s just been a choice of conservatisms. Hofstadter has clear preferences among these. He likes best the reluctant radicals who under the pressure of events are prepared to change everything so that everything can remain the same, like FDR and Lincoln — though as he pointedly notes in the case of Lincoln, this meant that he spent most of the Civil War seeking to restore the conditions that had produced the war in the first place. (This is always the problem for conservative reformers.) Much worse are the principled conservatives like Calhoun — or more unexpectedly Grover Cleveland, who out of pure principle favored business over labor even more than the most venally pro-business Republicans of the Gilded Age. Worst of all are the populist conservatives like Bryan and Theodore Roosevelt. TR’s is the most thoroughly repulsive of the generally unflattering portraits in the book, combining smug thoughtless aristocratic privilege with brutal petty-bourgeois resentment. He frankly said that the only good Indian is a dead Indian, and eagerly hoped that every strike would finally let him haul out the Gatling guns, or at least bring his “cowboys” around to smash some workers’ heads. After reading this, it’s hard to walk through the lobby of the Museum of Natural History without feeling a little queasy.

Not Entitled, by Frank Kermode. The thoroughly charming memoir of the critic and English professor. Somebody said that if we wrote about lives the way we experience them, there’d be a dozen chapters on childhood, two or three on adolescence, and a brief afterword covering the rest. Kermode more or less follows this formula, with almost half the book devoted to his childhood on the Isle of Man, and another third to life in the British navy during World War II; there’s a couple short chapters on his postwar flounderings, and he passes over his long and successful academic career in a rushed handful of pages, as if embarassed by them. Which he probably was: The title of the book refers to what sailors were told on payday when they had incurred enough fines to cancel out their whole salary, but it’s also the attitude Kermode takes toward his whole life. His successes were fortuitous and unearned; more deserving people missed their chance for no good reason. Even writing in his 70s, he describes himself as feeling always like the youngest one in the room, unprepared, the newcomer, off balance and out of place, having arrived late and trying to find his place in a conversation already under way. Traa dy lioaur, “at the heel of the hunt,” in the Manx phrase his mother used to use of him. It’s a long time since I’ve read a book in which I’ve found such a kindred spirit.

What the Best College Teachers Do, by Ken Bain. I won’t lie, I picked this up to help me talk about teaching on the academic job market. But it’s really good! It was recommended to me by Prof T., to whom it was recommended, I think, by some other teacher; it seems to be kind of a cult thing that way. Bain’s central point is that we should think of classes in terms of what students do, not what the instructor does. Teaching isn’t a matter of pouring “material” into students and hoping they “retain” it, it’s about creating an environment in which they can actively engage in the same kind of work and critical thought that professionals do. (The same spirit someone like Andrew Lawrence brings to guitar teaching.) It’s an insight I’d been stumbling toward on my own but which is much more fully developed here and backed up with research and case studies. This book goes on the short shelf with other pieces of everyday utopianism — A Pattern Language, Cziksentmihalyi’s Flow. It’s a slighter book than those but the spirit is the same — we don’t have to just carry out our daily activities the way they always have been, but we also don’t have to revolutionize them according to logic of profit. It is possible to think clearly, freely and genuinely about how to do things right on their own terms.

Man Gone Down, by Michael Thomas. A first novel by someone you’ve never heard of; he doesn’t seem to have published even a story before this. It was recommended to me by my father when it came out a couple of years ago; I resisted reading it then because I knew it had a 9/11 subplot, and I’m allergic to WTC sentimentalism. But that’s only a small part of the book, which as it turns out I like very much. It’s a bit hard to say why. After all, it’s an entry in the justly reviled struggling-writer-in-Brooklyn genre. And while I generally prefer a clean austere style, Thomas is a writer of compulsively detailed descriptions — a single golf swing takes half a page. (Think Updike on Doritos.) Now one obvious difference between Thomas and “all the sad young literary men” is that he is African-American. It’s treacherous to think that any work of art can allow you to really understand a subjective experience foreign to your own (but isn’t that always what we hope for from art?) but this feels like a convincing picture of (one kind of) life as a black man in post-civil-rights America. In tone it’s somewhere between Nathan McCall’s memoir Makes Me Wanna Holler and the lovely Medicine for Melancholy. It’s significant that, as a “type,” the unnamed (but clearly autobiographical) protagonist is arguably a black man only second, and a struggling artist first. Why can’t you have all the angst that goes with that just because you’re black?, is one of the main themes of the book. There’s a nice scene about halfway through where he plays a set at an open-mike night and, after doing various old blues songs ends with “Mr. Tambourine Man.” The white hipster running the thing is disappointed: “I thought you were going in a different direction.”

It’s also a book about being broke, about alcoholism, and most distinctly, about blue-collar work. The narrator, who needs to earn money very quickly to preserve his marriage, has set aside his novel and returned to his old work as a carpenter. Thomas’ overflowing, almost compulsive descriptions are so much more interesting when they’re not about golf swings, but about the specific tasks and relationships involved in renovating a building. (So it’s a book about gentrification too.) At one point the narrator finds himself in a nice restaurant, and all he can think about is how superb the dry-walling is. (This goes in the labor-as-man’s-highest-need file, next to the poor hatmaker in Mrs. Dalloway, whose favorite activity in her walks around London is admiring the workmanship of ladies’ hats.) That so much of the loving description is of manual labor rather than middle-class consumption rituals is one important thing that sets this book off from Updike and from the Jonathans. But setting aside all that, it’s just beautifully constructed, it achieves what fiction is there for, it engages you emotionally. When the narrator finally has some bills in his pocket and seems set to squander them, when he seems set to give up in his fight against alcohol, you want to push your head through the page and shout, No.

Credit Cards and the Corridor

I don’t know if most people realize how much credit card debt fell during and after the Great Recession. It fell by a lot! Credit card debt outstanding today is about $180 billion, or 21 percent, lower than it was at the end of 2007. This is a 50 percent larger fall than in mortgage debt in percentage terms — though the fall in mortgages is of course much bigger in absolute dollars.
This fall in credit card debt is entirely explained by the drop in the number of credit card accounts, from about 500 million to 380 million. The average balance on open credit card accounts is about the same today as it was when the recession began.

The obvious question is, is this fall in consumer credit due to supply, or demand? Are banks less willing to lend, or are households less eager to borrow?

Here’s some interesting data that helps shed light on this question, from the Fed’s most recent Quarterly Report on Household Credit and Finance.

The red line shows the number of credit card accounts closed over the preceding 12 months, while the blue line shows the number opened. So the gap between the blue and red lines equals the change in the number of accounts. The spike in the red line is mostly write-offs, or defaults. I’ll return to those in a subsequent post; for now let’s look at the blue and green lines. The green line shows the number of inquiries, that is, applications for new cards by consumers. The blue line, again, shows the number issued. As we can see, the number of new accounts tracks the number of inquiries almost exactly. [1] What do we conclude from this? That the fall in the rate at which new credit cards are issued is entirely a matter of reduced demand, not supply. And given that balances on outstanding credit cards have not fallen, it’s hard to avoid the conclusion that banks’ reduced willingness to lend played little or no role in the fall in consumer credit.

Of course one figure isn’t dispositive, and mortgage debt is much more important quantitatively than credit card debt. But Dean Baker has been making a similar argument about mortgages for several years now:

the ratio of applications to [home] sales has not risen notably in this slump, indicating that the inability of potential homebuyers to get mortgages has not been a big factor in the housing downturn.

As a matter of fact, after reading that post (or one of Dean’s many others making the same point), I tried to construct a similar ratio for credit cards, but I wasn’t able to find the data. I didn’t realize then that the Fed publishes it regularly in the household credit report.

Needless to say, the ratio of applications to contracts is hardly the last word on this question, and needless to say there are plenty of more sophisticated attempts out there to disentangle the roles of supply and demand in the fall in borrowing. Rather than get into the data issues in more detail right now, I want to talk about what is at stake. Does it matter whether a fall in borrowing is more driven by the supply of credit or the demand for it? I think it does, both for theory and for policy.

One important question, of course, is the historical one: Did the financial crisis straightforwardly cause the recession by cutting off the supply of credit for nonfinancial borrowers, or were other factors more important? I admit to being agnostic on this question — I do think that credit constraints were dragging down fixed investment in the year or so before the recession officially began, but I’m not sure how important this was quantitatively. But setting aside the historical question, we also need to ask, is the availability of credit the binding constraint on real activity today?

For monetarists and New Keynesians, the answer has to be Yes almost by definition. Here’s DeLong:

There is indeed a “fundamental” configuration of asset prices–one that produces full employment, the optimal level of investment given the time preference of economic agents and the expected future growth of the economy, and the optimal division of investment between safe, moderately risky, and blue-sky projects. 

However, right now the private market cannot deliver this “fundamental” configuration of asset prices. The aftermath of the financial crisis has left us without sufficient trusted financial intermediaries … no private-sector agent can create the safe securities that patient and prudent investors wish to hold. The overleverage left in the aftermath of the financial crisis has left a good many investors and financial intermediaries petrified of losing all their money and being forced to exit the game–hence the risk tolerance of the private sector is depressed far below levels that are appropriate given the fundamentals… Until this overleverage is worked off, the private marketplace left to its own will deliver a price of safe assets far above fundamentals  … and a level of investment and thus of employment far below the economy’s sustainable and optimal equilibrium.

In such a situation, by issuing safe assets–and thus raising their supply–the government pushes the price of safe assets down and thus closer to its proper fundamental equilibrium value.

In other words, there is a unique, stable, optimal equilibrium for the macroeconomy. All agents know their expected lifetime income and preferred expenditures in that equilibrium. The only reason we are not there, is if some market fails to clear. If there is a shortfall of demand for currently produced output, then there must be excess demand for some asset the private sector cannot produce. In the monetarist version of the story, that asset is money. [2] In DeLong’s version, it’s “safe assets” more generally. But the logic is the same.

This is why DeLong is so confident that continued zero interest rates and QE must work — that it is literally impossible for output to remain below potential if the Fed follows its stated policy for the next three years. If the only reason for the economy to be off its unique, optimal growth path is excess demand for safe assets, then a sufficient increase in the supply of safe assets has to be able to get us back onto it.

But is this right?

Note that in the passage above, DeLong refers to a depressed “level of investment and thus of employment.” That’s how we’re accustomed to think about demand shortfalls, and most of the time it’s a reasonable shorthand — investment (business and residential) generally does drive fluctuations in demand. But it’s not so clear that this is true of the current situation. Here, check this out:

We’re looking at output relative to potential for GDP and its components; I’ve defined potential as 2.5 percent real annual growth from the 2007Q4 peak. [3] What we see here is investment and consumption both fell during the recession proper, but since 2010, investment has recovered strongly and is almost back to trend. The continued output gap is mainly accounted for by the failure of consumption to show any signs of returning to trend — if anything, consumption growth has decelerated further in the recovery.

You can’t explain low household consumption demand in terms of a shortage of safe assets. The safest, most liquid asset available to households is bank deposits, and the supply of these is perfectly elastic. I should note that it is possible (though not necessarily correct) to explain falling consumption this way for the early 1930s, when people were trying to withdraw their savings from banks and convert them into cash. The private sector cannot print bills or mint coins. But classical bank runs are no longer a thing; people are not trying to literally hoard cash; it is impossible that a lack of safe savings vehicles for households is what’s holding down consumption today.

So if we are going to explain the continued consumption shortfall in DeLong’s preferred terms, households must be credit-constrained. It is not plausible that households are restricting consumption in order to bid up the price of some money-like asset in fixed supply. But it is plausible that the lack of trusted financial intermediaries makes investors less willing to hold households’ debt, and that this is limiting some households’ ability to borrow and thus their consumption. In that case, it could be that increasing the supply of safe assets will provide enough of a cushion that investors are again willing to hold risky assets like household debt, and this will allow households to return to their optimal consumption path. That’s the only way DeLong’s story works.

It’s plausible, yes; but is it true? The credit card data is evidence that, no, it is not. If you believe the evidence of that first figure, the fall in consumer borrowing is driven by demand, not supply; continued weakness in consumption is not the result of unwillingness of investors to hold household debt due to excess demand for safe assets. If you believe the figure, investors are no less willing to hold consumer debt than they were before the recession; it’s households that are less willing to borrow.

Again, one figure isn’t dispositive. But what I really want to establish is the logical point: The shortage-of-safe-assets explanation of the continued output gap, and the corollary belief in the efficacy of monetary policy, only makes sense if the weakness in nonfinancial units’ expenditure is due to continued tightness of credit constraints. So every additional piece of evidence that low consumption (and investment, though again investment is not especially low) is not due to credit constraints, is another nail in the coffin of the shortage-of-safe-assets story.

So what’s the alternative? Well, that’s beyond the scope of this post. But basically, it’s this. Rather than assume there is a unique, stable, optimal equilibrium, we say that the macroeconomy has multiple equilibria and/or divergent adjustment dynamics. More specifically, we emphasize the positive feedback between current income and expenditure. For small deviations in income, people and businesses don’t adjust their expenditure, but use credit and and/or liquid assets to maintain it at its normal level. But for large deviations, this buffering no longer takes place, both because of financing constraints and because true lifetime income is uncertain, so people’s beliefs about it change in response to changes in current income.

In other word’s Axel Leijonhufvud’s “corridor of stability”. Within certain bounds (the corridor), the economy experiences stabilizing feedback, based on relative prices; beyond them, it experiences destabilizing feedback based on the income-expenditure link. Within these bounds, the multiplier is weak; outside them, it is “strong enough for effects of shocks to be endogenously amplified. Within the corridor, the prescription is in favor of ‘monetarist,’ outside in favor of ‘fiscalist’, policy prescriptions.”
I’m going to break that thought off here. The important point for now is that if you think that the continued depressed level of real economic activity is due to excess demand for safe assets, you really need evidence that the expenditure of households and businesses is limited by the unwillingness of investors to hold their liabilities, i.e. that they face credit constraints. And this credit card data is one more piece of evidence that they don’t. Which, among other things, makes it less likely that central bank interventions to remove risk from the balance sheets of the financial system will meaningfully boost  output and employment.

[1] For some reason, inquiries are given over the past six months while the other two series are given over the past year. This implies that about half of all inquiries result in a new account being opened. The important point for our purposes is that this fraction did not change at all during the financial crisis and recession.

[2] To be fair, you can also find this story in the General Theory — “unemployment develops because people want the moon,” etc. But it’s not the only story you can find there. And, I would argue, Keynes really intends this as a story of how downturns begin, and not why they persist.

[3] Yes, it would be more “correct” to use the BEA’s measure of potential output. But the results would be qualitatively very similar, and I don’t think there’s nearly enough precision in measures of potential output to make the few tenths of a point difference meaningful.

LATE UPDATE: Here is a similar graph for the previous recession & recovery.