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Jason Furman on Fiscal Stimulus, the Platinum Coin, and Male Labor Force Participation
Jason Furman is a senior fellow at the Peterson Institute for International Economics. Previously, he served as the Chairman of the Council of Economic Advisers under President Obama. He joins the show to reflect on his time in the Obama Administration. Among other things, Jason and David discuss the efficacy of fiscal policy, the fiscal multiplier, and whether the platinum coin was ever seriously considered. They also discuss the problem of declining male labor force participation, its causes, and possible solutions.
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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: Jason welcome to the show.
Jason Furman: Good to be here.
Beckworth: It's a real treat to have you on. I ask all my guest this question, I'll ask you too, how did you get in to economics?
Furman: Well, I remember in 7th grade, I was getting really interested in foreign policy and I went to a friend of my father's who's political scientist and I said to him, what would you recommend I get a subscription to on the topic of foreign affairs? I thought I was teeing this question up to get the answer back, foreign affairs. Instead the answer I got back was The Economist.
Furman: I've been subscribing to the Economist since I was 13 and I always like Math a lot and I always like politics a lot too and economics was a really nice way to combine the two of this.
Beckworth: You kind of figured out on your own that economics was the best path that would bring all those interest together
Furman: Well, I don't want to overly exaggerate the on my own because my father was also ABD in economics at Columbia.
Beckworth: Well, tell us about any inspirational teachers you have that may have encouraged you along that path.
Furman: I've learned both from teachers in academia of which Greg Mankiw is my main adviser and I learned a huge amount from him, both about economic research but also how to think about economics and the economy outside of research. Then, I've learned a lot from two of the people I've worked for. I worked for Joe Stiglitz when he was chair of the Council of Economic Advisers in the 1990s. I work for Larry Summers as his deputy at the beginning of this administration. If you think any of my economic thought is incoherent and confused, that's what happens when you try to synthesize Greg Mankiw, Joe Stiglitz and Larry Summers.
Beckworth: Well, that's interesting perspective. Well, that's a number of great teachers you've had or inspirations in your journey towards economics. You have served now both on the CEA, the Council of Economic Advisers and the NEC, the National Economic Council for the president and one question is how are they different or what roles do they serve?
Comparing the CEA and NEC
Furman: Sure, and before I answer that, the most common misconception about government is that it's zero sum and one person has power and somebody else doesn't have power and it chips back and forth or something like that. My primary experience with government has been that it's positive sum. That you have an idea that sort of half right, and you come to a meeting and you say it and somebody else critiques it and then add something to it and makes it three quarters right and then maybe somebody else gets it to all the way right. I found most of the people I work with, are happy to share credit. They think a memo that goes to the president rather than just having their name on it will be better if two or three other people's names are on it as well and it's presented as a collective idea rather one person trying to take all the credit.
Furman: It's with that mind that I think it's important to understand the NEC and the CEA because I think they're very complimentary to each other. The NEC has the job of organizing the meetings, setting the agenda and making sure that the president gets something that's either a consensus recommendation or if it's different recommendations, that at least you're not arguing over the basic facts that you sort of agree on the pros and cons but maybe you weight them differently, for example. In doing that, that makes them more strategic, more political, generally there have been few with any PhD economist on the staff of the NEC, although the people there are very skilled at implementation, at public policy, at working with the Hill, at a range of other things.
Furman: CEA is where the PhD economists are. It is one of the players on the economic teams when the NEC calls a meeting, around the table, it will be the CEA, the treasury, the OMB and others and what CEA brings to that table is really something ... what the economics professor would wanted to bring to that table which is what economics would say and how economics would rank the options. Now, that doesn't always win at the end of the day and it shouldn't always win, for doing legislation, the very best idea that has no chance of passing doesn't make the world a better place but the job of CEA is not to overly internalize those types of legislative constraints and make sure that it's bringing a pure economic thing to the table.
Furman: A way in which their complimentary is, if all you had was a CEA, I think it would actually be hard to give pure economic advice. You'd want to internalize a lot of the politics because at the end of the process that really does matter. The fact that the NEC is there, actually frees the CEA up to do more of the impartial economic advice, knowing that that will then be incorporated, filtered with a set of other considerations, strategic, political and otherwise, that the NEC will help tee up for the president.
Beckworth: Okay. Now, the CEA chair, which you were, that's a cabinet level position or at least it was a cabinet level position, under President Trump it's been demoted but does that mean, when there's cabinet meeting like secretary of defense, state, all of them coming, you're there at the table as well?
Furman: Yeah. No, I had a seat at the cabinet table and when I left the administration like any other member of the cabinet, I was able to buy my seat which I certainly did and I have it at my home now, I'm not quite sure what to do with it but I'm sure, it'll come in handy one of these days. Cabinet meetings are sort of a fun bit of theater. They're not where the actual decisions and discussions take place.
Beckworth: Really. Okay.
Furman: Because the secretary of defense and I don't have a whole lot of issues where I can contribute to his topic or he can contribute to my topic so you're not going to have any of those issues discussed really in depth. This is almost as much a group bonding experience as anything else. Where the real decisional things are, happen at meetings of the economic principles and those could be chaired by the NEC director, they could be chaired by the chief of staff or they could be chaired by the president and it's the seat at that table that is the important one to have and one that, if and when President Trump names a CEA chair, I would fully expect them to have a seat at that table and that's the more important thing.
Beckworth: Okay. Two other maybe trivial questions, what I'm dying to know, as a cabinet holder, did you get your own secret service detail with you?
Furman: I was the only member of the cabinet that did not have that car detail, any of that.
Furman: I think ... My understanding is before the Clinton Administration, the CEA chair did in the Clinton Administration and a budget cutting exercise get rid of it and it's hard to argue with that decision.
Beckworth: Okay, so you're not considered the national security treasure that has to be protected?
Furman: I think I was either expendable or else, no one would care enough to do it.
Beckworth: No one cared.
Furman: Although I should tell you about it, once I did. I mean, get more than once but I got an antisemitic hate mail with a picture of a knife in the back of my head and I brought it into the White House security people, they inspected it and their basic attitude was, having assessed it, they decided that there wasn't anything in this that was any threat to the president but thanked me for bringing it to their attention just in case.
Beckworth: We're good, you're just an economist. Well, that's interesting. Okay, one other kind of trivial question, but still one I'm dying to ask, could you be one of the designated survivors should the whole cabinet ...
Furman: I was not in the line of succession, that's only the formal cabinet dependence.
Beckworth: Okay, okay. Now, we know. You were never going to be a potential president of the United States.
Beckworth: Okay, let's talk about what it is like to actually be in the CEA. Let's ask this question, how do you start your day, when you get up in the morning, do you go read Financial Times, Wall Street Journal, do you like blogs, Twitter, I mean, what do you do to start your day off right and be the informed economist the president wants.
Day in the Life at the CEA
Furman: I try to read all of that, the FT, the Wall Street Journal, New York Times, The Washington Post but I usually read it at night before going to bed. I have less time to do it in the morning, I maybe could do it in a bit of a rush. The White House had an excellent clipping service that you had to get through a lot of the non-economic stuff to find the economic stuff and the first morning meeting, the time of it varied but for most of the administration, around 7:30 AM and when you walked into that room, at the meeting led by the chief of staff around the table, the national security adviser, the communications director, the top legislative strategist et cetera, you could be pretty sure, the chief of staff had read everyone of those articles and you'd be pretty embarrassed if you didn't know what was going on in the economy.
Furman: The one thing I had it easy on was the economic data because I got in advance usually around mid day, the day before it was released so they are in a pretty leisurely way, I could make sure I understood the ins and outs of it with the help of my staff and was fully prepared to answer any questions the next day.
Beckworth: Yeah, so one of the other questions I had was you get for example the employment report before it's released to the public, I imagine GDP as well, numbers as well.
Furman: Yeah. No, we get all the ...
Beckworth: All of it, okay.
Furman: All the ... we did about I'd say 25 data memos a month for the president which he gets the evening before within usually about a one page analysis, some ... A table at the top, some bullet points and then, two charts at the bottom and we do that not just on GDP and jobs but also, on durable goods, retail sales, housing starts and those types of data as well.
Beckworth: Interesting. Did you ever talk about or maybe even push for getting more real time data. You had a report on these real time data but that's the data we have, so what I'm thinking about is something along the lines of like the MIT's million price measure.
Beckworth: Excuse me, billion price measure. It seems like you could do something similar for economic activity indicators, all the big time data, it seems that's possible but I have a friend who worked for a hedge fund. He told me, they get all those data from credit card in real time. Does the government have any plans to make something like that available or accessible for policy analysis?
Furman: Right, so in terms of my personal work, what I did was a lot of encouraging people to look at less noisy data. One example of that is we measure the size of the economy two ways. One is by adding up what everyone spends, that's called GDP. One is by adding up what everyone including companies earns, that's called GDI. In theory those two were identical in practice. They differ because of measurement error. We coined the term Gross Domestic Output or GDO for the average of the two and we found just a simple average of the two is a very close to optimal way to combine the information from the two of them. That would just be one example of what we did there.
Furman: Another one that we did work on is something called private domestic final purchases which is the growth rate of consumption plus fixed investment. So, it throws out inventories, government spending, exports and imports and that's a much less noisy measure and is a much better predictor of the next quarter's GDP than most any other contemporaneous variable like GDP. Those were things and the one thing I was really pleased about is the Bureau of Economic Analysis for both of those, GDO and PDFP didn't used to publish them so you'd have to calculate them yourself and I think they credited our advocacy with the reason that they now added those two lines.
Furman: Now, they don't feature them, which I think they should do but at least that information is there for anyone. In terms of real time data, our statistical agencies are putting a lot of thought into that because they're facing a problem that survey response rates are going down quite a lot and they're trying to understand how they can supplement that with administrative data. It's really hard to do administrative data all by itself, take credit cards for example, if you measure spending on taxi cabs, using credit card data, you'd think there had been a massive increase in the use of taxi cabs over the last decade. Of course there hasn't been.
Furman: There's been an increase in people paying with taxi cabs with their credit card. Accounting for the types of shifts and the way people spend money is really important. Now, if you have a survey that's pretty good, maybe your survey is once a year and then you have administrative data that's weekly, you might actually be able to produce a really good series of weekly spending on taxi cabs but you can only do that provided you have those anchor points that you got from surveys to figure out the shifts. I do think the future of economic statistics will be combining the two of them. I don't think we're there yet. I've seen a lot of different attempts to construct those outside data like what you referred to from the hedge funds and a lot of it is more timely than what we have but actually not to date, better on average than the data that we have.
Beckworth: That's quite a lot of noise in there. I've had another friend who's a professor. He has all this data from retailers on sales and it's really noisy and passed through a lot of seasonal adjustments and a lot of cleaning up of the data. I can see where these issues might ... this data may obscure more than ... and help the signals and noise ratio, it may not be that great.
Furman: The other data by the way is in Google searches and there's a number of people that have done different attempts to predict what's going to happen to house prices in local areas and other things and Hal Varian showed us data that ... using Google searches, he does a pretty good approximation of weekly on insurance ... unemployment insurance claims. I think that's another place. Alan Krueger is very creative about using those sorts of data that I think people look at more creative about as well.
Beckworth: In the future, we'll see more of it but still need to rely on surveys as anchors in traditional data.
Beckworth: To our listeners, this report that Jason is referring to, it's really interesting, on gross domestic output, it's called “A Better Measure of Economic Growth: Gross Domestic Output.” It was an interesting read to see how much better of a job it does, in terms of predicting and knowing where the economy is in real time. Let's move on to the American Recovery and Reinvestment Act, also known as the Obama Stimulus, Fiscal Stimulus that occurred after the great recession, or during the great recession that came in ... Actually, it's passed in 2009. Let's talk about it. You were there in the NEC and then the CEA which was all going on. Looking back what is your sense, your assessment of it?
Beckworth: There's a report, I read one of your reports, the economic impact of the American Recovery and Reinvestment Act five years later, I think it was 2014 it came out but what is your sense now of what happened and how you pulled it?
Economic Impact of ARRA
Furman: Right. Well, the first thing is it happened really fast. It was signed into law by President Obama in February 17th, 2009 which to put that into perspective, that's just about where we are in the calendar right now and President Trump hasn't even put forward the framework outline, any aspect of an economic plan and at the same time President Obama had signed something. Now, of course circumstances were much more urgent back then. It was something that I went to work on the morning after the election. I was on the campaign in 2008 on the morning after the election, I came into headquarters, I came in a little bit later than normal, maybe 9 AM. The only other economic staffer from the campaign, Brian Deese was there and one other random person was there.
Furman: We recruited him to work for us and handed up at the National Economic Council just by virtue of having been in the wrong place at the wrong time. Everyone else was able to sleep in that morning so we started work right away and over the next month or so, really put together the outline of this plan, did it ... the plan got much better when Larry Summers and Christie Romer and Tim Geithner and Peter Orszag and Jared Bernstein, all sorts of other people joined the transition but it was a difficult thing to put together because while we could reach out to the career staff at treasury and OMB and they could help with some things, they weren't directly working for us and they weren't in the same building as us.
Furman: So, you're trying to put together just a huge complicated piece of legislation without the type of support and time you would liked to have had. I think for the most part it came together quite well. There were some things like, we wanted to do an unemployment insurance program rather on an ad-hoc way, give you extended benefits in a recession that would create a new set of triggers that permanently from then on, anytime you were in a recession in a particular state, unemployment insurance benefits will get longer, we just didn't have time to design that idea and as a result, weren't able to put it in legislation and we did something ad-hoc and I think we'd be in better shape today if maybe there was one particular night instead of three hours, I'd slept one and we'd figured out how to do that.
Furman: Overall, the scale of it was much larger than what anyone had contemplated as of November 2008 now. People have all sorts of memories about what they were thinking back then. I know what they're thinking back then. This was a larger than the scale people would have thought. It was a mixture of things spent out quickly and that's spent out over time, a mixture of things that supported consumption and how people smooth their consumption with things that would have more of an investment for the future. It wasn't perfect. The high speed rail for example, it may or may not be something our country needs. I'm not sure this was the place we needed to do that but by and large I think quite a high percentage, it really was well done and effective.
Beckworth: Yeah, what's interesting, Larry Summers in early 2008 have the same, that any kind of fiscal stimulus seem to be timely, targeted and temporary but by the time you get there, it's a far worse situation and so, could I found that you guys use a speedy, substantial and sustained which I guess what happened. You got in, turn around pretty quickly and got something passed.
Furman: That's right and the thing to understand is it's not like fiscal legislation ended on February 17th 2009, after the recovery act, there were another 12 fiscal bills passed. Some of which extended things in the Recovery Act like unemployment insurance, some of which replaced things like a payroll tax cut to replaced the tax credit making work pay and somewhere brand new like, tax incentives for hiring a long term unemployed or investing in infrastructure. If you take all those subsequent fiscal measures, together it adds up to another 700 billion so in total, it was about 1.4 trillion dollars of discretionary stimulus, over four years that was 2% of GDP a year of discretionary stimulus and then it got up to as high as 5% of GDP if you counted the automatic stabilizers.
Beckworth: Now, most of that was ... well, you just said, 2% a year but my understanding, a lot of that was done in 2009, in 2010 though, a lot of the spending or tax expense.
Furman: A lot of it but no, I mean, we did the payroll tax holiday, was passed in December 2010, so it went into effect in 2011, was extended in 2012. That was we had a tax credit called making work pay in the Recovery Act, that was worth $400 for a single person, $800 for a couple. It phased out at higher incomes, it was refundable tax credit which means, you got a check in the mail if you don't have enough tax liability for it to offset. That was ... I can't remember exactly, was that 70 billion dollars a year. We replaced that with a payroll tax cut that was actually 110 billion dollars a year on that dimension, in 2011, we increased the magnitude of the individual tax cuts relative to what came before.
Beckworth: Paul Krugman who both cheer-leaded sometimes but also is very critical sometimes, he complained that the fiscal stimulus wasn't big enough, he was happy that it was ... we got what we got but he wanted something bigger so what are your thoughts on that critique?
Was the Fiscal Stimulus Big Enough?
Furman: Personally, I agree, we wanted something bigger too. We got the biggest thing that we could get. I've never seen a better legislative strategist than Rahm Emanuel but if somebody else thinks they could have done a better job than him in terms of getting congress to actually pass something bigger, at the time senate Republicans has beat up power over it, we have 59 democrats, you needed 60 to overcome a filibuster and they asked us to take it down but 100 billion. I think the critics don't appreciate one that in November of ... late November 2008, there were people calling me up saying, we needed to do something huge, something enormous, something like 300 billion or 400 billion or 500 billion.
Furman: Some of those same people who called me up and said that are now out in public criticizing us for having done something too small. That's the first thing. The second thing that critics missed is the dozen subsequent fiscal measures that brought a total to 1.4 trillion, admittedly spread out over a longer period of time over a four year period of time.
Beckworth: That number was larger than my ... My conception was, when I looked up the numbers which I remembered 787 billion and later 832 billion but that doesn't include these subsequent laws that were passed-
Furman: Then, it includes an AMT patch that isn't really stimulus because it had been going on for a long time and was sort of built in.
Beckworth: Okay. Well, let me just ask this question and what would have been the right size if you could be the benevolent dictator and have called the shots, no opposition, what would you have done?
Furman: The thing I would have done, the size could have been over a four year period of time, and two and a half trillion dollars I think could have been well-used. I think the thing that in retrospect, I think was maybe ... wished we had done was make it more automatic and more contingent on the economy. One suggestion we got was mail every household in the country a check for a thousand dollars send it every quarter until the unemployment rate fell below six and a half percent. I mean, I'm making all these numbers up but I don't remember the exact parameters. I think something like that would have freed us up not constantly be begging and scrounging to do another extension of this, another little stimulus thing of that.
Furman: Instead, just sort of put it all in place, made it simple, made it automatic and have done as much as what's needed but not more. That type of what I'd call not sort of automatic stabilizers but automatic discretionary stabilizers, that you put in a rule for when the thing kicks in and kicks out, so that's what I wished we had done rather than target some particular size.
Beckworth: So, it would have a timeline. I heard a number of calls like that too. I've even heard nominal GDP targeting being tied like a payroll tax adjustment based on the state of the economy. It's interesting.
Furman: One could ... Yes, one could spend all sorts of time and excitement designing the exact trigger and the exact mechanism and all that. I was just using one for simplicity.
Beckworth: No, and I think that would probably be an easy way to do it, through payroll taxes, given some of the other challenges involved and other approaches. One of the observations made about fiscal stimulus is that it ran up against the contraction of the state and local level that maybe the observed effect wasn't as large as it could have been because at the same there's a huge contraction of state and local government. Is that a fair comment?
Furman: Absolutely. If you look at what made this expansion in its first four or five years, different than previous expansions, one of the big factors was the contraction of state and local spending. If you look at every other recession, and you look at state and local spending before it, during it and after it, you wouldn't even necessarily know there was a recession. It just sort of was an upward sloping line that went on entirely unbothered by the fact that the economy was in recession whereas everything else, consumer spending, residential investment, business investment, they're all going down and state and local is just completely ... not even counter-cyclical, it's just a cyclical. It just sort of moves regardless of cycle.
Furman: This time, I think in part because of what happened to property taxes, there was a really big hit to state and local spending and the overall growth rate was probably more than half a point a year was taken off it. We certainly tried to provide relief for states and localities, so I think it could have been even worse than that but that was a big factor.
Beckworth: One question I have about the fiscal stimulus relates to the Federal reserve and its desire to have low and stable inflation and if you look back over the past eight years, since the crisis, we see that the Feds, preferred measure of inflation, core PCE, the deflators, average about one and a half percent. I've had this critique on a show, I guess. They seem to persistently undershoot their target but if we take that as a revealed preferences, maybe they're happy or they're comfortable with ... I'm not overshooting somewhere between one and a half, 2%. Did it ever concern you that if fiscal stimulus had been really, really effective generated robust aggregate, demand growth, inflation starts to go up, that the Fed would have stepped in and kind of put the brakes on what you guys were doing.
Beckworth: Did you ever go to bed not worrying about the Federal reserve offsetting on what you guys are trying to do?
Furman: That wouldn't have concerned me, that would have reassured me, which is that you don't need to get things exactly right in fiscal policy because the Fed can offset them and if you ... conventional monitoring policy is limited because rates can't go much below zero and we've chosen to not have them go at all below zero in this country. Unconventional monetary policy I think can play a constructive role but has a set of limitations and side effects. So, that means there's a relay symmetry, which is if we did too much in fiscal policy, the Fed could always offset it and make sure there wasn't too much inflation. If we did too little in fiscal policy, the Fed might not actually be able to offset that because its tools were limited and so, I think that type of argument is part of the rationale for doing more.
Furman: I can tell you though and maybe this is a confession that we should keep just between the two of us, inflation is not what people sitting in the White House or sitting in the administration working on economic policy worry about. Partly that's because our primary focus is jobs and growth and partly that's and partly that's because that's the Fed's responsibility and the Fed has done a great job of it and so appropriately, it's not what fiscal policy makers and structural policy makers would really concern themselves with day to day. By blood, the Feds worry about inflation. I don't think one shouldn't be, that just was not-
Beckworth: No, I agree but I talked to Gauti Eggertsson and I'll confess, I shared some review to him and that if you have a period of disinflation, a collapse in aggregate demand. It's not enough just to get back up to where you were before. You need to actually kind of overshoot for a little bit. Kind of, run the economy a little hot to close the output gap, get back to full employment and I guess the critique or the concern would be the Fed probably wouldn't allow that to the extent it was really, really a word about a low inflation. It never would allow an overshoot. Should fiscal policy be the agent that could push you there, the Fed would have just snapped it out when inflation started getting too close to 2%.
Furman: Yeah, I think the 2% target should be symmetric and I don't think it's terrible in the back of your head to think, I've undershot for five straight years, 10 straight years, whatever it is. A bit overshooting might even less bad than it would have been. Maybe if we have price level targeting something like that would be credible and understood in advanced. It certainly always bothered me when you think about wages that wage growth might be subpar for five years in a row and then one year suddenly wages jump faster than productivity and everyone starts to panic about a wage/price inflation or a spiral when I just think it's workers making up for the losses of the last decade and by the way, the profit share may have shrunk a bit but it's still way higher than it was 10 years ago.
Beckworth: Okay. One last question on monetary policy offset. The sequester in 2013 was a big deal, at the time, it was a big deal. A lot of concern about potential job loss but at the same time the Fed did QE3. Do you think QE3, provided kind of an offset ... kind of the opposite perspective now, it came in because fiscal policy was tightening, it provided that offset that kind of smooth, we didn't see the worst fears materialized.
Furman: Yeah. No. I think, we as a country are very lucky that when fiscal policy stopped being helpful in 2013, both premature withdrawal of steps like the payroll tax cut and then also some of the nonsense around the sequester, that monetary policy and QE3 was there to fill on the slack, so yes, I agree with you.
Beckworth: Okay, one of the other interesting stories that happened and many interesting stories during your time are the ones that kind of cut Econ world, the Econ nerds by storm was the calls for a platinum coin during debt ceiling talk. Talk us through that and I want to just mention, there was an article ... well Huffington Post had a piece I believe, and this is another article based on that, that said that you guys were seriously considering minting a trillion dollar platinum coin to avoid reaching a debt ceiling. Maybe explain to the listeners, what this debate was about and then whether this platinum coin was truly considered as a workaround.
Debt Ceiling and the Trillion Dollar Platinum Coin
Furman: Right, so, the debt limit, limits the amount that the United States can borrow. The only reason the United States borrows is in order to pay the spending of congress already passed and do it consistent with the revenue that Congress already passed, so in some sense, Congress passes three different constraints that are trying to bind, whether an effect to variables and that leads to a certain amount of tension and problems and incoherence and probably good reason to get rid of the debt limit. As we got closer and closer to debt limit, everyone had their own theory as to how you could get around it. One of them for example is, United States has a lot of gold.
Furman: We could go out and sell that gold and use that money to buy stuff. Now, it turns out that's perfectly feasible and would have bought us and don't hold me to the facts here, three days of extra government spending so it's not a quantitatively important thing and one of our fears is that an accident might happen if one side of the negotiation, the Republicans, in this case, thought that the administration had some way to solve the problem and they didn't need to actually legislate and didn't believe us when we said we didn't have a way to solve it. It's really important to us to try to convince people that there was no other options we had in our back pocket.
Furman: The only option was congress passing something. Otherwise, there was this risk of an accident. In terms of a platinum coin, I think it would be fair to say, I probably read Huff Po, more than Secretary Tim Geithner did at that time and I think I saw the article there and some place like that. I rarely read the law but I went and read the law and the law says, it's very precise about how many dimes and nickels and quarters you can produce and what they look like and how much they're worth and whatever else but then talked about platinum coins for commemorated purposes and it appeared to give the treasury, unlimited authority to mint those in whatever denomination it wanted.
Furman: In theory, it could have made a trillion dollar coin, brought it to the Fed, got a trillion dollar bank account line and in effect from the Fed and use that for our money and done that all without borrowing. I remember right before a meeting on the debt limit, jokingly bringing that up to Tim Geithner who's the secretary of the treasury at the time. He hadn't heard about it. We joked about it for another minute and I think that minute was the sum total of the consideration of this option in the Obama Administration.
Beckworth: All right, so we got that full amount of consideration. That's how seriously it was considered.
Furman: They may have been another three minutes elsewhere that I wasn't a party to.
Furman: I can't imagine much more more than that.
Beckworth: Nothing serious then is what you're saying.
Furman: No, there's no option other than to raise the debt limit.
Beckworth: Okay, along those lines, I've done some work and looked at this and many others have as well, is it yields on 10 year treasury, it's really low during this time, despite the huge run up in debt and large deficits, people were concerned about it but at the same time, rates were really, really low and if you look around the world, there's been a long term trend downward but particularly, I think you can see it, at kind of an inflection point, since 2008. I mean, you have a weak economy Euro zone, US, if you look at for example, Germany's 10 year bond, the US, UK, Japan. They all have dropped sharply and some have called this the safe asset shortage problem. There's this appetite for safe assets. There's not enough of them, that's been reflected in this low, low interest rate.
Beckworth: In some sense, the world wanted their government to provide more debt to the world and we ... I have a paper even titled, something along the lines banker to the world. We provide these safe assets to the world, did that consideration ever come in to play like hey, the world is asking for more safe assets. We should provide them. I know you have to sell it to congress but is that a discussion that came up?
Furman: Not in huge way, it actually came up in a much bigger way in the Clinton Administration, where President Clinton proposed investing share of the social security trust fund in equities, and that in effect would be like creating a US sovereign wealth fund, funded by selling government security so that was the proposal at the time. You can think of social security private accounts as an effect being that but handling the optics of the government owning and controlling the assets and thus having a stake in private sector by devolving that function to individuals. I've always been a little bit uncomfortable with these, a little bit that the equity premium as a reward for risk.
Furman: There's not a free lunch or one dollar of debt and one dollar of equity are worth the same amount as each other, you can't make yourself richer by switching from one to the other but I'm not positive that that view is right and I get confused about it relatively quickly. We didn't ever seriously consider it. It showed up though in issues like, the maturity structure of the debt if you think people, a lot of these safe assets are at the very short end of the spectrum, does that mean you'd save money by shifting your debt issuance towards the short end of the spectrum for example, would be one way this would show up, it effects thinking about the size of the balance sheet, the Feds should keep going forward.
Furman: Jeremy Stein and his co-authors have used this as an argument for why the Feds should maintain a large balance sheet because it's providing a service of this liquidity above and beyond any particular cyclical needs.
Beckworth: Ben Bernanke has made an argument recently, a number of folks have but it seems like the Fed is pretty determined to shrink the balance sheet.
Furman: They appear to be but they certainly haven't been in a hurry to do it today.
Beckworth: To be fair, the sovereign wealth fund does come with these challenges, it would be arguably a price maker and other kinds of other issues. In theory at least, it has a certain appeal that you're meeting this demand for safe assets but how you actually do it and implement it, I think it's a whole ... opens a whole can of worms that maybe we want to avoid. All right, let's talk about fiscal policy and maybe on more general terms, you had a paper at Vox called “A New View of Fiscal Policy and Its Application.” In it, you argue, there's been a shift from the old view of fiscal policy towards a new view on it and can you just quickly summarize this for us, what that new view is?
The New View of Fiscal Policy
Furman: Sure. My version of the new view of fiscal policy was number one, monetary policy can't do everything so you need fiscal policy and this would because of the zero lower bound or effective lower bound constraint. Number two, that fiscal policy could be even more effective than we previously thought because rather than getting crowded out by monetary policy, monetary policy wouldn't necessarily react because it would be at the zero lower bound and in fact, you might even get some crowd in through for example, higher expected inflation, a lower real interest rate and thus, more investment.
Furman: The third point was that there's more ... a lot of people around the world probably agreed with points one and two, especially in Europe where this debate is really still a live one, point three was that there's a lot more fiscal space than people appreciate. There's more fiscal space for a couple of different reasons. One is interest rates are lower so the optimal stock of the debt is higher than it used to be. Two, the long run fiscal outlook has gotten better. Health spending for example has slowed. In the United States, we have higher revenue over the long run. Third, that in zero lower bound conditions, which is not relevant for the United States right now but it might be relevant for Japan or for Europe.
Furman: In zero lower bound conditions, fiscal expansion can actually add enough to GDP, add it to the persistent enough basis that it could spend, pay for much or all of itself and result in a debt to GDP ratio that was lower than if you didn't engage in that stimulus. The fourth point about the new view of fiscal policy is that points one through three implied more sustained stimulus. I would say the whole point of the new view is not that at every point in time, you want to have a huge stimulus. It's in particular when you're in this type of liquidity trap when you're at the zero lower bound, that it's particularly important and that we're going to be there more often in the future.
Furman: In the United States, I don't think we need a big stimulus right now. I think we do need to be very worried about the next recession, the constraints on monetary policy then and the real importance fiscal policy will have in dealing with that.
Beckworth: What is your sense of how wide view that ... widely held is that view?
Furman: I think it is very widely held among official institutions, at the IMF, the OECD, the Fed, the council of economic advisors and the Obama Administration. I think all of them have that view, I think among more purely academic economist, a number of people have that view and there's a growing amount of research that supports it but they probably would continue to phrase charitably, be more debate about it, phrased uncharitably, people that haven't caught up to the changes in reality.
Beckworth: Okay, so again, for me, the big challenge in all of this is the monetary policy offset and my concern is you try fiscal policy and to the extent it works, unless, there's a huge output gap and you can close the output gap without any inflation but if then it starts generating inflation, central bank is sort of so worried about inflation, we're going to step in and nip it in the bud.
Furman: This is all about the monetary policy, reaction function.
Furman: Absolutely, I agree with you and so this is something that's relevant when you have a large output gap and when monetary policy makers would like to do more but are constrained from doing it either because they can't make interest rates any lower or because they're worried about financial stability or some other concern like that. If you look at Europe right now, their unemployment rate is close to 10%. Their inflation rate is less than 1%. Their interest rates are negative and expected to stay negative. I think this is very relevant for Europe right now. The United States, not relevant today. I predict confidently that there will be a recession at some point in the future and in that circumstance, this unfortunately would probably be relevant for us again too.
Beckworth: Well, wouldn't having a level target ... now, I would prefer a nominal GDP level target but price level target do the same thing, wouldn't that give more space to operate. In other words if in fact you needed to have a little bit of an inflation overshoot, to really close the output gap, wouldn't you want to level target to give you that space to operate?
Furman: I think a level target can help guide monetary policy. If you are of the view that expectations about the future monetary base or the future path of interest rates are fully sufficient to accomplish whatever you want today, then I don't think you need to worry too much about this. If you think that where interest rates are today, also matters, that it hit a zero or effective lower bound that monetary policy is to some degree tapped out, and you want help from fiscal policy, I think this comes into effect and I think that description of the world is a more accurate one. You can write down fancy models so you can just sort of put it into IS-LM and use that set of intuitions to get to this.
Beckworth: Based on your reading of the literature then, what is your best estimate the size of a fiscal multiplier and I guess what you've described ... I think I'm hearing you say, and it's conditional on the state of the economy so we're in a deep recession. Can you pin a number down on the size of fiscal multiplier?
Furman: One of the ... there's been a big burst of research into multipliers and exploiting for example variation across states and spending that's uncorrelated with the condition in that state as a way to identify at least a state level multiplier, now, there's issues with translating that up and aggregating them into a national one, but my reading of that is in a depressed economy, multiplier of one and a half is not an unreasonable rule of thumb to have in your head in an economy like we have today, a multiplier of a half would not be unreasonable.
Beckworth: Okay, interesting. I just now have to bring, her name, Valerie Ramey has done some work that kind of pushes back against the better numbers. I believe she argues that even in a depressed economy, there's a wide ... it could be anywhere, right? Is she ... what are your thoughts on her work? I mean, is she convincing or not?
Furman: I think she's an excellent economist and her work would be one in many things I would use to answer this question. There's work ... there's a whole slew of papers, Gabriel, Schroeder, Acriche, Nakamura and Steinsson, others that are looking at the state level and they've also done some intelligent thinking about how you'd aggregate up from the state level to use that to draw inferences about the national. To me, that has the feeling of a slightly greater degree of science and that you have your control group, the state that didn't get the treatment. You have your treatment group, the one that did get the stimulus, you compare what happened between the two of those and this is not quite yet at that level of credible identification and causation that we now have in most of micro but I think it's an improvement over a certain amount of macro we have in the past.
Beckworth: That is the big issue, I think in macroeconomist is the identification issue, no matter what view you take, it is ...even identifying something as a monetary policy shock, right? It's incredibly difficult ... I have friends who are micro-economist and I tell them, well my vector autoregression, I pose these identifying restrictions and they're laughing. In fact, you have not got a true causality on me. For them, they want to see some kind of national experiments and something really sharp and coined.
Furman: That's what we have for this state fiscal ... We had a Medicaid formula, where Medicaid money went to different states and there was a part of the formula that was effectively random, it was unrelated to the economic conditions in your states and you could study variations in Medicaid grants to states, impact on spending in the states and do something a little bit like that, that micro research and unfortunately, in macro, we have to work with the tools we have and some of the biggest and most important questions are macro, we can't have 100% confident answers but we can do the best we can.
Beckworth: Right. Well, I'm sure that lecture will continue to grow and we'll continue to learn from that. Well, let's move on to another paper that you've done. I think it's a macro question, it's related and that is the CEA study titled The Long Term Decline in Prime-age Male Labor Force Participation. I think I'm particularly interested in one. I mean, if you look at the employment to population right now, for the prime-aged workers, it still hasn't fully recovered from the pre-crisis. Now, your paper actually identifies a longer term ... a longer trend, not just recent eight years but speak to us what you found in that paper and implications to policy.
Furman: Yeah, I think the decline of participation in the workforce is one of the really most profound failures of our economy and our society and I think it's been understudied by economist as well. In the 1950s, 98% of men between the age of 25 and 54 is what I called prime-aged men, 98% of them were in the workforce. Now, it's 88% of them in the workforce. That 10 percentage point difference is enormous, when you think that a typical recession, you think of it as like two percentage point increase in the unemployment rate and we call it a recession, this is five times that, spread out over 60 years of course. If you drill down one level further, you see that this is primarily a phenomenon of men with a high school degree or less.
Furman: In the 1950s, the amount you participated in the workforce was largely unrelated to your degree of your educational attainment. Now, there's a very steep gradient and around 95% of people with a college degree or more participate but 80% of people with a high school degree or less, participate and so our analysis was number one, that this is consistent with a demand shock, the same skill biased technological change that reduced the demand for less skilled workers, reduce their wages which we call inequality and reduce their employment prospects, which was this. That alone wasn't sufficient to explain it because you see large differences across countries and the fraction of people participating in the workforce.
Furman: The way our institutions handle this shock and what we did to train workers, prepare them, help them search for jobs, that all of that has made a big difference in this too.
Beckworth: Yeah. You go through in the paper and look at supply side explanations and demand side explanations and that was interesting, you went through and documented I think fairly convincingly that supply side isn't as important as demand side so you showed the disability which is an easy one to point a finger to but the evidence does not suggest that's really important contribution. You also looked at, well, maybe there's more state home dads. Maybe there's alternative sources of income. That's not the issue. Then, you went and look at their time use and you have a table here in the time use and you show on this table and it comes from the American Time Use Survey that they're not carrying anymore than someone who is in the labor force, they're not doing any more like productive activity at home.
Beckworth: What was really striking to me, what does seem to be a big difference is the amount of leisure they're engaging in, I'm going to read this paragraph which is really ... I wanted to laugh but it's sad. This is head commentary. You have here the largest difference in how men in and out of the labor force spend their time is time spent on leisure activities, socializing, relaxing in leisure with non-participating men spending almost twice as much time on these activities than those prime-aged men overall are more than twice as much time watching television and then you show the minutes here watching television, prime-aged men here in the labor force, they watch per day, minutes average per day is 154 minutes for the people not ... men not in the labor force is 335. I mean, this is striking.
Furman: It's very striking. It's very sad, of course we don't know if it's cause or effect. It could be television has gotten better so people drop out of the workforce to watch it or it could be job opportunities have gotten more scarce, as a result of that, you can't find a job and you're led to watch more television. I think that second interpretation probably accounts for the bulk of it. Although there are issues like with younger men and video games becoming more attractive that that may affect their entry into the workforce, so it could be ... some of this could be on the supply. I interpret most of this as caused by the problem as opposed to causing it.
Beckworth: I hope that's interpretation, that people are resorting to this as a substitute, as a fall back, a way to use their time as opposed to wanting to watch TV as ... going and getting a job and providing for themselves and their family.
Furman: Yes, and I think people want jobs and they want to provide for their families and that can be tough and tougher than it needs to be.
Beckworth: Now, you call this, fewer jobs for these gentlemen with high school education less as a demand side development but could you also view it as a structural adjustment? I mean, those jobs, they're simply disappearing due to technology, trade.
Furman: Yes. We may just be using different words so it could be structural, something is causing a less demand. That's something, it could be trade, it could be technology, it could be immigrants, it could be anyone, decline of manufacturing. I think all of those are different explanations for the decline.
Beckworth: Yeah. I just worry some of our listeners are going to think, everything is demand, but what you're saying, is it's a structural change and that are ...
Furman: Everything is demand.
Beckworth: Paul Krugman would agree with that. What this speaks to though is that our labor markets aren't as resilient as they used to be or that people don't have the training or we don't institutions in place to help them adapt to these changes.
Furman: Yeah. I mean, I think the really troubling fact that we identify here is the fraction of men between the age of 25 and 54 in France who are working is higher than it is in the United States. That's with them in a worst cyclical position than us and they're still have higher fraction working. They do just about everything wrong in their labor market, at least from the perspective of a standard of neoclassical economics, we do just about everything right in our labor market and yet, it turns out flexible labor markets are not sufficient for people to be at work, you also need a set of government policies and support to help make that happen.
Beckworth: What are some examples of that?
Furman: Active labor market policies, job search assistance, job training, we spend 0.2% of our GDP on those types of things. The OECD average is six tenths of represented GDP, every other country other than Chile and Mexico and the OECD spends more than us. Now, those programs have a mixed record. Some of them work well, some of them don't but that I don't think is an argument for short changing them. It's an argument for figuring out the right ones and scaling them up.
Beckworth: Okay, so would it be similar to the Trade Adjustment Act that for people and other sectors may have lost their job?
Furman: Yeah, trade adjustment includes training. It includes ability to ... subsidies for moving to a different place which by the way I think is an important part of this, the ability to move and get a job elsewhere and it includes some support for you during this whole process. Trade adjustment assistance is limited to a very specific set of circumstances as opposed to ... an actual work crew doesn't care if their job gets lost due to trade or technology or incompetence of their boss, any one of the three of those, it's the same impact on them and they have the same needs.
Beckworth: My understanding is that a lot of people who are eligible for trade assistant don't take advantage of it. Because of this reason, they don't recognize what's driving their job loss or maybe they do, they're just aren't aware of the program.
Furman: There's a lot of complications. It's not a simple program to navigate.
Beckworth: Do you think it's something that could be scaled up for other ... I mean, being able to retrain someone, do you think that's something that's easy to do if you design it better?
Furman: I think we don't know all the answer but we know some. There's a large evaluation literature and it looks at different types of programs. Community colleges for example work quite well, dealing with disadvantage we dealt is something we haven't figured out very well how to do, dealing with dislocated ones we have. To some degree maybe even just having some insurance. Something called wage insurance where you were making $60,000 a year. You lose your job, the best you can get is a new job at 40,000. We'll pay you some of the difference. We don't just give you an insurance for not taking a job. We give you some insurance for taking a job, if it's not the best job in the world but it's the best job you can get.
Beckworth: All right. Well, our time is up. Our guest today has been Jason Furman. Jason, thank you so much for coming on the show.
Furman: Thanks for having me.