Liberals thought they were making a good deal, but it turned out to be a Devil's pact.

Whatever happened to the goal of Full Employment? Boston Review has a forum on the topic. It kicks off with a lead essay by economist Robert Pollin, "Back to Full Employment", which also gives a history of the term and how it has been used. Contributors include Reihan Salam, James K. Galbraith, Ruy Teixeira, Lane Kenworthy and many others. Highly recommended.

Two additional things.

1. Reihan Salam's essay "Open the Labor Market" exposes the problem of using supply-side arguments to understand this crisis. Salam doesn't mention any kind of demand-side concepts, be they monetary or fiscal. Instead, he wants us to focus on the problem of incarceration blocking the supply of labor, which I think is a great idea. A great idea that can work in tandem with demand, but as a secondary problem in the crisis we now face. Incarceration doesn't explain our current crisis -- the huge drop in people employed is not the result of aggressive policing starting in 2007:

Unemployment has roughly doubled across every age and education group as well as by location. I'm sure if we dug deeper we could find that unemployment among college educated white women over 34 is up at least 80%. This is a group whose labor isn't a function of their interactions with the carceral state. And as the weakest potential employees are the last to benefit from growth after a recession, the longer we sit in this depressed state the worse it will be for the workers who were struggling the most going into the recession.

2. Jamie Galbraith has a piece, "Policies for Today’s World", that includes a history of the 1978 Humphrey-Hawkins Full Employment and Balanced Growth Act as well as arguments on infrastructure that are relevant to the State of the Union.

Paul Krugman and others are trying to figure out how demand arguments are being lost in the opinion-making class. I'd argue the problem is twofold. Conservatives went all-in attacking the notion of demand-side politics in the early 1980s, and liberals abandoned it in the 1990s for a different set of language on a pro-government supply side, leaving the demand work up to the Federal Reserve.

Jamie has written a lot during this crisis, but the piece I learned the most from for that debate was actually written in 1996 for The American Prospect, "The Surrender of Economic Policy." Here he explained, back when the debate was still being fought during the Clinton years, how liberals abandoned demand-side arguments in order to try and win over a role for the government in the supply-side arguments:

...LIBERALS LOST ON THE SUPPLY SIDE

At the very least, New Keynesian acceptance of the New Classical theoretical structure reduces macroeconomic policy to the fringe role, that of large-scale intervention only in deep and lasting recessions. In all other circumstances, the macro authorities are warned off -- as was Clinton himself during his brief Keynesian phase in early 1993.

What then can liberals do? The actual approach of the Clinton administration illustrates: Liberals can favor education, training, adjustment assistance, and other programs that upgrade skills and help workers move from one job to the next. They can support public investments in infrastructure, on the ground that these assist in the international competitiveness of the economy. They can support a combination of research and development assistance to advanced enterprises, alongside efforts to open foreign markets to American products, that help shore up the position of American companies in the world. If they are feeling brave, they can also support a higher minimum wage.

All of these are supply-side measures (except the last, which is a direct intervention in the labor market). Their purpose is to improve the long-term competitive performance of the American economy, on the thought that a more productive economy will generate higher average living standards. The further thought, that these higher averages will trickle down to low-paid production workers, is left as an assumption.

We can all agree that expenditures on education, training, research, development, and infrastructure are generally good things. But a macroeconomic commitment to full employment is the key to translating these investments into higher growth and living standards...

Infrastructure and associated environmental spending is undoubtedly of enormous need and value. But to whom? To the American citizen, as an element in the standard of living. Roads, water, sewer, power, and communications systems are all durable public consumption goods. It is consumers and workers, not the main business shippers, who hit the potholes on the road to work. It is people who breathe the air, drink the water, and boat on the rivers and lakes. All this has little to do with international competitiveness -- which is very sad, but true. This explains why business interests are not demanding higher infrastructure spending and why these items were the first to fail in the face of Republican opposition in the Congress.

We are left with the unpleasant conclusion that the liberal mainstream has fallen into a self-deluding trap. The right has taken over the commanding heights of both fiscal and monetary policy, leaving liberals with token sums to spend on supply-side interventions. Education, training, and infrastructure are very important, but not for the reasons usually given. Business won't support funding them at levels that liberals desire, and it is wishful to argue to business that they should. We must find, instead, a language in which to defend them for the sake of the people themselves, and organize the people around them for the vital direct benefits they bring (as indeed the environmental, consumer protection, and health and safety movements have traditionally done). Otherwise they will continue to lose the budget battles.

And if we want full employment, we need something else -- a full employment macroeconomics...

The liberals who built their careers post-1980 understand the tradeoff that was made when they took on the government-can-provide-productivity-too language, assuming that the Federal Reserve and break-glass-in-case-of-emergency federal fiscal policy would be there to step in and manage demand when a crisis happened. Which might help explain why they are so pissed at what is happening to the country right now.

Mike Konczal is a Fellow at the Roosevelt Institute.

Since banks have cash in their pockets, why aren't the lending gears grinding?

There was lot of interesting back-and-forth on balance sheet recessions at the end of last week. Here are Ryan Avent and Mark Thoma each explaining the argument. David Beckworth pushes back on the concept here (as well as here):

[T]he explanation incorrectly assumes the entire U.S. economy is on a deleveraging cycle....[The balance sheet recession view] fails to recognize that for every debtor there must be a creditor. Thus, for every debtor who is cutting back on spending in order to pay off his debts, there is a creditor receiving money payments. In principle, these creditors should be increasing their money spending to offset the decline in money spending by the debtors -- but if that were happening, there would have been no decline in overall total current-dollar spending. Instead, creditors are sitting on their money because they see an uncertain economic future...

If these creditor households, firms, and banks all simultaneously started spending their excess money balances, this would increase total current-dollar spending and in turn spur a real economic recovery. Moreover, knowing that the real economy would improve would feed back and reinforce current spending decisions by the creditors -- creditor households would buy new cars and remodel their kitchens, creditor firms would build new plants, and creditor banks would increase lending. A virtuous cycle would take hold and push the economy back toward full employment. But this virtuous cycle is not taking off because creditors are still hanging on to their money balances. What is needed to kickstart this cycle is an entity powerful enough to incentivize all the creditor households and firms to start spending their money simultaneously.

Enter the Federal Reserve. It alone has the ability to provide these incentives through its control of monetary policy. The fact that total current-dollar spending has remained depressed for so long means that the Federal Reserve has failed to do its job and effectively has kept monetary policy too tight.

Andy Harless writes a comment I agree with:

"why aren't the creditors who are receiving the increased payments spending the money?"

There's no reason to expect them to spend it, because it's not income; it's just a return of capital. The question would be, "Why aren't they re-lending it?" The reason they aren't re-lending it is that, with debtors trying to pay down their loans, the demand for loans is too low to produce high enough interest rates to justify the risk. You can call it an excess money demand problem, but the excess money demand is a result of the balance sheet problem, because money happens to be an asset that becomes attractive when loan demand is weak.

There are two questions to be answered. The first is whether or not we are on a deleveraging cycle and what the consequences of this would be. The second is whether or not fiscal and/or monetary policy can impact deleveraging.

The economy is deleveraging; that's not made up. The Federal Reserve's latest quarterly Fed Flow of Funds came out last week, and consumers continue to delever:

You can also see this at the FRBNY Consumer Credit Panel.

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What are the consequences of this? I want to recommend this excellent presentation (pdf) by Karen Dynan of Brookings, who walks through likely consumer spending scenarios related to consumer deleveraging. She finds that there is more to come. It certainly looks like consumers are develeraging too fast for it to come just from households paying down debt. Indeed, Dynan finds that a large majority of the deleveraging is coming from writing off bad debt.

When there's a charge-off event, two things happen that are relevant to whether or not the money is relent. The first is that the borrower signals he or she is a credit risk, which will reduce access to credit. The second is that the lender's probability of financial distress goes up, so they want to be more restrictive in how they lend; they have suddenly gotten themselves in the real estate business through replacing a debt asset with an abandoned home in a flooded market. This is the opposite problem of someone saving too much and becoming a better credit risk while a bank has too much to lend.

I think the spillover effects from foreclosures, abandoned properties, limbo REO houses, etc. are real and have consequences for consumer spending, borrowing and investments in neighborhoods. That at least some, if not many, of these foreclosures are the result of a broken, too-thin servicer model is one reason I spend so much time arguing for moving foreclosure negotiations from servicers to bankruptcy judges. We can fix a lot of this with a Chapter M for Mortgage expedited bankruptcy process (and some inflation).

Sometimes people float the argument that mass foreclosure waves should boost consumer spending power, since those homeowners are getting free rent. I think that overestimates how many people stay in their house once foreclosure starts. There's evidence that many people who are delinquent on a first mortgage are still paying junior lien claims. And if you are losing your home, you often have had an unemployment spell; it's not clear that you've boosted your income.

There's other criticisms of this approach. JW Mason reminds us that claims that fiscal consolidation will reduce aggregate income are empirical, ones that are likely true but that we shouldn't take for granted.

Mike Konczal is a Fellow at the Roosevelt Institute. **Don't miss Mike speaking with CNN about the nature of our unemployment crisis here.