Here’s a Yahoo article discussing the growing problem of finding skilled factory workers in America:

U.S. factories are creating many new jobs. But owners are hard pressed to find skilled American workers to fill them.

There is a “critical shortage of machinists,” a common and crucial position in factories, said Rob Akers, vice president at the National Tooling and Machining Association. “Enrollment in this field in technical schools has been down for a long time.”

The problem comes at a terrible time. Domestic contract manufacturers — known as “job shops” — are seeing a boom in business.

In the case of Win-Tech, a Kennesaw, Ga., manufacturer, orders are coming in fast and furious from its customers in the defense and aerospace industries.

But the company’s owner Dennis Winslow is more concerned than elated.

Winslow’s been trying to add 12 more workers to his staff of 42 to meet the increased demand, but he’s struggling.

“I’m facing a real conundrum,” he said. “There are so many unemployed people in the country. But I can’t find the skill sets that I need. I would hire tomorrow if I could.”

.   .   .

He said he may be forced to hire people who are not fully skilled, and then train them.

“I am coming to the conclusion that this [situation] has become the new normal,” said Winslow. “Being a machinist once was considered a respectable trade. But young Americans just don’t consider manufacturing to be a sexy vocation.”

He noted that most people possessing the skill sets he needs today are baby boomers, many of whom work at his factory.

As the United States outsourced its manufacturing jobs over the last few decades, the country lost a significant chunk of its manufacturing talent pool, said Mitch Free, CEO of MFG.com, an online directory that matches businesses with domestic manufacturers.

“Now, as manufacturing is slowly coming back, we just don’t have this talent quickly available,” said Free, a machinist by training.

.   .   .

It takes about a year in trade school to become a machinist, followed by a few years of apprenticeship at a manufacturing facility, said Free.

Machinists make about $60,000 a year. But with many logging overtime lately, Free said that income can get close to $100,000 a year.

“This is also a highly technical craft,” he said. “It requires knowledge of computers, programming, even geometry. You can’t hire someone off the street and turn them into a machinist.”

Mark Engelbracht, owner of Omni Machine Works in Covington, Ga., is trying to hire just three new machinists. He, too, is having a hard time, a situation that will worsen as his older machinists retire.

“Finding more work isn’t the problem for our business,” he said. “Getting the worker is becoming a problem.”

.   .   .

“I’ve been trying to hire for a year,” he said. “It’s not that people aren’t applying. But many are claiming to be machinists when they aren’t exactly.”

We need to do two things:

1.  Allow thousands of skilled machinists to migrate to America.  This will boost our manufacturing sector, and allow for the employment of lots more less skilled workers in factories.  Those $60,000 to $100,000 salaries will seem quite appealing to Chinese workers.

2.  Have the Fed boost AD so that Americans can find jobs in the service sector, where most work, and most seem to want to work.

PS.  Here’s an article on how Chinese factories are moving back to America.  If we accepted more Chinese workers we could speed up this process.

PPS.  And here’s a Chinese entrepreneur who brought candle-making jobs back to America.  While we’re at it, import more Chinese entrepreneurs too!

Via Mark Thoma, James Bullard has a reply to Tim Duy that sheds further light on his argument.  In this piece he concentrates his criticism on the concept of “potential output.”  Here I actually agree with Bullard; potential output is hard to measure, may move around at times, and can easily lead monetary policy astray.  But I still have major problems with his overall argument:

So, what Irwin’s picture is doing is taking all of the upside of the bubble and saying, in effect, “this is where the economy should be.”  But that peak was based on the widespread belief that “house prices never fall.”  We will not return to that situation unless the widespread belief returns.  I am saying that the belief is not likely to return–house prices have fallen dramatically and people have been badly burned by the crash.  So I am interpreting your admonitions on policy as saying, in effect, please reinflate the bubble.  First, I am not sure it is possible, and second, that sounds like an awfully volatile future for the U.S., as future bubbles will burst once again.

Now we can see the damage to monetary policy by the widespread (but false) view that this recession was caused by the bursting of the housing bubble, and the resulting financial crisis.  Interestingly, this is exactly that same argument that the Fed used in the 1930s; “Do you mean you want us to go back to the false prosperity of 1929?”  Most economists would now say; “Yes.  The 1927-29 expansion saw no inflation at all.  There is no evidence the economy was overheated in 1929.”

Now I’m willing to concede that this perception may be wrong, about both 1929 and 2007.  Both years might have seen output slightly above the mythical “natural rate.”  There’s really no way to know for sure.  But it’s important to recognize the nature of Bullard’s argument—in some respects it’s a return to 1930s macro after a 70 year hiatus.  Why did the Fed ignore bubble theory for so long?  Two reasons.  Modern macro models really don’t have much of a place for bubbles, except to the extent they throw monetary policy off course and lead to excessive NGDP growth.  But NGDP growth followed a fairly stable path along a 5% trend line after 1990.  It might have been slightly too high in 2007, but nothing of the sort that would cause a major crisis.  The second reason is that between 1929 and 2000 we didn’t seem to have bubbles that influenced the business cycle.  The huge 1987 stock market crash didn’t even dent the economy.  So macroeconomists naturally (and correctly) ignored bubbles.  Bullard continues:

This is admittedly a qualitative story, but much of the rhetoric about the U.S. economy during this period fits this description.  So it is not that the bubble destroyed potential, instead it is that actual output was higher than properly-defined potential during the mid-2000s, and then it crashed back as the bubble burst.

But where is the evidence for this?  I think everyone agrees that housing construction was too high in 2004-06.  But that doesn’t mean RGDP was too high.  After all, the resources that went into housing could have come at the expense of other sectors.  Housing is only about 5% of GDP.  Is there evidence that AD was too high?  Maybe a tad too high, but nothing out of the ordinary compared to other business cycle expansions.  How about SRAS?  Bullard mentions a rise in labor supply caused by the housing bubble, but I don’t see the logic.  What would be evidence for a rise in labor supply?  Presumably you’d see unusual patterns in the employment to population ratio during the 2000s, but I just don’t see it.  His best argument would be that the desire to work has been dropping sharply for many years, and that this increased preference for leisure was temporarily covered up by a housing bubble that mysterious caused people to want to work more.  Then when they found they could no longer build houses, they decided they didn’t want to work at all.  They didn’t like other jobs being offered.  I’m probably being unfair here, but I just don’t see the argument, or the data to support such an argument.

Of course you could make a “recalculation” argument, but that wouldn’t fit Bullard’s claim of a semi-permanent downshift in trend output.  And it doesn’t even fit the data, as the big housing construction crash was mostly during the period of January 2006 to April 2008, and yet the unemployment rate was unusually low during that period of supposed “recalculation.”

Here’s the Bullard argument I find most troublesome:

As I noted earlier, the Irwin description is the dominant view of the U.S. economy.  But, as you and many others have stressed, we have not seen the bounce back toward potential that would be suggested by that picture.  That is giving me pause, and frankly I think it is giving everyone who follows the U.S. economy pause.

At a superficial level Bullard may be right.  We may not ever get back to “potential output” as described in many conventional macro models.  But I think at a deeper level Bullard is confusing two completely unrelated issues, the link between monetary policy and NGDP, and the link between NGDP and RGDP.  Let’s start with the data.  Bullard’s right that potential output is very misleading.  In my view employment is a better indicator of cyclical patterns.  For example, over the past 14 months the level of employment has risen by somewhere between 2.3 million and 2.9 million.  Both of those numbers are above trend growth in jobs.  So we are having an (admittedly weak) recovery in jobs.  But at the same time RGDP is growing well below the 3% long run trend.  Let’s assume Bullard’s right that the potential output estimates are too high, perhaps due to reasons outlined in Tyler Cowen’s The Great Stagnation.  In that case the jobs numbers show us slowly recovering toward a reduced trend.  The next question is; why isn’t the recovery faster?  That’s where I suspect Bullard and I would part company.

Now let’s look at NGDP growth.  During this period of recovery NGDP has been growing at about 4%, which I consider tight money.  So the explanation for the slow recovery is quite easy, money has been too tight.  Bullard would presumably reject that argument, as the Fed insists that money has been very easy—even though they’ve followed the same low interest rate/high monetary base policy that the Hoover Fed adopted.  But even if money has been easy, it doesn’t help Bullard’s case.  Now the mystery would be why the “easy money” hasn’t boosted NGDP, not why slow NGDP growth hasn’t triggered fast RGDP growth.  There’s no direct effect of easy money on RGDP.  It works, if it works at all, by boosting NGDP growth.  Then if we assume wages and prices are sticky in the short run, the higher NGDP growth will (partly) translate into higher RGDP.  But only if you get the desired NGDP growth.  And that hasn’t happened.  In contrast, during the first 6 quarters of the 1983-84 recovery, NGDP grew at an 11% rate, and RGDP grew at a 7.7% rate.  The proximate cause of the slow recovery is obviously slow NGDP growth.  The only debate is (or should be) whether the Fed or the fiscal policymakers are to blame for the slow NGDP growth.

[BTW:  Ben Bernanke has called for fiscal stimulus at various times, tacit admission that the Fed sees an AD shortfall.]

The Fed’s current position is very similar to the Fed’s stance in 1932—they’ve done their job, provided low rates and a greatly enlarged monetary base, now why isn’t the economy recovering?  I think we now know why the economy wasn’t recovering in 1932, money was way too tight.  As soon as FDR adopted a (Woodfordian) price level target, the economy turned around on a dime.  Even Vincent Reinhart, the guy who (according to Lawrence Ball) turned Bernanke from a bold advocate of monetary stimulus at the zero bound to a timid Fed-clone, now says the Fed isn’t moving fast enough in a Woodfordian direction.

If we get adequate NGDP growth, growth high enough where Bernanke doesn’t have to worry about Congress suddenly getting religion on the deficit, and if the economy still doesn’t recover, then we can entertain real theories of the recession.

Mark Thoma also links to Barkley Rosser:

The basis of this argument is that the fall in output following the collapse of the bubble has reduced the rate of real capital investment. Of course, the sharpest decline was in the real estate construction sector, the part of the economy that was most severely distorted by the housing bubble, and we should expect that part of investment to remain reduced for some time.

If Rosser means “reduced from 2006 levels” I obviously agree.  But housing construction is also greatly reduced from normal levels, and hence there’s no reason why some recovery isn’t possible.  What about the huge “overhang” of housing caused by “overbuilding?”  Actually housing construction over the past 10 years has been well below normal.  That’s why many young people are living with their parents.  They have no job, because the Fed hasn’t provided enough AD.

I do like Bullard’s new argument better than the old one.  This is what I strongly objected to earlier:

A better interpretation of the behavior of U.S. real GDP over the last five years may be that the economy was disrupted by a permanent, one-time shock to wealth.  In particular, the perceived value of U.S. real estate fell substantially with the 30 percent decline in housing prices after 2006. This shaved trillions of dollars off of the wealth of the nation. Since housing prices are not expected to rebound to the previous peak anytime soon, that wealth is simply gone for now. This has lowered consumption and output, and lower levels of production have caused a significant disruption in U.S. labor markets.

This is doubly wrong.  There is no reason to assume that building too much investment goods (housing) would cause people to want to build fewer consumer goods.  Indeed in a well functioning economy overbuilding in one sector should cause resources to re-allocate into other sectors.  Output of consumer goods would probably rise (although it’s theoretically possible that this could be offset by an increased preference for leisure that was even bigger than the fall in labor utilized in housing construction.)

And even if I’m wrong about the effect of less housing wealth on consumer goods production, the “consumption and output” connection is completely unjustified.  You can’t simply assume that lower consumption translates into lower output; it could lead to higher investment or exports.  Indeed that’s the sort of adjustment predicted by most equilibrium models.  Now you might make a Keynesian argument that less wealth depressed AD, but Bullard is claiming the problem is not a lack of AD.

I notice that Bullard did not repeat this argument in his second piece, so the widespread criticism by economics bloggers may have nudged him in the right direction.  This represents a sort of victory for the economics blogosphere, and especially Tim Duy.

Here’s Vincent Reinhart testifying at the FOMC in June 2003:

An alternative would be to make a promise linked not to the calendar but to some economic event. Under a conditional commitment, the Committee could pledge to hold short rates at a low level until some event y happens. Possible triggering events would include posting sustained economic growth, making progress in trimming economic slack, and recording inflation above a specified floor. The yellow warning sign along the road to a commitment strategy is that words ultimately have to be matched by deeds for the public to believe the Committee””that is, shaping expectations does not introduce another policy instrument in the long run. Moreover, the Committee might be concerned about its credibility in delivering on its promise. As one example, you might be concerned about establishing a target range above the current rate of inflation if you thought there was a reasonable risk that the actual outcomes for inflation will move lower for the next few years. As another example, the Committee might be worried about its credibility in the other direction if a focus on a backward-looking indicator of economic progress induced overshooting.

And here’s a response by Ben Bernanke (p. 45) at the same meeting:

What I think has been missing from the discussion we have had here today so far is that working on expectations of future short-term interest rates can be done through a comprehensive package. There are many different ways to approach expectations management. One is communications of the type we’ve been doing through our statements. There are various targeting procedures for inflation or price level targeting. Eggertson and Woodford talk about some reasons for price level targeting, which is their favorite approach. There is also signaling through various kinds of market interventions of the kind Dino has talked about””options, purchases of bonds, discount window lending, and so on. In particular, to those of you who have argued against trying to “target” long-term interest rates””if by that you mean that we specify a target for the five-year bond and then try to enforce it by buying five-year bonds””I must say that I agree with you 100 percent that that’s not going to work. But if the policy is one in which we essentially try to lower the whole path of long-term interest rates and we enforce that with a package of complementary actions that includes trying to manage expectations along the term structure and taking a series of other actions such as purchasing long-term bonds and other kinds of instruments, I think that’s one of the first things we ought to be doing. I believe that would actually work and would in fact be a good approach.

So my answers to Vince’s four questions are, in short, that I agree with Bill Poole and Don Kohn that short-term nominal interest rates should be brought down quite low. I don’t have much sympathy or forbearance necessarily for protecting small segments of the financial markets. I believe our first approach should be the continuation of our current policy of working on the management of expectations. And then I think we should consider packages of policies that support each other to try to manage expectations in the market and thereby affect longer-term interest rates.

Maybe I’m reading too much into this exchange, but here’s my takeaway:

1.  In 2003, when Bernanke’s not in the public spotlight, he shows real enthusiasm for a Woodfordian approach.  And I’d add that the Fed seems to be currently taking baby steps in that direction.  Not level targeting, but at least moving toward tying interest rate projections to economic outcomes.

2.  I read Reinhart as being somewhat less enthusiastic about that approach.

I’m not certain about either assertion, so feel free to correct me if I’m wrong.  Now here’s Reinhart in March 2011, all but apologizing to the head of the Bank of Japan:

In 2002, Ben Bernanke, then a member of the Federal Reserve’s Board of Governors, spoke at a conference honoring Milton Friedman. Gov. Bernanke offered a public apology for the Fed’s role in the Great Depression. Judging from the lengthy interview of the head of the Bank of Japan published in the Wall Street Journal on March 1, Gov. Masaaki Shirakawa is probably also expecting an apology from his Fed counterpart for second-guessing the BOJ’s conduct of policy.

I was one of Bernanke’s co-authors for an academic paper published in 2004 that did some of that criticizing. After seeing how other major central banks, including the Fed, handled similarly trying circumstances, I admit that Gov. Shirakawa has reason to feel aggrieved. In particular, the main point of contention, quantitative easing, is a policy that looks good on paper but has a flaw when implemented by a democratic central bank.

.   .   .

Second is the problem. Market participants have to be convinced that the central bank is committed to the policy for quantitative easing to be effective. If investors think the authorities will stop or reverse soon, then long-term yields will not move much nor will the extra reserves be used. Underappreciated in the theory (and the criticism) is that the monetary policies of major central banks, such as the BOJ, are decided by committees. Individual members do not usually see the world exactly in the same way. Because the balance of judgments may change over time, a decision at one meeting cannot presume the outcome of the democratic process at future committee meetings. As a consequence, policy statements tend to be hedged to foster compromise, making them tentative and undercutting the effectiveness of policies relying on a credible long-term commitment.

Ill effects of this drawback of democracy can be tempered if the central bank follows a policy rule. The BOJ ultimately did so, with the promise made in 2001 to keep the policy rate at zero as long as the price level was declining. The Fed has not yet seen fit to do so.

Evidently, getting from paper to practice is harder than it looks.

That’s quite an eye-opener.  It could be viewed as Reinhart criticizing the Fed (and by implication Bernanke?) for not being sufficiently Bernankian.  He’s hinting that they should consider adopting the policy Bernanke discussed at the 2003 meeting.

[BTW, I see no reason why Reinhart should apologize to the BOJ.  He’s right that these policies only work if the public doesn’t think the BOJ will reverse course before achieving its objective.  If you view “inflation” as the objective, then the BOJ did reverse course too soon; not once, but twice.  The Japanese people didn’t trust the BOJ to inflate, and they were right not to trust them.  On the other hand you could argue that deflation was the objective.  After all, Reinhart points out that the BOJ suggested they’d tighten monetary policy when deflation ended.  What other goal could there be for doing that other than pushing Japan right back into deflation?  I’m not sure if that was their goal, but they acted like it was, and it “worked.”  After each tightening, Japan would slip back into deflation.]

Eight days later he seemed to criticize the Fed as being too expansionary:

This basic lesson of history from the North Atlantic is going unheeded by Federal Reserve Chairman Ben Bernanke and his colleagues on the Federal Open Market Committee (FOMC). On March 15, they issued a statement that their ongoing second experiment with quantitative easing, the expansion of the central bank’s balance sheet known as QE2, would continue full-speed ahead. A prudent course would have been to slow, but not stop, QE2.

But the criticism seems to be more about procedure than policy stance, as six days after this statement he switched to a clearly dovish position:

Thus, Fed officials have reason to seek to make monetary policy more accommodative. With its nominal policy rate already at zero, expanding the balance sheet by purchasing assets with newly created reserves, quantitative easing (QE), is the obvious tool. The Fed’s asset of choice is Treasury securities, the safest of them all.

.   .   .

QE has risks. On one side, the Fed’s competence might be called into question should there be no apparent benefit from the latest round. On the other, QE might work too well in restarting inflation if the Fed is slow to remove its accommodation when resource slack dissipates. These risks could be mitigated if the Fed were rule-like in applying QE. If the change in its Treasury holdings were linked to its outlook, the public could understand that asset purchases would last only as long as necessary.

For now, the Fed seems dead-set on retaining discretion by relating that its asset purchases will be routinely reviewed rather than relying on a rule. This clouds its commitment, undercutting effectiveness.

Now Reinhart is clearly echoing Bernanke’s arguments from the 2003 meeting.  Maybe he was there all along (and playing the devil’s advocate), but I read his 2003 testimony as being a bit skeptical of this policy.  In any case, the recent moves by the Fed probably reflect Bernanke’s frustration with the pace of recovery, and a renewed determination to implement the ideas he discussed in 2003.  And Reinhart is standing on the sidelines giving him encouragement.

I doubt Bernanke will be able to implement a full-fledged Woodfordian policy.  But if the Karl Smith/Matt Yglesias hypothesis is correct (about the recovery gradually picking up momentum), then it’s possible he’ll be able to do enough to get a robust recovery by 2013.

I wish we had an NGDP futures market, so we knew who was right.

I was going to entitle this post “Who is Vincent Reinhart?” but then I remembered poor Vincent Foster.  Here’s a quote from a Lawrence Ball paper (taken from a post by Marcus Nunes):

The analysis starts with a puzzle about Ben Bernanke. From 2000 to 2003, when Bernanke was an economics professor and then a Fed Governor (but not yet Chair), he wrote and spoke extensively about monetary policy at the zero bound. He suggested policies for Japan, where interest rates were near zero at the time, and he discussed what the Fed should do if U.S. interest rates fell near zero and further stimulus were needed. In these early writings, Bernanke advocated a number of aggressive policies, including targets for long-term interest rates, depreciation of the currency, an inflation target of 3-4%, and a money-financed fiscal expansion. Yet, since the U.S. hit the zero bound in December 2008, the Bernanke Fed has eschewed the policies that Bernanke once supported and taken more cautious actions-primarily, announcements about future federal funds rates and purchases of long-term Treasury securities (without targets for long-term interest rates).

A number of economists have noted the difference between recent Fed policies and Bernanke’s earlier views- usually critically. In discussing one of Bernanke’s early writings on the zero bound, Christina Romer says “My reaction to it was, ‘I wish Ben would read this again'” (quoted in Klein [2011]).

Paul Krugman (2011b) asks “why Ben Bernanke 2011 isn’t taking the advice of Ben Bernanke 2000.” In criticizing Fed policy, Joseph Gagnon echoes Bernanke’s criticism of the Bank of Japan: “It’s really ironic. It’s a self-induced paralysis” (quoted in Miller, 2011).

Sections IV-VI review the broader evolution of Bernanke’s views. I find that they changed abruptly in June 2003, while Bernanke was a Fed Governor. On June 24, the FOMC heard a briefing on policy at the zero bound prepared by the Board’s Division of Monetary Affairs and presented by its director, Vincent Reinhart. The policy options that Reinhart emphasized are close to those that the Fed has actually implemented since 2008; Reinhart either ignored or briefly dismissed the more aggressive policies that Bernanke had previously advocated.

In the discussion that followed the briefing, Bernanke joined other FOMC members in agreeing with most of Reinhart’s analysis.

Shortly after the meeting, Bernanke began writing papers that took positions very close to Reinhart’s-some with Reinhart as a coauthor. Clearly, the analysis of the Fed staff in 2003 was critical in changing Bernanke’s views about the zero bound.

At first glance, Bernanke’s sharp change in views is surprising. In 2003, he was a renowned macroeconomist who had studied the zero-bound problem extensively and expressed strong views about it. Yet he quickly accepted a different set of views when Reinhart presented them.

Why did the positions of the Fed staff influence Bernanke so strongly?

This question is difficult to answer, as we can’t observe Bernanke’s thought processes. Yet we can develop hypotheses based on research by social psychologists, who study group decisionmaking.

Based on this research, Section VII suggests two factors that may help explain Bernanke’s behavior. The first possible factor is “groupthink” at the FOMC, a tendency of Committee members to accept a perceived majority view rather than raise alternatives that might be unpopular.

The second is Ben Bernanke’s personality, which is typically described as “quiet,” “modest,” and “shy”- traits that might make him unlikely to question others’ views.

That made me wonder about the mysterious Vincent Reinhart, and decided to investigate his views.  Here’s some comments from early 2008, when he was at the AEI:

I believe that Ben Bernanke began his chairmanship influenced by his own experience on the Board as a governor, by academic research that tended to show groups perform better than individuals, and by the foreign precedent of argumentative yet still successful monetary policy committees.  And he embarked on a fundamentally selfless act by attempting to make the Federal Open Market Committee more central to policy making. Eschewing the power and trappings of authority is not an everyday occurrence in Washington, DC.

Thus Reinhart gives the changes a more positive spin, but basically agrees with Ball.  So what does Reinhart think of policy?  I was all set to view him as a “bad guy,” but his views are actually pretty sensible.  However I take strong exception with this comment:

Looking at the bigger picture, America has embarked on one of the great experiments in the history of monetary economics. We are testing the notion that the size of a central bank’s balance sheet matters more to the economy than the overnight interest rate that balance sheet produces in money markets. The hope is that this experiment will stabilize asset prices, reduce credit spreads, and boost the economy.

This “notion” is clearly the monetarist view that “money matters,” even apart from changes in interest rates.  And it’s clearly true.  But this theory applies to “high-powered money” which is non-interest bearing base money.  Once the Fed started paying interest on reserves, the base no longer represented high-powered money.  Today the currency stock is the stock of high-powered money.  Thus there is no test of monetarism.  That’s not to say that monetarism would pass a fair test, as even the demand for non-interest bearing money can be highly unstable near the zero bound, but the point is that the Fed never tried the monetarist experiment of boosting the supply of high-powered money at the zero bound.  I’m worried by the fact that Fed officials think that they did this test.

But Rienhart also has many sensible things to say, such as this:

The Fed is guilty as charged in setting policy to achieve the goals mandated in the law. Fed policy makers cannot be held responsible for the fuel to speculative fires provided by foreign saving and the thin compensation for risk that satisfied global investors. Nor can the chain of subsequent mistakes that drove a downturn into a debacle be laid at the feet of the Federal Open Market Committee of 2002 to 2005. If the results seem less than desirable in retrospect, change the law those policy makers were following, but do not blame them for following prevailing law.

And there’s this prophetic statement from 2009, right after Bernanke was re-appointed:

First, the White House will likely learn that a Fed chaired by Ben Bernanke will follow a policy uncomfortably tight as the 2012 election looms into sight. Bernanke has espoused a commitment to low inflation over his entire career. He also is a democratic and consultative chairman, so the voices of monetary conservatives among Fed officials will be heard loudly and frequently.

And this statement from 2009:

As a result of legislative convenience, bureaucratic imperative and historical happenstance, a variety of responsibilities have accreted to the Fed over the years.  . . .

Apparently, the argument runs, there are hidden synergies that make expertise in examining banks and writing consumer protection regulations useful in setting monetary policy. In fact, collecting diverse responsibilities in one institution fundamentally violates the principle of comparative advantage, akin to asking a plumber to check the wiring in your basement.

There is an easily verifiable test. The arm of the Fed that sets monetary policy, the Federal Open Market Committee (FOMC), has scrupulously kept transcripts of its meetings over the decades. (I should know, as I was the FOMC secretary for a time.) After a lag of five years, this record is released to the public. If the FOMC made materially better decisions because of the Fed’s role in supervision, there should be instances of informed discussion of the linkages. Anyone making the case for beneficial spillovers should be asked to produce numerous relevant excerpts from that historical resource. I don’t think they will be able to do so.

On monetary policy he has many statements that are mildly dovish, mostly supportive of Bernanke’s policy preferences.  This doesn’t prove anything, but it’s consistent with Ball’s claim that Bernanke is a Reinhartian central banker.  I certainly did not find calls for level targeting, NGDP targeting, or raising the inflation target to 4%.  For now, Ball’s paper is the best explanation of the evolution of Bernanke’s policy views.

In my next post I’ll argue that in an ironic twist, Reinhart has now become a Bernankian.

Many progressives like to point to the fact that labor supply curves are backward bending.  That is, people tend to work less as countries get richer.  Leisure is a normal good.  That’s all true.  But then they forget that this backward-bending curve is not an income-compensated labor supply curve, and hence has no bearing for aggregate tax analysis.  Here’s Paul Krugman:

This is not a crazy position: “backward-bending” labor supply is a staple of economics textbooks, because income effects work against substitution effects. Raise my wage rate, and the payoff to working more increases; but I also get richer; and one of the things people consume more of when they get richer, other things equal, is leisure. So a higher wage could lead either to a rise or fall in labor supply, and a lower wage similarly could work in either direction.

.  .  .

But this argument applies just as much to the rich as to the poor. And strange to say, you never do find conservatives arguing that we shouldn’t worry about higher tax rates on the rich, because they’ll just work harder to be able to afford those luxury goods; or that a higher inheritance tax probably expands work effort, because it would force the Paris Hiltons of this world to go out and get real jobs.

Funny how that works.

It would be funny if true, but in fact his comments are slightly misleading.  A tax increase doesn’t have any first order effect on national income.  (Even if it does reduce national income, that’s not much of an argument for higher tax rates.)  Thus the standard assumption in public finance is to use income-compensated labor supply curves.  This means higher tax rates will unambiguously reduce national income, as all you have is the substitution effect.

I presume Krugman would respond that he’s making an argument for income effects within some sub-groups, such as the rich.  But that doesn’t strengthen Krugman’s argument very much, for three different reasons:

1.  What matters is aggregate employment.  In recent years the problem of falling labor force participation is increasing concentrated among the non-rich.  At a minimum, Charles Murray is right about that.

2.  The Paris Hilton example actually works the other way.  With a 90% tax rate on the rich (as in the 1950s) there was little incentive for the wives of wealthy people to work.  They had little incentive to work.  As rates came down, labor force participation of women in high income families increased.  I don’t even know if Paris Hilton is married, but if you are one of those people who so driven by envy that you are obsessed with seeing that sort of woman “get a job,” high MTRs for the rich is the last thing you should be rooting for.

3.  Supply-siders claim that higher MTRs for the rich won’t raise much revenue, as they’ll just find more loopholes.  I don’t completely buy that argument, but there’s certainly some truth to it.  For instance, the huge fall in MTRs for the rich between the 1950s and the late 1980s didn’t seem to cost revenue, but we don’t really know if this is because the lower rates on the rich caused their REPORTED pre-tax incomes to rise sharply, or whether they rose for some other reason (in which case the tax cuts did cost revenue.)  Conversely the 1990s works in progressives favor, but we don’t know if that was helped by an exogenous tech bubble.

To summarize, supply-siders are not obsessed with getting the rich to work longer hours.  They want Americans to work more, save more, and invest more.  And to the extent they make that labor supply claim for tax cuts for the rich, it’s using an income-compensated assumption, i.e. the Laffer curve.  You may not buy that argument, but Krugman has not found any logical inconsistency in supply-siders touting Murray’s findings.

PS.  I’m no dogmatic libertarian.  I’m fine with a progressive payroll tax, plus luxury taxes on these sorts of homes: