Some of you have gotten at least a taste of Assistant Professor of Economics Nicholas Mangee‘s work via his column Our Economic Times in the Savannah Morning News. I was lucky to have an office just a couple of doors down from Nick’s for the last two years, during which time I became accustomed to his incisive thinking and his ability to discuss the behavior of markets in clear terms.

Some Savannah residents took advantage of the chance to see and hear Nick in person last week at the old Savannah Cotton Exchange on Factors Walk — the building is now Solomon’s Lodge, the oldest continuously operating English-constituted Freemasons lodge in the western hemisphere.

The 1886 structure seemed an especially appropriate venue for Nick’s talk kicking off Armstrong’s lecture series “A Moveable Feast.” Nick spoke about the ways in which the various liberal arts can and should be applied to economists’ assessments of markets.

Nick is an expert in Imperfect Knowledge Economics, which recognizes “the importance of non-routine change and imperfect knowledge for understanding market outcomes and the consequences of economic policy.”

As we consider those outcomes and try to understand the limitations of our own knowledge of markets, we would do well to call upon thinkers and theorists from a variety of fields. And obviously we need to avoid letting ideology outweigh the stories that good numbers are telling us. While Nick emphasized the need for economists to look outside their own field, I’d flip that around a little: it’s incumbent upon thinkers across disciplines to have a working knowledge of economics and to force themselves to become comfortable with data and math.

The next installment of “A Moveable Feast” will be Armstrong Assistant Professor Lara Wessell speaking on the limits of presidential power at 6 p.m. on October 24 at The Ralph Mark Gilbert Civil Rights Museum.

The Fed has a dual mandate: to maximize employment and to keep inflation in check.

John C. Williams of the Federal Reserve Bank of San Francisco recently made these remarks:

Maximum employment is a moving target that depends on how efficient the labor market is at matching workers with jobs. Itâ€s not a number you can measure directly. Economists fiercely debate what it might be. Expressed in terms of the unemployment rate, I estimate that maximum employment is currently around 6¼ percent.6 The current unemployment rate is far above that level, which means we are far short of maximum employment by any reasonable measure. Whatâ€s more, with the economyâ€s recent loss of momentum, job creation will barely keep up with labor force growth. As a result, I expect little progress toward maximum employment over the next year or more.

The second part of the Fedâ€s mandate is price stability. As Iâ€ve noted, our policy body, the Federal Open Market Committee, has specified that a 2 percent inflation rate is most consistent with maximum employment and price stability. Over the past year, prices rose 1.5 percent, according to the Fedâ€s preferred measure of inflation. Falling commodity prices, a rising dollar, and subdued labor costs suggest that inflation will fall to around 1¼ percent this year and then rebound somewhat to about 1¾ percent next year.

What does this mean for the Fed? We are falling short on both our employment and price stability mandates, and I expect that we will make only very limited progress toward these goals over the next year. Moreover, strains in global financial markets raise the prospect that economic growth and progress on employment will be even slower than I anticipate. In these circumstances, it is essential that we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates.

From Mangee’s column today:

Given such projections by the people who ultimately decide on monetary policy, how can the Federal Reserve just sit on its hands with so many people entering long-term unemployment? Wouldnâ€t helping to put hundreds of thousands of people back to work take precedent over the possibility of a slight increase in the price level, one that appears far from certain and perhaps even desirable?

You’ll hear folks say that the Fed has done all that it can do, but it hasn’t. The bank needs to be even more aggressive. Given so much slack in the economy, we’ll have plenty of warning if inflation starts to rise; the Fed will can easily respond as needed.

We’re spending too much time worrying about speculative negative results of Fed action while tolerating current conditions that should be intolerable.

The Fed has already taken other actions over the last 4 years to try to bolster the economy.

Here’s how my Armstrong colleague Nicholas Mangee explained it in a recent Savannah Morning News column:

From 2008 through 2011, the Federal Reserve embarked on a series of financial market operations to try to rejuvenate an economy grasping for air. Massive amounts of reserves were injected into the commercial banking system. These policies, known as Quantitative Easing (QE) I, and II, and Operation Twist (a term from a similar policy enacted in 1961) consisted of purchasing hundreds of billions of dollars worth of mortgage-backed securities and treasuries from major federal agencies like Fannie Mae and Freddie Mac and other financial intermediaries.

Unlike QE I and II, Operation Twist involved re-shuffling the Fedâ€s balance sheet by which short-term treasuries were sold in exchange for assets with greater maturities, such as mortgage-backed securities. These assets were bought in order to lower medium to longer-run interest rates, the only existing yields not near zero.

By purchasing the toxic assets that so many financial firms were caught holding when the music stopped on the great credit expansion of 2003 through 2007, the Fedâ€s balance sheet and bank reserves expanded to historically unprecedented levels.

From 1984 through 2008, the average amount of commercial bank reserves held with the Fed was approximately $20 billion. By the end of 2011, that amount skyrocketed to $1.53 trillion. Even though commercial banks are required to keep a portion of reserves on site with the Fed, almost all of these new injections of liquidity were excess reserves allowed to be loaned out at will.

Calculated Risk has a succinct QE Timeline in this post. He also puts those dates into this graph of the S&P 500. It speaks for itself.

And contrary to what you might be reading or hearing, the Fed’s actions over the last few years have not damaged the economy. We have not seen runaway inflation: in fact, we still need higher inflation. We have not seen investors run away from U.S. debt: the dollar is still — even increasingly — regarded as one of the world’s few safe havens.

And by not using all the tools in its toolbox, the Fed is virtually assuring that the American economy will remain weak for years, probably until the end of this decade.

For a broader but still concise summary of the Fed’s actions over the last few years, check out an April column by my Armstrong colleague Nicholas Mangee: What the Federal Reserve has (has not) done

Today’s economic projections after the latest round of Fed meetings are, in a word, dismal. They show continued growth and continued declines in unemployment — i.e., no recession — but with a growth so slow that millions of Americans will remain un- or underemployed. Many Americans already have a tenuous hold on their standing in the middle class; millions more will fall out of it if the Fed doesn’t do more.

Here are the projections in graph form that the Fed released today. There’s obviously a considerable range of uncertainty in these forecasts, in part because of the potential catastrophe in Europe and other external events, but note that the best case scenarios are weak. To a large extent, these weak forecasts are still rooted in the housing crisis, which I last discussed at length here.

From the Fed:

And those projections in table form:

So absent Fed action, the best estimates right now are for GDP growth to remain below 3% into 2014 and for the unemployment rate to stay above 7% into 2015.

The Federal Reserve has a dual mandate: to control inflation and to maximize employment. Both those goals are currently significantly below the Fed’s targets.

Check out Calculated Risk for a broader discussion and additional links. He expects QE3 to be announced on August 1.

But home prices are just part of the much bigger story of housing’s importance to the economy.

New residential investment is typically a driver out of recession, but our recent deep recession and financial crisis were largely due to excessive housing speculation and construction. Since there was simply no way that housing could drive us out of this recession, there was never really any doubt that the current recovery would be slow, choppy, and ugly — no matter what moves public officials made.

Armstrong economics professor Nicholas Mangee covers a lot of this ground — and more — in his dense Savannah Morning News column today: Our economic times: The persistent impact of the housing market on the economy and jobs

From the column:

How does a persistently poor housing market impact jobs prospects? With downward pressure on prices, many families unwilling to take a capital loss on selling may become tied to their properties. Such immobility in the labor market shrinks the pool of workers available for job opportunities, hindering the ability to match job and skill set.

Moreover, residential investment may impact the labor market through two channels. The direct channel affects construction, engineering and real estate agency jobs. The indirect channel affects all those secondary firms manufacturing the intermediary goods used to produce the homes. The extent to which the latter is affected by a fall in residential investment is particularly difficult to assess.

Thus, a fall in the housing market may have a whirlwind influence in dampening the labor market and economic growth.

Take a look at the following graph from Calculated Risk, which shows residential investment as a percentage of GDP going back to 1947. Note how rarely and briefly it even fell below 4%. In this downturn, the percentage has fallen from over 6% to nearly 2%.

There are no easy fixes for this.

Sure, there are some things that might have helped:

• Some of the mortgage modification programs could have been more streamlined and pushed more aggressively a couple of years ago.
• We could have abandoned the vanity of the homebuyer tax credits, which had no other real effect than to drag out the price bottoming process for at least a year.
• We could have tried to create incentives for faster household creation.
• The Fed could be spending more time worrying about employment than inflation (it’s clear which half of its dual mandate it has been most concerned about).

But at the end of the day, even if every possible policy move had been implemented perfectly, it’s likely we’d be in only slightly better shape than we are now in terms of housing and in terms of the broader economy.

The logic of that assumption was always pretty meager. How would widespread layoffs of teachers, public safety personnel, and road crews become an impetus for private sector activity?

Armstrong economics professor Nicholas Mangee tackled this issue of austerity in his recent Savannah Morning News column: Our economic times: The fanciful world of expansionary austerity

He notes the ample evidence that sudden contractions in government spending do not spur growth — rather the opposite.

From Mangee’s column: Decades of experience suggest that painful economic contractions are only amplified when expenditures diminish within an economy regardless of which sector the cuts are being drawn from.

An example:

One need only look across the Atlantic for the most recent evidence on the importance of timing in policy implementation. Portugal, for instance, has found itself in a most precarious debt position even after obediently complying with the European Central Bankâ€s austerity measures. Why? Because the measures have deprived their economy of growth and, in turn, decreased gross domestic product.

When GDP falls, a countryâ€s debt-to-GDP ratio (the bellwether for a countryâ€s fiscal health) rises. Sadly, a similar story could be told for other EU members as the regionâ€s unemployment rate has just reached 10.8 percent with Spainâ€s rate climbing over 23 percent.

He also notes that there are clear advantages to reducing debt, if the timing is right: “Reeling in a countryâ€s debt is critical to its long-term growth prospects. But most economists understand the best time to do so is on an economic upswing.”

We should never have embraced policies during the Bush presidency that caused the yearly deficits and total debt to climb dramatically.

Mangee’s columns will be appearing every other Wednesday in the Savannah Morning News. It’s going to be good to have a regular dose of fact-based economic analysis in the local paper.