Blog Posts by Daniel Gross

In the 1990s, when both men were members of the Princeton University economics department, Paul Krugman and Ben Bernanke would frequently discuss monetary policy in Fisher Hall. Now, the two economists debate issues surrounding growth, inflation, and the mission of the Federal Reserve, in much larger rooms. In his New York Times columns, media appearances, and in his new book, End This Depression Now, Krugman has criticized Bernanke's Fed for not doing enough to spur economic growth and reduce unemployment. In his press conference last week, without naming names, Bernanke punched back at some of Krugman's specific criticisms.

Bernanke has yet to accept our invitation to join the Daily Ticker for an exclusive interview. But Krugman came by our New York studio to discuss his new book, the economy, and his former Princeton colleague.

Krugman has persistently argued that the Federal Reserve should come out and say it would be willing to tolerate slightly higher inflation than we have now as a way of goosing the economy. Bernanke disagrees. Back in the 1990s, Krugman argues, "Ben Bernanke was on my side. So he's flipped and has become a conventional central banker. He's saying that aggressive measures to boost the economy and in particular raising the inflation target a little bit, which a lot of us think is the most effective thing for the Fed to do, would be imprudent and risky." Krugman notes that Bernanke had criticized Japan for not taking such efforts to combat its economic malaise in the past. As well, he notes, "it's a really odd thing to be deeply worried that we might have inflation as high as it was in Ronald Reagan's second term, as opposed to having the highest level of long-term unemployment we've had since the 1930s."

Krugman notes that the hyperinflation that critics warned would materialize as a result of the Fed's aggressive monetary policies of 2008 and 2009 hasn't come to pass. He points to the Consumer Price Index, which has risen 2.7 percent in the past 12 months, and to other measures such as M.I.T.'s Billion Price Index.

The perpetual discussion about the ongoing battle between rich and poor, between the one percent and the ninety-nine percent, has generated a great deal of heat, but not much light. With The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It, New Republic columnist Timothy Noah brings a well-reasoned array of high-wattage spotlights.

Noah, who joined Henry Blodget and me this morning to discuss his book, traces the history of income inequality and synthesized much of the academic research on the topic into a highly readable extended essay. And the news isn't great. "There are various ways to measure income distribution, and by all of them the United States ranks at or near the bottom in terms of equality."

The data — and our personal experiences — tend to tell a widely accepted story. Between 1950 and 1980, a period economists call "the Great Compression," income inequality tended to decline. The rising tide of American economic growth lifted all boats, and people at the bottom and middle runs of the income ladders enjoyed rising incomes and standards of living. But starting in about 1980, the period of "The Great Divergence," began to change.

Noah runs through the various explanations that pundits, economists and polemicists have put forward to account for the fact that the very rich have been getting richer while the poor, middle-class, and upper-middle-class struggle. He rules out some of the usual suspects. "The Great Divergence did not result from societal prejudice against women or blacks," he writes. The influx of low-skilled immigrants has played a role in undermining wages and benefits at the bottom of the income scale. But, as Noah notes, while immigration "has helped create income inequality during the past three decades, it isn't the star of the show."

To the rich and growing literature of American decline we must add, Time to Start Thinking: America in the Age of Descent, by Edward Luce. Luce, the chief U.S. columnist for the Financial Times, is British but has spent many years in the U.S. (He wrote speeches for then-Treasury Secretary Larry Summers in the late 1990s.) Like a modern day De Tocqueville, Luce took some time off to travel around the U.S. for several months. And what he saw left him profoundly concerned for the future.

He saw a middle-class being hollowed out, declines in once-great cities like Detroit, the loss of manufacturing jobs, busted education systems, and a political system paralyzed by bitter partisanship and an inability to get things done. While not predicting America's collapse, Luce is "skeptical about America's ability to sharply reverse her fortunes."

It's ironic that Luce shares a last name with the one of the great champions of America's future—Time, Inc. founder Henry Luce. That Luce famously proclaimed that the 20 century would be an "American century." By contrast, Edward Luce has a tough time imagining how the 21st century will be kind to the United States. Luce doesn't believe the U.S. is going to pitch into a prolonged depression now. Rather, he sees the U.S. falling behind international competitors on a relative basis.

We must examine America's plight "in the context of the rise of others, and of the challenges posed by rapidly exponentially changing technology and globalization, and the challenges they pose to the middle class and their relative skill set in this world," Luce says.

Give me your tired, your poor, your huddled masses seeking . . . to buy luxury goods?

Yes.

One of the big themes of the past few years has been the influx of foreigners investing and spending in the U.S. As more people around the world grow wealthy, they want to live, eat, and shop like Americans. Brazilians have been snapping up condos in Miami while Russian oligarchs are falling over themselves to purchase trophy Manhattan real estate.

Luxury retailers like Saks are big beneficiaries of this trend. Saks doesn't have much of an international presence -- it has only four licensed stores outside the U.S., compared with 45 at home. But as Saks CEO Stephen Sadove tells me in the accompanying video, foreign shoppers are keeping the registers at Saks humming — and have the potential to do much more.

The flagship Saks store in midtown Manhattan sits just across the street from Rockefeller Center, a tourist mecca. In 2010, New York City welcomed — or didn't welcome, as the case may be — 48.8 million visitors, of which 9.7 million, or 20 percent, came from abroad. As a result, foreign tourists can account for up to 20 percent of sales at Saks' New York outlet. Beyond New York, foreign shoppers are a significant force in gateway cities like Miami and Los Angeles. "We have core Canadian and European customers that come into Saks. When we had the very weak dollar back in 2007 for example, you saw the empty suitcases coming into the store," said Sadove. "Today we have an influx of Russians and Brazilians, and the Chinese tourists are really starting to pick up." (Here's a two-year chart of Saks's stock)