Hamilton and Wu: The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound...: http://tinyurl.com/276upwg #worthreading
Ricardo Caballero: A helicopter drop for the Treasury: http://tinyurl.com/23pnunc #worthreading
Maxine Udall: Genetic Information, Health Insurance, and "Socialized Medicine": http://tinyurl.com/24pyowu #worthreading
Carmen and Vince Reinhart: Beware those who think the worst is past: http://tinyurl.com/2dhfr48 #worthreading
Obama was too cautious in fearful times: Suppose that the US presidential election of 1932 had, in fact, taken place in 1930, at an early stage in the Great Depression. Suppose, too, that Franklin Delano Roosevelt had won then, though not by the landslide of 1932. How different subsequent events might have been. The president might have watched helplessly as output and employment collapsed. The decades of Democratic dominance might not have happened.
On such chances the wheel of history turns. But this time was different: the crisis brought Barack Obama to power close to the beginning of the economic collapse. I (among others) then argued that policy needed to be hugely aggressive. Alas, it was not. I noted on February 4 2009, at the beginning of the new presidency: “Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused.” A week later, I asked: “Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much.” This was right.
The direction of policy was not wrong: policymakers – though not all economists – had learnt a great deal from the 1930s. Sensible people knew that aggressive monetary and fiscal expansion was needed, together with reconstruction of the financial sector.
But, as Larry Summers, Mr Obama’s chief economic adviser, had said: “When markets overshoot, policymakers must overshoot too”. Unfortunately, the administration failed to follow his excellent advice. This has allowed opponents to claim that policy has been ineffective when it has merely been inadequate. In consequence, the administration has lost credibility with the public and the chances of a renewed fiscal expansion have disappeared. With the Federal Reserve cautious, too, the likelihood of a lengthy period of weak growth and heavy joblessness is high. So, too, are the chances of domestic and global political friction.
True, the idea that the policies adopted in the last few months of the Bush administration and the first months of this one were far better than nothing is weirdly controversial in the US. A recent paper by Alan Blinder, former vice-chairman of the Fed, and Mark Zandi of Moody’s argues that such critics are wrong....
A fascinating perspective does come, however, from comparisons with what happened in other advanced countries. The recession in US output (and so demand) has been relatively small, but the decline in employment has been exceptionally large, as a result of an extraordinary surge in US productivity (see charts). This contrast between what would happen to output and what would happen to employment was missed in the initial Congressional Budget Office analysis of the stimulus....
Debate is emerging on how much of the surge in unemployment is structural. My answer, from European experience, is that one way to ensure it becomes structural is to let it linger. In the short run, the simplest way to prevent that from happening is to expand demand and so output. Since there is huge slack in the labour market, not the slightest threat of inflation – far more a risk of deflation – and no constraint from bond or foreign exchange markets on further monetary and fiscal stimulus, these are the policies that have to be pursued. Yet, alas, the Fed seems to have decided to fall asleep and the administration has lost the initiative.
So what is going to happen? I assume that, after the midterm elections, resurgent Republicans will offer new tax cuts and ignore the fiscal deficits. They will pretend that this has nothing to do with any reviled stimulus, though it is much the same thing – increasing fiscal deficits, thereby offsetting private frugality. That would put the administration on the spot. It would have to choose between vetoing the tax cuts and accepting them, so allowing the Republicans to get the credit for their “yacht and mansion-led” recovery. Any recovery is better than none. But it could have been much better than this. Those who were cautious when they should have been bold will pay a big price.
Oooh boy. You couldn't make this up:
Daily Kos: Simpson to disabled vets: You cost too much: Joan McCarter: Fresh off of being forgiven by the White House, Simpson has a new target.
RALEIGH, N.C.—The system that automatically awards disability benefits to some veterans because of concerns about Agent Orange seems contrary to efforts to control federal spending, the Republican co-chairman of President Barack Obama's deficit commission said Tuesday.
Former Wyoming Sen. Alan Simpson's comments came a day after The Associated Press reported that diabetes has become the most frequently compensated ailment among Vietnam veterans, even though decades of research has failed to find more than a possible link between the defoliant Agent Orange and diabetes.
"The irony (is) that the veterans who saved this country are now, in a way, not helping us to save the country in this fiscal mess," said Simpson, an Army veteran who was once chairman of the Senate Veterans' Affairs Committee....
"It's the kind of thing that's just driving us to this $1 trillion, $400 billion deficit this year," Simpson said. "It's not that I'm an uncaring person, but common sense is the most uncommon thing in Washington."
Paying for disabled veterans as the place to economize... we cover 9 million people by spending $50 billion a year on the VHA. That's 1/8 of the cost of the Bush tax cuts. That's 1/28 of this year's federal deficit.
What a tool...
Right-wing drivel is fine: if it did not contain right-wing drivel, it would not be the Economist:
But quality right-wing drivel, please! Free Exchange is, right now, a very good brand: don't ruin it!
Seriously: these may be the two most pig-ignorant paragaphs ever published by the Economist:
[S]tart-ups keep the economy dynamic, competitive, and innovative. But they are also a primary engine of job creation, and not just in Silicon Valley. This suggests there is scope for policy to support these ventures. Start-ups may lead to lots of job creation, but also to job destruction because they often go bust. Some start-ups need to fail, but many others do not expand due to their limited access to capital. Poor information on small, new firms means that credit is more expensive and less available compared to larger, older firms.
Or, if the government really wanted to spur small firm hiring it could tackle health care costs. Providing benefits to employees is getting increasingly expensive—especially for small firms who face relatively large administrative costs and a smaller pool of workers (driving up premiums). This may depress the ability of a small, new businesses to hire new people (or at least hire full time staff instead of contractors). Perhaps the new health care legislation will ease the burden small firms bear providing benefits, but I doubt it. It’s too soon to tell, but I suspect the law may have made the problem worse...
They give me the sinking feeling that the author has no clue about what U.S. policy is--neither policy toward start-ups, nor policy toward health care.
The Varieties of Unemployment - Project Syndicate: BERKELEY – We hear from surprisingly many quarters these days that governments in Europe and North America, and their central banks, should give up on the expansionary policies they have pursued to try to create jobs. The high unemployment currently afflicting the North Atlantic, critics of government stimulus maintain, is not cyclical but “structural,” and thus cannot be alleviated by policies that boost aggregate demand.
Let me be the first to say that structural unemployment is a true and severe danger. When people who in other circumstances could be happy, healthy, and productive members of the workforce but lack the skills, confidence, social networks, and experience needed to find work worth paying for, we obviously have a problem. And if unemployment in Europe and North America stays elevated for two or three more years, it is highly likely that we will have to face it. For nothing converts cyclical unemployment into structural unemployment more certainly than prolonged unemployment.
But is that true today? Does it look right now as if the biggest problem facing the economies of Europe and North America is structural unemployment? It does not.
Let us remember what structural unemployment looks like. The economy is depressed and unemployment is high not because of slack aggregate demand generated by a collapse in spending, but instead because “structural” factors have produced a mismatch between the skills of the labor force and the distribution of demand. The structure of demand by consumers is different from the jobs that workers are capable of filling.
For example, suppose that you have many workers qualified and skilled to work in construction, but households have decided that their houses are more than large enough, and wish to fill them with manufactured goods. This would produce structural unemployment to the extent that the ex-construction workers could not do things in manufacturing that would make it worthwhile for manufacturing firms to hire them.
In that case, we would expect to see construction depressed: firms closed, capital goods idle, and workers unemployed. But we would also expect to see manufacturing plants running at double shifts – the money not spent on construction has to go somewhere, and, remember, the problem is not a lack of aggregate demand. We would expect to see manufacturers holding job fairs, and when not enough workers showed up, we would expect to see manufacturers offering higher wages to attract workers into their plants, and then raising prices to cover their higher costs.
The size and duration of the excess unemployment of ex-construction workers might be substantial and long lasting. It might require significant time to retrain construction workers and plug them into social networks in which they become good manufacturing workers. We might see prolonged and high unemployment in the construction sector, and in regions that had seen the biggest previous construction booms.
But depression in the construction sector and unemployment among its ex-workers would be balanced by exuberance in the manufacturing sector, rising prices for manufactured goods, and long hours and high wages for manufacturing workers
That is what “mismatch” structural unemployment looks like – and it is not what we have today, at least not in Europe and North America. In the past three years, employment in construction has shrunk, but so has employment in manufacturing, wholesale trade, retail trade, transportation and warehousing, information distribution and communications, professional and business services, educational services, leisure and hospitality, and in the public sector. Employment is up in health care, Internet-related businesses, and perhaps in logging and mining.
In the United States, the past three years have seen employment fall from 137.8 million people in July 2007 to slightly less than 130 million in July 2010 – a decline of 7.9 million during a period in which the adult population grew by six million. What we have witnessed is not a shift in demand into sectors lacking an adequate number of qualified and productive workers, but rather a collapse in the level of aggregate demand.
This may well look like structural unemployment in three years. In three years, we may well see labor shortages, rising wages, and increasing prices in expanding sectors, accompanied by high unemployment elsewhere in the economy.
But that is not our problem now. Sufficient unto the day is the evil thereof.
Bring your genes to Brandeis « The Berkeley Blog: I was going to write another post about how increasing genetic knowledge ought to push us toward something like single-payer health care, but Bill Hoffman of the University of Minnesota reminds me that my friend Steve Cecchetti at Brandeis wrote it three years ago–and wrote it better than my draft post.
So I am canning my draft post, and turning the microphone over to Steve Cecchetti of Brandeis:
The inevitable future of health care: Economists believe in markets. Market-determined prices allocate scarce resources efficiently, encouraging individuals to put them to their best possible uses. This improves everyone’s welfare. But there are times when private markets break down, and insurance is one of them. When markets fail, the government inevitably has to step in and provide insurance. That’s the case with deposit insurance as well as with insurance against the devastation from natural disasters.
The future is one in which health care will fall into this same category. Even in countries like the United States, the government, not the market, will ultimately control the level and cost of the medical care we will receive. A single-payer, publicly run, health-care system is the inevitable consequence of the nearly continuous scientific revolution in molecular genetics that began a half century ago. One day it is James Watson, one of the discoverers of the structure of DNA, being handed the complete genetic code inside his own cells. The next day, researchers tie yet another chronic disease to the presence of specific patterns on individual chromosomes. And then, a few days after that, we learn that scientists are learning to make stem cells from skin cells. The time is fast approaching when we will have an inexpensive test that is capable of revealing a person’s genetic propensity to contract a broad array of chronic diseases. That means that we will be able to accurately assess the cost of medical treatment over their lifetime….
I am not anxious to learn about my genetic predisposition to develop Alzheimer’s disease or my propensity to contract heart disease or type 2 diabetes…. [But there will be] the medical equivalent of my credit score – call this my “health score”… [to] summarise my overall health-care risks…. The fact that we will all have health scores has profound implications for… the failure of market-based insurance…. [When] private insurers can accurately compute customer premiums to reflect expected future payouts… insurance market will break down. Insurance is about shifting risk…. When either the insurer or the insured can forecast… and accurately distinguish… insurance disappears….
When it comes to housing, cars, vacations, and the like, we are fairly tolerant of disparities between rich and poor. Our focus is on equal opportunities, not equal outcomes…. Not so for health care. Members of wealthy societies share the view that their members are entitled to high-quality medical care. Social justice demands that the rich and poor among all of us receive roughly comparable treatment…. [T]echnology will force private health insurance to disappear at the same time that the social pressure to provide equal access to care will remain. This makes it inevitable that health care systems everywhere will provide universal coverage and be publicly run. Governments will replace markets, insuring that the poor and uninsurable receive medical treatment at the same time that the healthy are forced to participate in a comprehensive system…. I’m off to my wine cellar to ponder the best way to design a publicly run, single-payer health care system.
My reading is a lot of FOMC members detached from reality, not enough serious macroeconomists in the room to dominate the discussion, and Bernanke trying to create a consensus.
Tim Duy is much harsher:
No Clothes - Tim Duy's Fed Watch: Rereading Federal Reserve Chairman Ben Bernanke's recent speech and measuring it against the incoming data leaves me with a pit in my stomach. I sense Bernanke reveals in this speech he is the proverbial emperor without clothes, short on policy options but long on hope. A last ditch attempt to persuade us that as long as we don't believe deflation will be a problem, it will not be a problem. But he faces the same challenge as did then President Gerald Ford. All hat and no cattle. You need to be ready to back up your talk with credible policy options. While Bernanke outlined possible policy options, reading between the lines makes clear he lacks conviction in the viability of any of those options. Simply put, Bernanke is not ready to embrace the paradigm shift bold action requires....
When Bernanke expresses concern for the near term pace of economic growth, he is concerned with failing to track the current path of economic activity, as illustrated by the path of consumption since July of last year. This already is a substantial lowering of the bar, and appears to be a resignation that previous trends are unattainable. That is a problem in many respects, the most important of which is that previous trends were consistent with full employment. The failure to acknowledge the importance of re-achieving the previous path is, in my opinion, an admission of the willingness to accept a protracted period of high unemployment. This, of course, has been essentially admitted by Bernanke:
Although output growth should be stronger next year, resource slack and unemployment seem likely to decline only slowly. The prospect of high unemployment for a long period of time remains a central concern of policy. Not only does high unemployment, particularly long-term unemployment, impose heavy costs on the unemployed and their families and on society, but it also poses risks to the sustainability of the recovery itself through its effects on households' incomes and confidence.
As I have already commented, if unemployment is a concern, and there is no conflict between the Fed's dual mandate, then why is the Fed waiting for further evidence of disinflation before acting?...
Carmen and Vince Reinhart:
Beware those who think the worst is past: Ben Bernanke, chairman of the Federal Reserve, painted a sober but reassuring picture of US prospects.... Such optimism, however, may be premature. We have analysed data on numerous severe economic dislocations over the past three-quarters of a century; a record of misfortune including 15 severe post-second world war crises, the Great Depression and the 1973-74 oil shock. The result is a bracing warning that the future is likely to bring only hard choices.... [G]ross domestic product growth tends to be much lower during the decade following crises. Unemployment rates are higher, with the most extreme increases in the most advanced economies that experienced a crisis. In 10 of the 15 episodes we studied, unemployment never fell back to its pre-crisis level, not in the following decade.... [L]arge destabilising economic events produce big changes in long-term indicators, well after the upheaval of the crisis. Up to now we have been traversing the tracks of prior crises. But if we continue as others have before, the need to deleverage will dampen employment and growth for some time to come....
[A]t Jackson Hole, policymakers debated whether further measures to stimulate demand were needed. History shows that today’s problems could certainly materialise as a consequence of the failure to provide sufficient economic stimulus.... However, it is also possible that economic contraction and a slow recovery can dent aggregate supply... a sustained stretch of below-trend investment... hits the level and growth rate of potential output... unemployment rate stays high because it has been high....
[T]he bigger worry remains the assumption that dust has begun to settle; that the shock from the crisis is temporary, when it is likely to be deep and persistent. Today, as in the past, over-optimistic fiscal authorities are over-estimating tax revenues. Financial supervisors want to believe that troubled banks are temporarily illiquid, not permanently insolvent...
@delong You have a dropped blockquote in the Whelan post... http://delong.typepad.com/sdj/2010/08/the-irish-model.html – Mark Thoma (MarkThoma) http://twitter.com/MarkThoma/statuses/22580594258
Mike Konczal: Government Regulation and the Financial Crisis: http://tinyurl.com/2cqc6gc #worthreading
Mike Konczal: 15 years of Cato Financial Deregulation: http://tinyurl.com/2bdk7fz #worthreading
The DeLong Daily http://paper.li/delong #worthreading
Evans, Guse, and Honkapohja (2008), Liquidity Traps, Learning and Stagnation: http://tinyurl.com/2evoo3k #worthreading
Notes: Keynes on Trotsky: : Review of Trotsky On England (Where is Britain Going?), by John Maynard Keynes. From John Maynard Keynes (1933), Essays in Biography (London: Harcourt, Brace).
A CONTEMPORARY reviewing this book says: "He stammers out platitudes in the voice of a phonograph with a scratched record." I should guess that Trotsky dictated it. In its English dress it emerges in a turbid stream with a hectoring gurgle which is characteristic of modern revolutionary literature translated from the Russian. Its dogmatic tone about our affairs, where even the author's flashes of insight are clouded by his inevitable ignorance of what he is talking about, cannot commend it to an English reader. Yet there is a certain style about Trotsky. A personality is visible through the distorting medium. And it is not all platitudes.
The book is, first of all, an attack on the official leaders of the British Labour Party because of their "religiosity", and because they believe that it is useful to prepare for Socialism without preparing for Revolution at the same time. Trotsky sees, what is probably true, that our Labour Party is the direct offspring of the Radical Non-conformists and the philanthropic bourgeois, without a tinge atheism, blood, and revolution. Emotionally and intellectually, therefore, he finds them intensely unsympathetic. A short anthology will exhibit his state of mind:
The doctrine of the leaders of the Labour Party is a kind of amalgam of Conservatism and Liberalism partially adapted to the needs of trade unions ... The Liberal and semi-liberal leaders of the Labour Party still think that the social revolution is the mournful privilege of the European Continent.
"In the realm of feeling and conscience," MacDonald begins, "in the realm of spirit, Socialism forms the religion of service to the people." In those words is immediately betrayed the benevolent bourgeois, the left Liberal, who "serves" the people, coming to them from one side, or more truly from above. Such an approach has its roots entirely in the dim past, when the radical intelligentsia went to live in the working-class districts of London in order to carry on cultural and educational work.
Together with theological literature, Fabianism is perhaps the most useless, and in any case the most boring form of verbal creation ... The cheaply optimistic Victorian epoch, when it seemed that to-morrow would be a little better than to-day, and the day after to-morrow still better than to-morrow, found its most finished expression in the Webbs, Snowden, MacDonald and other Fabians ... These bombastic authorities, pedants, arrogant and ranting poltroons, systematically poison the Labour Movement, befog the consciousness of the proletariat, and paralyse its will ... The Fabians, the I.L.P.ers, the Conservative bureaucrats of the trade unions represent at the moment the most counter-revolutionary force in Great Britain, and perhaps of all the world's development ... Fabianism, MacDonaldism, Pacifism, is the chief rallying-point of British imperialism and of the European, if not the world, bourgeoisie. At any cost, these self-satisfied pedants, these gabbling eclectics, these sentimental careerists, these upstart liveried lackeys of the bourgeoisie, must be shown in their natural form to the workers. To reveal them as they are will mean their hopeless discrediting.
Well, that is how the gentlemen who so much alarm Mr. Winston Churchill strike the real article. And we must hope that the real article, having got it off his chest, feels better. How few words need changing, let the reader note, to permit the attribution of my anthology to the philo-fisticuffs of the Right. And the reason for this similarity is evident. Trotsky is concerned in these passages with an attitude towards public affairs, not with ultimate aims. He is just exhibiting the temper of the band of brigand-statesmen to whom Action means War, and who are irritated to fury by the atmosphere of sweet reasonableness, of charity, tolerance, and mercy in which, though the wind whistles in the East or in the South, Mr. Baldwin and Lord Oxford and Mr. MacDonald smoke the pipe of peace. "They smoke Peace where there should be no Peace," Fascists and Bolshevists cry in a chorus, "canting, imbecile emblems of decay, senility, and death, the antithesis of Life and the Life-Force which exist only in the spirit of merciless struggle." If only it was so easy! If only one could accomplish by roaring, whether roaring like a lion or like any sucking dove!
The roaring occupies the first half of Trotsky's book. The second half, which affords a summary exposition of his political philosophy, deserves a closer attention.
First proposition. The historical process necessitates the change-over to Socialism if civilisation is to be preserved. "Without a transfer to Socialism all our culture is threatened with decay and decomposition."
Second proposition. It is unthinkable that this change-over can come about by peaceful argument and voluntary surrender. Except in response to force, the possessing classes will surrender nothing. The strike is already a resort to force. "The class struggle is a continual sequence of open or masked forces, which are regulated in more or less degree by the State, which in turn represents the organised apparatus of force of the stronger of the antagonists, in other words, the ruling class." The hypothesis that the Labour Party will come into power by constitutional methods and will then "proceed to the business so cautiously, so tactfully, so intelligently, that the bourgeoisie will not feel any need for active opposition," is "facetious" though this "is indeed the very rock-bottom hope of MacDonald and company."
Third proposition. Even if, sooner or later, the Labour Party achieve power by constitutional methods, the reactionary parties will at once Proceed to Force. The possessing classes will do lip-service to parliamentary methods so long as they are in control of the parliamentary machine, but if they are dislodged, then, Trotsky maintains, it is absurd to suppose that they will prove squeamish about a resort to force on their side. Suppose, he says, that a Labour majority in Parliament were to decide in the most legal fashion to confiscate the land without compensation, to put a heavy tax on capital, and to abolish the Crown and the House of Lords, "there cannot be the least doubt that the possessing classes will not submit without a struggle, the more so as all the police, judiciary, and military apparatus is entirely in their hands." Moreover, they control the banks and the whole system of social credit and the machinery of transport and trade, so that the daily food of London, including that of the Labour Government itself, depends on the great capitalist combines. It is obvious, Trotsky argues, that these terrific means of pressure "will be brought into action with frantic violence in order to dam the activity of the Labour Government, to paralyse its exertions, to frighten it, to effect cleavages in its parliamentary majority, and, finally, to cause a financial panic; provision difficulties, and lock-outs." To suppose, indeed, that the destiny of Society is going to be determined by whether Labour achieves a parliamentary majority and not by the actual balance of material forces at the moment is an "enslavement to the fetishism of parliamentary arithmetic."
Fourth proposition. In view of all this, whilst it may be good strategy to aim also at constitutional power, it is silly not to organise on the basis that material force will be the determining factor in the end.
In the revolutionary struggle only the greatest determination is of avail to strike the arms out of the hands of reaction to limit the period of civil war, and to lessen the number of its victims. If this course be not taken it is better not to take to arms at all. If arms are not resorted to, it is impossible to organise a general strike; if the general strike is renounced, there can be no thought of any serious struggle.
Granted his assumptions, much of Trotsky's argument is, I think, unanswerable. Nothing can be sillier than to play at revolution if that is what he means. But what are his assumptions? He assumes that the moral and intellectual problems of the transformation of Society have been already solved--that a plan exists, and that nothing remains except to put it into operation. He assumes further that Society is divided into two parts the proletariat who are converted to the plan, and the rest who for purely selfish reasons oppose it. He does not understand that no plan could win until it had first convinced many people, and that, if there really were a plan, it would draw support from many different quarters. He is so much occupied with means that he forgets to tell us what it is all for. If we pressed him, I suppose he would mention Marx. And there we will leave him with an echo of his own words "together with theological literature, perhaps the most useless, and in any case the most boring form of verbal creation."
Trotsky's book must confirm us in our conviction of the uselessness, the empty-headedness of Force at the present stage of human affairs. Force would settle nothing no more in the Class War than in the Wars of Nations or in the Wars of Religion. An understanding of the historical process, to which Trotsky is so fond of appealing, declares not for, but against, Force at this juncture of things. We lack more than usual a coherent scheme of progress, a tangible ideal. All the political parties alike have their origins in past ideas and not in new ideas and none more conspicuously so than the Marxists. It is not necessary to debate the subtleties of what justifies a man in promoting his gospel by force; for no one has a gospel. The next move is with the head, and fists must wait.
The Enduring Influence of Ireland’s 1987 Adjustment: When I was a junior economist in short trousers, the first research I ever did was inspired by Ireland’s successful 1987-89 fiscal adjustment. Many international researchers looked at Ireland and decided that our successful adjustment stemmed from consumers stepping into the breach filled by the government spending cuts. The story was that increased consumer confidence, fueled by expectations of lower future taxes, was the key to the recovery.
From the research I did on this topic (both on my own and with John Bradley) I came away fairly convinced that this was not what had happened. Rather, the 1987 boom seemed to be fueled more by strong exports to the UK thanks to Nigel Lawson’s tax cutting exercise.
However, Ireland’s 1987 experience continues to pop up in discussions of fiscal austerity. I have to admit that I’ve not been too impressed by Alberto Alesina’s work (here and here) on how fiscal adjustment can be expansionary—work that has had a lot of influence this year. Well, sure enough, Paul Krugman now cites work from Arjun Jayadev and Mike Konczal showing that the only country that ever cut its way to growth in a slump was, you guessed it, Ireland in 1987. The power of this datapoint endures.
Matthew Yglesias's take::
Remainders: Bernanke’s Speech: Remainders: Taken literally, I don’t think Ben Bernanke’s speech last week made any sense at all. He described a hypothetical future situation in which the inflation rate gets lower and employment growth continues to be unsatisfactory. He said that in such a situation the Federal Reserve would attempt to increase aggregate demand and that he believed it would be successful in doing so. So far so good. He also said that currently the inflation rate is below what he regards as optimal and that currently real output is below what it could be. Given Bernanke’s stated belief in the possibility and desirability of monetary action to raise aggregate demand in the hypothetical scenario and his description of the current scenario, it’s clear that the Fed should act now to raise aggregate demand.
But it’s not going to happen.
I think the most reasonable way to read the speech is non-literally.
Several FOMC members and Regional Fed Presidents who aren’t currently voting FOMC members are clearly agitating for tighter policy or, at a minimum, the status quo. The speech is incoherent because the Chairman is trying to put together a consensus that papers over existing divides. One can’t know for sure if current policy would be different if the Obama administration has acted more expeditiously to fill the still-extant Fed vacancies, but it seems plausible that it could be. I doubt that any political reporters in America are going to put “failure to prioritize Federal Reserve vacancies” high on their list of post-election “why the Democrats lost so many seats” articles, but the issue deserves very high placement in my view.
Munchau On Germany: Munchau On Germany Wolfgang Munchau has some not-so-nice things to say about the German economic situation. He notes that so far, at least, Germany’s growth simply reflects recovery from an unusually deep slump: “So far, this looks like classic dead-cat bounce.” He also stresses the role of German undervaluation; this is a big problem, and I agree that it’s at the heart of the eurozone’s troubles.
Also today: Clive Crook says sensible things about monetary and fiscal policy. They’re more or less the same things he has spent months trashing me for saying, but I welcome him back to the light.
A spokesman who cannot stay on message is no good at all.
The message wasn't "nobodycoudanoed we needed a bigger stimulus": it was (a) Congress would not go for a bigger stimulus, and (b) the federal government's capacity to ramp up its spending was limited, so (c) fiscal stimulus functioned as an insurance policy, and (d) the Fed and the Treasury could also swing into action to stimulate the economy.
That Gibbs is now saying "nobodycoudanoed" is off message, and profoundly unhelpful.
BooMan sends us to:
Booman Tribune ~ A Progressive Community: Asked if the stimulus bill was too small, [White House press secretary Robert] Gibbs says: "I think it makes sense to step back just for a second. ... Nobody had, in January of 2009, a sufficient grasp of ... what we were facing." He adds that any stimulus was "unlikely to fill" the hole the financial meltdown created. "What the Recovery Act did was prevent us from sliding even into a deeper recession with greater economic contraction, with greater job loss than we have experienced because of it," he says.
Wrong Answer. This is not good enough:
This answer has the dubious distinction of being erroneous and stupid. Plenty of people had a sufficient grasp of the situation to recommend a much bigger stimulus bill. The no one could have predicted line of argument is not a political winner under any circumstances but it really stinks when it isn't true.
Now, the best answer here may not have been the most truthful one, which is that Congress wasn't offering a significantly bigger stimulus, but it is now clear that it is not going to be enough to significantly bring down high unemployment. Rather than looking helpless, the administration should just start making the argument that we have a choice between prolonged high unemployment or another big stimulus package. Make the election a referendum on that choice.
Setting aside that his delivery was uncharacteristically terrible, the president's statement on the economy today was pretty pathetic.
This ain't getting it done on any level.
And we all remember Ryan Lizza:
Ryan Lizza: Perhaps nobody’s task was more important than Romer’s. She had drafted a crucial section of the memo which included an economic forecast and projections about the impact of a fiscal stimulus.... At the December meeting, it was Romer’s job to explain just how bad the economy was likely to get. “David Axelrod said we have to have a ‘holy-shit moment,’” she began. “Well, Mr. President, this is your ‘holy-shit moment.’ It’s worse than we thought.”... Axelrod told me, “The basic message was that, if we didn’t act quickly to replace the output we were losing, unemployment could skyrocket.” Romer mentioned that employers had dropped more than half a million workers from the payrolls in November, the biggest cut in more than three decades. “The conditions are grim, and deteriorating rapidly,” she told the President.
The most important question facing Obama that day was how large the stimulus should be.... Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010.... Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus....
There were sound arguments why the $1.2-trillion figure was too high. First, Emanuel and the legislative-affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.” He pointed east, toward Capitol Hill. “And the world was watching us, the market was watching us. If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.”
There was also a mechanical argument against a stimulus of that size. Peter Orszag, who was celebrating his fortieth birthday that day, said that, while the argument for a bigger stimulus was sound theoretically, there were limits to how much money the government could practically spend in the near future...
A lecture I simply won't have time to give: the topic will have to be covered in section...
Bring Your Genes to Your Life Insurance Sales Representative « The Berkeley Blog: Put me down as one of those who was puzzled when Dean Mark Schissel said on “All Things Considered,” of the three genes to be tested in “bring your genes to Cal”:
[W]e purposefully chose three genes that are not disease associated…
People who are lactose-intolerant are more likely to develop hip fractures late in life–especially if they do not regularly take their calcium supplements. People with a low ability to metabolize alcohol are unlikely to become alcoholics–but if they do, they (at least as I read the literature) may be at greater risk of developing cirrhosis of the liver.
Pregnant women who metabolize folic acid poorly are more likely to have babies with neural tube defects like spina bifida. People with poor folic acid metabolism may be at greater risk of heart attack, stroke, and cancer. [UPDATE: This was wrong. See correction]
Now lactose-intolerance, slow alcohol metabolism, poor folic acid metabolism are not associated with any diseases that Berkeley freshmen have now: they are all healthy as horses–an amazingly fit and clean-living group. In that Dean Schissel is correct: a freshman who hits “bingo” and is lactose intolerant, cannot metabolize alcohol easily, and metabolizes folic acid poorly does not have any diseases. Today. But these genetic markers are associated with a greater likelihood to develop diseases later on. And that has implications.
The first and most important impication is that, from a public health perspective, we would very much want freshmen to bring their genes to call and find out what the tests say. Those who are or will become lactose intolerant should get in the habit of taking their calcium supplements, and taking them regularly, now. Those with low alcohol metabolism… well, there are some fraternities that I think they should definitely not join, because the long-term health dangers of high alcohol consumption may be grave. Those with poor folic acid metabolism should get in the habit of taking folic acid supplements, and get in the habit now–especially women who are thinking of becoming pregnant. Figuring out what your genetic endowment is, determining what risks and obstacles it puts in the way of your leading a long and happy life, and taking action to mitigate those risks and avoid those obstacles is a very smart thing to do.
But there is a second implication–a consequence of our highly messed-up health and insurance system.
If you ask a normal American whether those unlucky enough to get deathly ill should have to pay the full cost of their extraordinary medical treatment, he or she will say no–that that is what health insurance is for. Most of us will be lucky. Some of us will be unlucky. We should all buy insurance. That way, being unlucky in your health will not leave you broke and impoverished as well as unhealthy. That is fair.
But suppose that the “luck” is something that is inextricably a part of you–suppose that the luck is, literally, in your genes and thus part of what makes you you? Are you still unlucky if you have a hip fracture at 70 because you have been lactose-intolerant all your life because that was in the genes that your parents gave you? Or should the insurance company be allowed to say that that is not bad luck, that is who you are–and charge you a higher price for your life and Medigap insurance than it charges others?
I would say no: people who are unlucky in their genes are unlucky just as people who are unlucky in having a tree branch fall and break their leg are unlucky. In both cases we want the community to cover the cost of their treatment: it’s bad enough that they are in bad health, we don’t need to make them poor also. There are others who would say yes: that once you know that you have a good chance of developing some condition or disease it is no longer insurance, and that others who don’t run the same chance as you shouldn’t pay for treating you for something that they never had any chance of getting.
In the United States of today, the logic of the life insurance industry and of risk underwriting is pushing us toward the second answer. If some life insurance companies use genetic information–like that being tested for in “bring your genes to Cal”–to deny policies and raise rates while others do not, those life insurance companies that do not will find themselves losing money and markets and disappear. And it is conceivable in some possible futures that some insurance adjuster somewhere will deny payment because “your mother knew that she was at higher risk for a hip fracture because of her lactose intolerance, and did not disclose that to us.”
In the United States of today, however, the logic of the social insurance state–most recently the PPACA Obama health care reform bill–is to deny private insurance companies and the government of the option to treat some people differently than others, to charge some more or deny some policy coverage completely because of what is in their genes. The PPACA requires community rating: that insurers ignore what they know about how much your medical care is likely to cost because you are lactose intolerant or predisposed to hypertention or whatever.
Thus I would like to see “bring your genes to Cal” proceed along two tracks:
First, what our genetic endowment tell us about how we should, as a group and also as individuals each with our own unique genetic makeup, change our behavior to lead longer, richer, and healthier lives.
Second, what the increase in knowledge about our individual selves and our individual risks does to undermine the more general principles of social insurance–that one of the things societies do is to spread risks around, so that the unhealthy are covered by insurance and treated by doctors and so are just unhealthy, and that their ill-luck is not amplified by a system that requires that they impoverish themselves in order to get treatment or even that denies them treatment so that they die instead.
The best place to be, it seems to me, is with single-payer publicly-funded national health insurance and as much individual fine-grained information about genetic makeup and risk as we can get.
But the United States is not there. And it does not look like the United States is going there anytime soon. And as long as we are not there–as long as your life insurance company would dearly like to know how likely it is that you will fracture a hip at 70 because it might cost them money–there was going to be a tension to manage between social insurance risk-spreading on the one hand and knowledge of our genes and their effect on our destinies on the other.
So we had better get started on managing this tension.
Mark Thoma reminds me that the basic learning point is covered in his colleague George Evans's European Economic Review (2008) paper with Seppo Honkapohja and Eran Guse:
The unintended steady state, with 0 (or near 0) net interest rate and a deflation rate that satisfies the Fisher equation, is unstable under plausible learning rules -- small deviations of expectations away from this equilibrium will move the system further away, and in particular slightly more pessimistic expectations about future consumption and inflation will lead to a deflationary spiral accompanied by falling output.
The same analysis says that if you happened to be exactly at the 0 net interest rate/deflation steady state, and if the Fed raises interest rates, then that action will push the economy into a deflationary spiral, i.e. deflation will intensify and there will be further downward pressure on consumption and output.
George Evans, Eran Guse and Seppo Honkapohja (2008), "Liquidity Traps, Learning and Stagnation," European Economic Review 52,pp. 1438 – 1463.
Alan Blinder: "Now I’m looking at the political system turning itself into a paralyzed beast" http://tinyurl.com/24fuq8y #worthreading
A question from the floor:
As I understand Kocherlakota and Williamson, theyre saying that in the long run, fundamentals determine the real return, r (ie monetary neutrality). The Fed then can choose i or pi and the other is then pegged. So low interest rates lead to deflation.... I thought the Fisher equation is a (long-run) no-arbitrage condition. In that sense, theres no reason to talk about causality. We choose i or pi and the other one is set by fundamentals (ie, r) and no-arbitrage...
Yes, you are confused.
The Federal Reserve chooses pi by choosing the rate of growth of the money stock. If i is then below pi + r, you can make profits by borrowing in nominal dollars and investing in physical capital that yields the real return r. You do so. The supply of bonds goes way way up as bond issuers make money hand over first, and that enormous flood of the supply of bonds pushes the interest rate i up until it is equal to r + pi.
Now suppose the Federal Reserve sets i, and once again i is below pi plus r--i minus r is less than pi. You can still make money by issuing bonds. But when you issue bonds that has no effect on i--remember, the Fed is pegging it. So you issue more bonds. And then you take the bonds and use them to buy up factors of production in order to make more physical capital. And the increased demand for factors of production increases wages and prices, so pi rises as well. And the gap between i and r + pi is now bigger. And so you issue even more bonds.
When the Federal Reserve pegs the money stock growth rate, the arbitrage trade drives i to r + pi. When the Federal Reserve pegs the interest rate, the arbitrage trade drives pi away from i - r. In one case, arbitrage gets you to the rational expectations equilibrium. In the other case, arbitrage pushes you away from it--thus it is hard to see how you would ever get to the rational expectations equilibrium at all.
All of this is, I think, said better in Howitt (1992)...
And we have Andy Harless and Rajiv Sethi in comments:
Stephen Williamson Makes His Play for the Second Stupidest Man AliveTM Crown: Andy Harless writes:
Basically, it all depends on how pi^e (expected inflation) responds to changes in i. It's reasonable to think that, if the Fed raises i, pi^e will rise too, because the increase in i probably reflects higher inflation expectations on the part of the Fed, and private agents will take that into account in making their own forecasts. In order for Kocherlakota's argument to be valid (i.e., in order to get a system that converges to the rational expectations equilibrium at a constant value of i) the change in pi^e has to be at least one-for-one (in the same direction) with the change in i. That seems highly improbable to me. If I'm expecting 0% inflation, and the fed raises the funds rate by 50 basis points, I will not start to expect 0.5% inflation.
Rajiv Sethi said in reply to Andy Harless...
Andy, the thing is, in an RE model the extent to which expectations respond to changes in interest rates is not a behavioral parameter - it's determined endogenously in equilibrium. And one can set up very standard, currently mainstream models with or without sticky prices that give you an equilibrium response that is strong enough for Narayana's claim to be valid (Jesus Fernandez-Villaverde has convinced me of this in email correspondence over the past couple of days). The question, then, is whether the models themselves are robust to departures from RE, for instance with respect to learning. This is what Howitt's paper addresses so nicely.
And I say, crossing with Rajiv's comment:
I would add to the requirements. I would say it has to be (a) a robust equilibrium that (b) people can find via some normal learning process.
Now, as Robert Waldmann points out, we have run the natural experiment: the Reichsbank pegged its discount rate at 3.5% nominal after World War I. The outcome was not price stability or slow deflation, but rather hyperinflation.
Preliminary: U.C. Berkeley Economic History Seminar
M 2-3:30, Evans Hall 597
Aug 30: Organizational Meeting
Sep 6: Labor Day Holiday
Sep 13: Mrdjan M. Mladjan
Sep 20: Economic History Association Week
Sep 27: Nathan Sussman: “Taxation Mechanisms and Growth in Medieval Paris”
Oct 11: Jeff Greenbaum
Oct 18: Oliver Falck
Oct 25: Shari Eli
Nov 1: Greg Clark
Nov 8: Doug Irwin
Nov 15: Matt Ridley
Nov 29: Stelios Michalopoulos: "'Divide and Rule' or the Rule of the Divided? Evidence from Africa."
Dec 7: Hoyt Bleakley
Narayana Kocherlakota of the Pain Caucus, President of the Minneapolis Fed, wrote that the Federal Reserve must raise interest rates before too long a time has passed or else its low interest rate policy will generate deflation:
Narayana Kocherlakota Speech: But over the long run, money is, as we economists like to say, neutral.... [I]f the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative. Why? It’s simple arithmetic. Let’s say that the real rate of return on safe investments is 1 percent and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25 percent. The only way to get that is to add a negative number—in this case, –0.75 percent... a low fed funds rate must lead to consistent—but low—levels of deflation.... If the FOMC hews too closely to conventional thinking, it might be inclined to keep its target rate low. That kind of reaction would simply re-enforce the deflationary expectations and lead to many years of deflation...
People--most notably Nick Rowe--correctly took exception.
As Andrew Harless put it: Kocherlakota said that if you want it to be dry then people should not carry umbrellas because umbrellas cause rain, while the correct statement is that if it is going to be dry then people will not carry umbrellas.
Now comes Stephen Williamson, claiming that all Kocherlakota said was that deflation would be a period of low interest rates:
Stephen Williamson: New Monetarist Economics: More-Than-Ever Worked Up About Nothing: I missed some of this stuff, as I try not to read DeLong's blog, for fear of depreciating my human capital. Here's a Krugman post, and a LeDong post relating to this. Having a rational discussion with these guys is something like having afternoon tea with a couple of psychotic ferrets....
Ultimately, the lower monetary growth as the result of tightening leads to lower inflation and lower nominal interest rates over a longer horizon. Look at what happened after the Volcker tightening. Nominal interest rates went up, then they came back down again as the inflation rate fell. In the short run, there is a "liquidity effect" whereby tight monetary policy tends to increase the nominal interest rate. In the long run, what dominates is the "Fisher effect" whereby an inflation premium gets built into the nominal interest rate. That's pretty much what Krugman and DeLong seem to be trying to say. What's all the heat about?
Perhaps Williamson is genuinely too stupid to notice that Kocherlakota said "a low fed funds rate must lead to... deflation" when he should have said "a low fed funds rate reflects the existence of deflation..."
Perhaps Williamson knows very well that umbrellas do not cause rain, and that Kocherlakota said that umbrellas cause rain as an argument for higher interest rates soon, but that Williamson is just pretending not to understand what is going on.
In neither case is the spectacle edifying.
THE ORWELL PRIZE: Air-raid alarms during the last 3 nights have totalled about 16-18 hours for the three nights.... It is perfectly clear that these night raids are intended chiefly as a nuisance, and as long as it is taken for granted that at the sound of the siren everyone must dive for the shelter, Hitler only needs to send his planes over half-a-dozen at a time to hold up work and rob people of sleep to an indefinite extent. However, this idea is already wearing off.... For the first time in 20 years I have overheard bus conductors losing their tempers and being rude to passengers. E.g. the other night, a voice out of the darkness: “’Oo’s conducting this bus, lady, me or you?” It took me straight back to the end of the last war.
E. and I have paid the minimum of attention to raids and I was honestly under the impression that they did not worry me at all except because of the disorganisation, etc., that they cause. This morning, however, putting in a couple of hours’ sleep as I always do when returning from guard duty, I had a very disagreeable dream of a bomb dropping near me and frightening me out of my wits. Cf. the dream I used to have towards the end of our time in Spain, of being on a grass bank with no cover and mortar shells dropping round me.
Why oh why can't we have a better press corps?
To fulfill the public editor’s charge, I plan to write columns and blog posts, publish readers’ letters, reply to readers privately, and otherwise mediate an exchange between The Times and its audience.... I believe that journalists should leave their political views at the door when they report and edit the news. I’m a registered Democrat who voted for Barack Obama and then Scott Brown, so, as you can see, I have already left my views at the door!
That is, I think, very bad. If your political views are anything but a joke, they are a natural reflection of what you see in the news and thus of what you report and edit. A journalist who lives his or her political views at the door has (i) either reduced himself or herself to a mindless sock puppet-like regurgitator of press releases, (ii) or a pointless chyron of the horse race--even if he or she can avoid writing "opinions on shape of earth differ," (iii) or is simply a liar.
Hopefully Arthur Brisbane is the last of these. It would simply be a waste of ink to be a regurgitator of press releases, or a chyron of horse races, or to be reduced to writing "opinions on shape of earth differ."
So I will presume that Brisbane will not in fact check his politics at the door: doing so would mean checking his judgment and his perception of reality at the door. And so I want to know about his judgment and his perception of reality: I need to know where he is coming from if I can understand how to understand what he writes.
So, a simple question: what kind of view of America and the world makes somebody think it was a good idea to vote first for Barack Obama for president and then for Scott Brown for senator?
There were 3 million voters in Massachusetts in 2008. Roughly 950,000 voted for John McCain in 2008 and Scott Brown in 2010. Roughly 100,000 did not vote in 2008 and voted for Scott Brown in 2010. Roughly 50,000 did not vote in 2008 and voted for Martha Coakley in 2010. Roughly 50,000 voted for John McCain in 2008 and Martha Coakley in 2010. Roughly 950,000 voted for Barack Obama in 2008 and Martha Coakley in 2010. Roughly 850,000 voted for Barack Obama in 2008 and stayed home in 2010.
Roughly 100,000 voted for Barack Obama in 2008 and Scott Brown in 2010.
That's what Arthur Brisbane did. And, as you can see, that is a very unusual thing to do--something only 3% of Massachusetts's 2008 voters did. It makes me curious about the shape of Arthur Brisbane's mind, and about what reality he perceives.
Eschaton: Contempt: In his opening column, the new ombud at the NYTimes displays the newsroom's contempt for its readers--people are apparently either partisans or nitpickers--and, by extension, for the "scold, scourge" in "the principal's office" who ostensibly represents them.
The Public Editor - Why I Would Do This: “I feel like I’ve been sent to the principal’s office.” The Times reporter sitting across from me smiled nervously. I hadn’t even spoken yet. Scold, scourge, wreaker of cold justice: apparently, that’s what’s expected of the public editor. In my introductions around the office, the first question — almost universally — was, “Why on earth would you want this job?” All of this came after I had accepted the position, of course, and before I had considered that this is how the public editor’s post is viewed in some corners of The Times.
Maybe it’s a good question. Why on earth?
I wanted the job for several reasons. First is that The Times matters. No other American news organization has the resources and the ambition to reach as deeply and as broadly.... The public editor deals with problems in the aftermath. It’s forensic, a kind of journalistic “CSI.”
Second, the next few years will be an inflection point for The Times....
Finally, any journalist would find it hard to say no to the chance to practice the trade here.
Admittedly, serving as the paper’s fourth public editor is a really strange way to do it. The job bears little resemblance to the roles I have played previously: newspaper reporter, columnist, editor, publisher, corporate manager.
The public editor is a radical concept...
I think it is time to hit the pause button and say: Newspapers have had ombudsmen for two generations now. That Brisbane can still call it a "radical concept" tells us a lot about him--and is a bad signal for his qualifications to hold the job.
Brisbane goes on:
According to my agreement with The Times, the public editor is the “designated representative of the readers of The New York Times.”... Bloggers, tweeters, aggregators and competing Web sites pore over Times content every day, hunting for food, hunting for fodder. In military terms, you could call it asymmetric warfare — a lightly armed foe waging war against a much larger and less agile one. The metaphor of war, though, is incomplete because this is not just about the committed antagonists of The Times. It’s also about the loyalists. When they find errors or other shortcomings, they expect their beloved to own up. Theirs is not to wage war but to salvage affection. That said, when they do get angry, they too resort to the blogosphere, the Twitterdome and the like...
Again, pause: no, the metaphor is not "incomplete," the metaphor is wrong. And it is a very worrying sign that Brisbane classifies those who want the Times to be its best self with those who want it to die because the loyalists "too resort to the blogosphere, the Twitterdome and the like..."
Brisbane goes on:
To fulfill the public editor’s charge, I plan to write columns and blog posts, publish readers’ letters, reply to readers privately, and otherwise mediate an exchange between The Times and its audience.... I believe that journalists should leave their political views at the door when they report and edit the news. I’m a registered Democrat who voted for Barack Obama and then Scott Brown, so, as you can see, I have already left my views at the door!
As I said above, that is, I think, very bad. If your political views are anything but a joke, they are a natural reflection of what you see in the news and thus of what you report and edit. A journalist who lives his or her political views at the door has either reduced himself or herself to a mindless sock puppet-like regurgitator of press releases, or a pointless chyron of the horse race--even if he or she can avoid writing "opinions on shape of earth differ," or simply a liar.
Hopefully Arthur Brisbane is the last of these. It would simply be a waste of ink to be a regurgitator of press releases, or a chyron of horse races, or to be reduced to writing "opinions on shape of earth differ." So I will presume that Brisbane will not in fact check his politics at the door, because doing so would mean checking his judgment and his perception of reality at the door. And so I want to know about his judgment and his perception of reality: I want to know where he is coming from so I can understand how to take what he writes.
So, a simple question: what kind of view of America and the world could make somebody think it was a good idea to vote first for Barack Obama for president and then for Scott Brown for senator? There were 3 million voters in Massachusetts in 2008. Roughly 950,000 voted for John McCain in 2008 and Scott Brown in 2010. Roughly 100,000 did not vote in 2008 and voted for Scott Brown in 2010. Roughly 50,000 did not vote in 2008 and voted for Martha Coakley in 2010. Roughly 50,000 voted for John McCain in 2008 and Martha Coakley in 2010. Roughly 950,000 voted for Barack Obama in 2008 and Martha Coakley in 2010. Roughly 850,000 voted for Barack Obama in 2008 and stayed home in 2010.
Roughly 100,000 voted for Barack Obama in 2008 and Scott Brown in 2010. That's what Arthur Brisbane did. And, as you can see, that is a very unusual thing to do--something only 3% of Massachusetts's 2008 voters did.
So I would like to know why Arthur Brisbane did this.
Why We Need a Second Stimulus - Laura Tyson http://icio.us/xexdge #worthreading
Rajiv Sethi; Lessons from the Kocherlakota Controversy: http://tinyurl.com/26dr2r9 #worthreading
David Beckworth on Ben Bernanke's Jackson Hole Speech: http://tinyurl.com/2gxtmf2 #worthreading
Paul Krugman: Angela and the Fifty Hoovers: http://tinyurl.com/28jpyyu #worthreading
Karl Smith: Fannie/Freddie Acquitted: http://tinyurl.com/3xqmygz #worthreading
Best Star Trek:TNG-Cognitive Linguistics Mashup Ever from Josh Rosenau: http://tinyurl.com/25abm3h #worthreading
World War II Day-By-Day:
World War II Day-By-Day: Battle of Britain Day 50. With fine weather, Germans mount 4 raids of 60-100 aircraft bombing RAF airfields in Southern England, from 8.30 AM to 7 PM. Most are turned back by RAF fighters and little damage is done to airfields. Germans lose 19 Bf109 fighters, 8 bombers and a WWI-era Gotha biplane bomber which crash lands on Lewes racecourse. RAF loses 20 fighters, including 3 Defiants of 264 Squadron which are still easy prey for Bf109s. Overnight, there is the first concerted heavy bombing of industrial centers in the Midlands (Birmingham, Coventry, Derby, Sheffield, Manchester and South Yorkshire).
The Yield Spread and the Odds of Recession « Donald Marron: [H]ow likely is a return to recession? Researchers at the San Francisco Fed [Travis J. Berge and Òscar Jordà] took a crack at this question a few weeks ago. Their answer? It depends.
When they used a traditional model based on the leading economic indicators, the probability of a second dip turned out to be about 25% over the next two years (the blue line). When they dropped one indicator from their model, that probability doubled to about 50% (the red line).
That important indicator is the yield spread–the difference between the 10-year Treasury interest rate and federal funds rate. In recent decades, the yield spread has done a terrific job at anticipating recessions. When the federal funds rate has risen above the 10-year rate, the economy has invariably fallen into recession.... [T]he relative steepness of today’s yield curve... suggests, by itself, that renewed recession is unlikely, despite recent weak economic data. On the other hand, there are reasons to believe that this time things are different (usually a scary phrase)...
The Long Twilight Fight Club § Unqualified Offerings: In comments downblog, Gary Farber tries get clever:
The reason losing the Vietnam War was supposed to be a Bad Thing was because it would make the U.S. look irresolute and weak.
We seem to have survived.
Please. We “survived” the humiliation of Vietnam because our only real threat was a nuclear-armed superpower that managed to align itself for a time with a worldwide tide of anti-colonialism. Today the United States faces several hundred bad-tempered men with beards. There’s no margin for error against that kind of opposition.
Stephen Gandel writes:
How High Should Taxes be Raised?: A blogger for Ezra Klein's policy blog over at the Washington Post recently asked a number of economists what they thought the top tax rate for the wealthiest Americans should be, and the answers were all over the map. Emmanuel Saez, a prof at Berkeley and a tax expert, said the top federal income tax rate, currently 35%, should be raised to 69%...
1) What my colleague down the hall Emmanuel Saez says was is if you want to maximize tax revenue the top tax rate should be 69%--which means a federal income tax rate of 60% given the existence of state and local taxes:
Ezra Klein - Where does the Laffer curve bend?: The tax rate t maximizing revenue... e=.25 seems like a reasonable estimate... which means a top federal income tax rate of 69% (when taking into account the extra tax rates created by Medicare payroll taxes, state income tax rates, and sales taxes)...
And what my colleague Emmanuel Saez (along with slemrod and Giertz) says is that the top tax rate ought to be lower than the revenue-maximizing tax rate unless you do not care at all about the incomes of the wealthy. But we do care about the incomes of the wealthy--all else being equal, we would all be happier if Bill Gates were a little richer and the rest of us were just as well off. And even though Bill Gates's income is earned by somebody very rich, a large chunk of it is spent improving the lives of people who are very poor--see "nets, mosquito."
Thus Emmanuel Saez simply does not say what Gandel says he says.
2) Dylan Matthews has a name. Gandel should use it--unless, that is, he wants people to call him "the nameless stupid one who works for Time.
Why oh why can't we have a better press corps?
This is not rocket science, people.
Justin Fox, who established Time's Curious Capitalist weblog, would be rolling in his grave if he had one...
Comment for the Economist on Christina Romer (2009), "The Lessons of 1937": Five Lessons from 1937 and Otherwhen:
Let me make five points to eliminate or refute or at least to fight against or lay down a marker that there is--well, call it "confusion" about what the right state of policy for the American macroeconomy should be.
My first point is that over the past six months the economy has been a severe disappointment. Output and employment have fallen much faster than people were projecting last December. Romer and Bernstein (2009) projected at the very start of this year that unemployment in the U.S. would reach a peak of 7.9% in the summer of 2009. But unemployment now in mid-June is about 9.7%, with 10% baked in the cake and the possibility existing that it might go much higher. The signs that the cliff-dive of employment has come to an end are very few. The level of new unemployment claims is still consistent with a rapidly-collapsing labor market nationwide.
Six months ago a net federal fiscal stimulus of about $1 trillion--$400 billion each year for about 2.5 years--seemed appropriate: that seemed to balance the benefits of filling-in the hole in aggregate demand without running too great a risk of triggering worrisome inflationary fever further down the road. Now the hole in aggregate demand is greater than was thought likely last December--about twice as great--and the likelihood of heightened future inflation is less. Thus if it was appropriate to set a $1 trillion federal fiscal stimulus in motion last December given what we knew then, if we had known then what we know now it would have been appropriate to set a roughly $2.4 trillion fiscal stimulus--$800 billion for 3 years--in motion back then.
My first point is thus that the Obama administration's federal fiscal stimulus programs are on the low side of what is appropriate by a substantial margin: this is the largest economic downturn since the Great Depression and the standard tools of expansionary monetary policy are tapped out and broken right now.
My second--related--point is that the need for federal-level fiscal expansion is reinforced by what state governments are doing right now. The federal government's discretionary actions are expanding aggregate demand by about $400 billion over fiscal year 2010, but state governments are right now cutting their spending and raising their taxes in order to offset this federal fiscal expansion more or less completely. On net, the government sector will be on autopilot as far as discretionary policy moves to stimulate the economy are concerned: federal-level expansion is offset and neutralized by state-level fiscal contraction. This is not an appropriate macroeconomic policy stance: this is the largest economic downturn since the Great Depression.
My third--unrelated--point is that the policy innovations of the past year have created a potentially dangerous weakness in the Federal Reserve system. The Federal Reserve's balance sheet has more than doubled over the past year, as it has acquired an enormous and bizarre menagerie of assets. On the liability side, it has funded this acquisition by expanding the monetary base, and has increased private-sector willingness to hold this monetary base by paying interest on reserves. This has added a fourth motive--profit--to the three traditional motives for holding reserve deposits at the Fed: the transactions demand, the emergency liquidity demand, and the speculative demand.
As long as the dollar remains the safest currency in the world, as long as the dollar remains the linchpin of the global financial system, there is no problem in the Federal Reserve's funding by what is essentially overnight borrowing the expansion of its balance sheet and the purchase of private securities that will vary up or down in market price with an eye toward holding them to maturity.
However, at some future time the dollar will cease to be the linchpin of the world financial system, in which case the Federal Reserve's financing its balance sheet via overnight borrowing will leave it vulnerable to the mother of all bank runs. It would be very good to fix this now: to give the Federal Reserve now the option to borrow not in what are essentially demand but rather in time deposits--to grant the Federal Reserve the power to issue its own bonds. This diminishes the chance of a great financial crisis in 2050 or so, with no downside that I can see.
My fourth point is the obvious one that health care is the only thing that matters for the long run budget. The other points that the Hon. Dr Christina Romer raises, are--as is almost always the case--accurate and important. America's long-run fiscal problems are caused by health care, and will not be appreciably made worse by this half-decade's federal fiscal stimulus. If restructuring the health care system can bend the curve on the rise in overall (and hence public as well as private) health care costs, then America has ample debt capacity to borrow whatever we wish in this crisis--and to borrow it at extraordinarily favorable rates as well. If the curve of rising health-care costs is not bent, then the government's long-term finances are in trouble and so is the growth of private-sector non-health living standards: health care costs that rise as fast as CBO is projecting in the baseline cause lots of long-run economic problems, of which government fiscal bankruptcy is not the worst. Health care reform to bend the long-run curve of costs is now just what it was back in 1993: the most important issue for the American political system to deal with.
Fifth, I have the sense that the Obama administration's economic policymakers have forgotten one of the most basic lessons taught by Robert Rubin during his stewardship of economic policy during the 1990s. The lesson is to think probabilistically: to project yourself forward into the possible futures, to ask in each one what would be the actions that you would then wish you hd undertaken today, and then to actually take the appropriate action today. Looking forward into the future, (a) I see a 10% chance that something happens to create renewed cliff diving--a recession that bottoms out not with an unemployment rate in the 10-12% range that we currently anticipate but an unemployment rate that blows through 12% and keeps on rising. (b) I see a 30% chance of a rapid recovery as confidence and asset prices recover, and firms take advantage of high unemployment to hire new workers in droves at wage levels that make increasing production very profitable. But (c) I see a 60% chance of the end of the current cliff-dive in employment being followed by what happened in Japan in the 1990s, in the U.S. after 1991, in the U.S. after 2001, and to some extent in the U.S. after 1933--a recovery that does not see the market exert sufficient upward pressure on employment to return the unemployment rate to normal levels in two or three years, but that instead sees a jobless or low-job recovery during which the unemployment rate continues to drift upward for years, or falls only then to rise again.
The Obama administration's policies appear to me to be the ones that would be adopted if we believed that there was a 75% chance of scenario (b) and a 25% chance of scenario (a). But I don't think those are the probabilities. And I wonder what the Hon. Dr. Christina Romer thinks the probabilities are. For she is the one who warns of how:
[t]he 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy following an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently [than in normal times]. If the government withdraws support too early, a return to economic decline or even panic could follow...
The blunt fact is that the economic recoveries that have been rapid and seen fast growth in employment are those that ended when a Federal Reserve following strongly restrictionary policies to fight inflation eased off and significantly lowered interest rates. No such lowering of interest rates is possible this time--interest rates are already as low as they can possibly go at the short end. So I can see no reason to anticipate a rapid recovery and employment when the cliff-diving stops. And I do not understand why the Obama administration is following policies that presume such a rapid recovery--a V rather than an L for the shape of the recession--is not just possible but probable.
Nobody Could Have Predicted: One point I haven’t seen made about the troubles of the US economy is that the timing of recent growth tells you a lot about what was — and what wasn’t — wrong with economic policy. After all, we had more or less a consensus view about when the stimulus would kick in... the peak impact of growth come in 2009.... [S]timulus worked as long as it lasted, boosting the economy — which is the same conclusion Adam Posen drew from Japan’s experience.... Fiscal policy works when it is tried. But the stimulus wasn’t nearly big enough to restore full employment — as I warned from the beginning. And it was set up to fade out in the second half of 2010.
So what was supposed to happen? The invisible cavalry were supposed to ride to the rescue.
I never understood why the Obama administration thought this would happen so soon; history tells us that the effects of a financial crisis on private spending are normally protracted. And sure enough, the cavalry has not arrived.
Christina Romer, CEA Chair, March 9, 2009:
http://www.brookings.edu/~/media/files/events/2009/0309_lessons/0309_lessons_romer.pdf: [M]onetary policy was very expansionary in the mid- 1930s. Fiscal policy, though less expansionary, was also helpful.... And the economy responded. Growth was very rapid in the mid-1930s. Real GDP increased 11% in 1934, 9% in 1935, and 13% in 1936. Because the economy was beginning at such a low level, even these growth rates were not enough to bring it all the way back to normal. Industrial production finally surpassed its July 1929 peak in December 1936, but was still well below the level predicted by the pre-Depression trend. Unemployment had fallen by close to 10 percentage points—but was still over 15%. The economy was on the road to recovery, but still precarious and not yet at a point where private demand was ready to carry the full load of generating growth.
In this fragile environment, fiscal policy turned sharply contractionary. The one- time veterans’ bonus ended, and Social Security taxes were collected for the first time in 1937. As a result, the deficit was reduced by roughly 21⁄2% of GDP. Monetary policy also turned inadvertently contractionary. The Federal Reserve was becoming increasingly concerned about inflation in 1936. It was also concerned that, because banks were holding such large quantities of excess reserves, open-market operations would merely cause banks to substitute government bonds for excess reserves and would have no impact on lending. In an effort to put themselves in a position where they could tighten if they needed to, the Federal Reserve doubled reserve requirements in three steps in 1936 and 1937. Unfortunately, banks, shaken by the bank runs of just a few years before, scrambled to build reserves above the new higher required levels. As a result, interest rates rose and lending plummeted.
The results of the fiscal and monetary double whammy in the precarious environment were disastrous. GDP rose by only 5% in 1937 and then fell by 3% in 1938, and unemployment rose dramatically, reaching 19% in 1938. Policymakers soon reversed course and the strong recovery resumed, but taking the wrong turn in 1937 effectively added two years to the Depression.
The 1937 episode is an important cautionary tale for modern policymakers. At some point, recovery will take on a life of its own, as rising output generates rising investment and inventory demand through accelerator effects, and confidence and optimism replace caution and pessimism. But, we will need to monitor the economy closely to be sure that the private sector is back in the saddle before government takes away its crucial lifeline...
Christina Romer, CEA Chair, June 18, 2009:
Economics focus: The lessons of 1937: [I]t hit me that I should have told the story of 1937. The recovery from the Depression is often described as slow because America did not return to full employment until after the outbreak of the second world war. But the truth is the recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid.... However, that growth was halted by a second severe downturn in 1937-38, when unemployment surged again to 19%... an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy.... According to a classic study of the Depression by Milton Friedman and Anna Schwartz... monetary contraction was a central cause of the 1937-38 recession.
The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently. If the government withdraws support too early, a return to economic decline or even panic could follow. In this regard, not only should we not prematurely stop Recovery Act spending, we need to plan carefully for its expiration. According to the Congressional Budget Office, the Recovery Act will provide nearly $400 billion of stimulus in the 2010 fiscal year, but just over $130 billion in 2011. This implies a fiscal contraction of about 2% of GDP. If all goes well, private demand will have increased enough by then to fill the gap. If that is not the case, broad policy support may need to be sustained somewhat longer.
Perhaps a more fundamental lesson is that policymakers should find constructive ways to respond to the natural pressure to cut back on stimulus.... Granting [the Fed]... additional tools now could provide confidence that the Fed will be able to respond to inflationary pressures, without it having to create that confidence by actually tightening prematurely.
Now is also the time to think about our long-run fiscal situation.... To switch to austerity in the immediate future would surely set back recovery and risk a 1937-like recession-within-a-recession. But many are legitimately concerned about the longer-term budget situation.... The fundamental source of long-run deficits is rising health-care expenditures. By coupling the expansion of coverage with reforms that significantly slow the growth of health-care costs, we can dramatically improve the long-run fiscal situation without tightening prematurely.
As someone who has written somewhat critically of the short-sightedness of policymakers in the late 1930s, I feel new humility. I can see that the pressures they were under were probably enormous. Policymakers today need to learn from their experiences and respond to the same pressures constructively, without derailing the recovery before it has even begun...
Mark Thoma: The Fed’s Wait and See Policy is a Mistake: http://tinyurl.com/2f9r5mm #worthreading
Mark Thoma: Michael Woodford's Magic Spell: http://tinyurl.com/29f5w8v #worthreading
Ricardo Caballero: On the Macroeconomics of Asset Shortages: http://tinyurl.com/2f5egnr #worthreading #revisit
Bruce Bartlett et al.: The Great Stimulus Debate: http://tinyurl.com/39cbd3j #worthreading
Mark Thoma: Why Did Economists Reject Flexible Price Models?: http://tinyurl.com/32fensh #worthreading
Ben S. Bernanke: The Economic Outlook and Monetary Policy: http://tinyurl.com/25nhnze #worthreading
Bernstein and Eisinger: Banks’ Self-Dealing Super-Charged Financial Crisis: http://tinyurl.com/37zd8h4 #worthreading #assignforecon1
Felix Salmon: Time for TIPS Consols: http://tinyurl.com/25yl9jd #worthreading
Creating ePub Files with Pages: http://support.apple.com/kb/HT4168 #worthreading
Eddy Elfenbein: Time for US Treasury Consols?: http://tinyurl.com/2eo2oco #worthreading
Ed Balls: There Is an Alternative: http://tinyurl.com/2bsalp5 #worthreading
Alan Rappeport: Fed stands by to boost US growth: http://tinyurl.com/2avugxd #worthreading
Dana: A prologomena to all future blathering about gender on the Internet: http://tinyurl.com/2bfb3fd #worthreading
...subscribing to the principles of the Atlantic Charter:
A Joint Declaration by the United States of America, the United Kingdom of Great Britain and Northern Ireland, the Union of Soviet Socialist Republics, China, Australia, Belgium, Canada, Costa Rica, Cuba, Czechoslovakia, Dominican Republic, El Salvador, Greece, Guatemala, Haiti, Honduras, India, Luxembourg, Netherlands, New Zealand, Nicaragua, Norway, Panama, Poland, South Africa, Yugoslavia.
The Governments signatory hereto,
Having subscribed to a common program of purposes and principles embodied in the Joint Declaration of the President of United States of America and the Prime Minister of the United Kingdom of Great Britain and Northern Ireland dated August 14, 1941, known as the Atlantic Charter.
Being convinced that complete victory over their enemies is essential to defend life, liberty, independence and religious freedom, and to preserve human rights and justice in their own lands as well as in other lands, and that they are now engaged in a common struggle against savage and brutal forces seeking to subjugate the world, declare:
Each Government pledges itself to employ its full resources, military or economic, against those members of the Tripartite Pact and its adherents with which such government is at war.
Each Government pledges itself to cooperate with the Governments signatory hereto and not to make a separate armistice or peace with the enemies.
The foregoing declaration may be adhered to by other nations which are, or which may be, rendering material assistance and contributions in the struggle for victory over Hitlerism.
Done at Washington
January First, 1942
The signatories to the Declaration by United Nations are as listed above.
The adherents to the Declaration by the United Nations, together with the date of communication of adherence, are as follows:
Mexico, June 5, 1942
Philippines, June 10, 1942
Ethiopia, July 28, 1942
Iraq, January 16, 1943
Brazil, February 8, 1943
Bolivia, April 27, 1943
Iran, September 10, 1943
Colombia, December 22, 1943
Liberia, February 26, 1944
France, December 26, 1944
Ecuador, February 7, 1945
Peru, February 11, 1945
Chile, February 12, 1945
Paraguay, February 12, 1945
Venezuela, February 16, 1945
Uruguay, February 23, 1945
Turkey, February 24, 1945
Egypt, February 27, 1945
Saudi Arabia, March 1, 1945
Lecture Audio: http://delong.typepad.com/files/20100830_econ_1_ls.aac
There is a danger in this business. If you don't mark your beliefs to market occasionally, and throw out worthless intellectual trash, you ossify--you become one of those demented old coots detached from reality ranting unintelligibly at the moon.
I was reminded of this recently as the intelligent, thoughtful, patient, and polite Nick Rowe suddenly turned... shrill:
Nick Rowe Loses It: Oh Christ. Oh Christ. Oh Christ. SW interprets Kocherlakota the same way I do, and thinks he’s right. Oh Christ. [...] Oh Christ. Central banks can’t keep the price level and inflation rate determinate by pegging the nominal (or even real) rate of interest forever. We’ve known that was wrong at least since Wicksell’s cumulative process. I assumed that everyone (except a few hopeless lefties and funny money guys) knew that was wrong. Nobody’s monetary model tells us that (except a few hopeless Post Keynesian types, who are at least logically consistent, because they assume very sticky prices that don’t respond to AD at all). Oh Christ. [...] This is much worse than Cochrane getting Say’s Law wrong. Say’s Law is very nearly right, and very few people understand precisely why say’s Law is wrong, and that it’s money, and only money, and not any other asset, that makes Say’s Law wrong. I give up. This isn’t New Monetarism. It’s got nothing to do with Monetarism at all. It’s the exact opposite of Monetarism. Somebody resurrect Milton Friedman.
(Not, mind you, that Nick Rowe is demented, old, a coot, detached from reality, unintelligble, and ranting at the moon. It's simply that his--entirely justified--... shrillness... reminded me of the need to mark your beliefs to market periodically.
So what major analytical mistakes--errors of either theoretical analysis, of empirical description of reality, or of applying theory to reality--have I made in the past decade?
I can think of three offhand to start the ball rolling. I erred:
In my belief that central banks had the tools, the skill, and the political will to stabilize economies at high levels of employment and low levels of inflation, and thus that fiscal policy and financial institutions policy no longer had any compelling stabilization policy role to play.
In my belief that large, leveraged financial institutions had sufficient caution and sufficient control over their derivatives books that their derivative positions did not pose major systemic risk.
In my belief that the principal threat to the world economy would come from the fact that in a crisis the shaky long-term finances of the U.S. social insurance state might provoke a collapse of confidence in the long-term value of the dollar.
These were three biggies. But surely there were others. What were they?
Hoisted from Comments: RJW http://delong.typepad.com/sdj/2010/08/stephen-williamson-commits-himself-to-cargo-cult-macroeconomics.html?cid=6a00e551f0800388340134867e98ec970c#comment-6a00e551f0800388340134867e98ec970c writes:
I'm not a fan of new monetary economics, but it isn't isomorphic to cargo cults. In new monetary models there are typically two steady state equilibria one in which money is valuable and one in which it is worthless. I am not really expert so I wrote "typically" to mean "always (as far as I know)" A new Monetary economist would believe that a Fed policy of keeping the nominal interest rate below the natural real rate would lead to one of two steady states -- one with prices falling and the other with dollar prices meaningless (or infinite) as no one is interested in dollars. It is clear that the policy of setting the discount rate to 0.25 % forever would lead to the second.... This isn't just theory. From 1918 through most of 1923 the Reichsbank kept the discount rate quite low (3.5% IIRC) and satisfied banks demand for money at that discount rate. The result was not deflation.
The Fed Is Running Low on Ammo: You may have noticed that the complexion of the U.S. economy has turned a bit sallow of late.... Chairman Ben Bernanke has told the world that the Fed is not out of ammunition. It still has easing options, should it need to deploy them. The good news is that he's right. The bad news is that the Fed has already spent its most powerful ammunition; only the weak stuff is left.... Let's examine....
From exit to re-entry. The first easing option is to create even more bank reserves by purchasing even more assets—what everyone now calls "quantitative easing." The FOMC took a baby step in that direction at its last meeting by announcing that it would no longer let its balance sheet shrink as its holdings of mortgage-backed securities (MBS) mature and are paid off. Instead, it will reinvest the proceeds in Treasury securities.... When the Fed buys private-sector assets like MBS it is trying to shrink interest rate spreads over Treasurys—and thereby to lower private-sector borrowing rates such as home mortgage rates—by bidding up the prices of private assets, and so lowering their yields. Judged by this criterion, the MBS purchase program was pretty successful. But when the Fed buys long-dated Treasury securities it is trying to flatten the yield curve instead.... Now put the two together. By reducing its holdings of MBS and increasing its holdings of Treasurys, the Fed de-emphasizes shrinking risk spreads and emphasizes flattening the yield curve. That strikes me as a bad deal for the economy because the real problem has been high risk spreads, not high Treasury bond rates.
If the FOMC is serious about re-entry into quantitative easing, it should buy private assets, not Treasurys. Which assets? The reflexive answer is: more MBS. But with mortgage rates already so low, how much further can they fall? And would slightly lower rates revive the lifeless housing market? To give quantitative easing more punch, the Fed may have to devise imaginative ways to purchase diversified bundles of assets like corporate bonds, syndicated loans, small business loans and credit-card receivables. Serious technical difficulties beset any efforts to do so without favoring some private interests over others. And the political difficulties may be even more severe. So the Fed will go there only with great reluctance.
What's in a word? The FOMC has been telling us repeatedly since March 2009 that the federal-funds rate will remain between zero and 25 basis points "for an extended period."... The Fed's second option for easing is to adopt new language that implies an even longer-lasting commitment to a near-zero funds rate. Frankly, I'm dubious there is much mileage here....
Interest on reserves. In October 2008, the Fed acquired the power to pay interest on the balances that banks hold on reserve at the Fed. It has been using that power ever since, with the interest rate on reserves now at 25 basis points. Puny, yes, but not compared to the yields on Treasury bills, federal funds, or checking accounts. And at that puny interest rate, banks are voluntarily holding about $1 trillion of excess reserves. So the third easing option is to cut the interest rate on reserves in order to induce bankers to disgorge some of them.... How about minus 25 basis points? That may sound crazy, but central bank balances can pay negative rates of interest. It's happened.... [S]uppose some fraction of the $1 trillion in excess reserves was to find its way into lending. Even if it's only 10%, that would boost bank lending by 3%-4%. Better than nothing.
A fourth way out. There is a fourth weapon, which the Fed chairman has not mentioned: easing up on healthy banks that are willing to make loans.... It would probably do some good, maybe even a lot, if word came down from on high that some modest loan losses are not sinful, but rather a normal part of the lending business.
So that's the menu. The Fed had better study it carefully, for if the economy doesn't perk up, it will soon be time to fire the weak ammunition.
The cargo cults of the South Pacific noted a strong correlation during World War II between (a) the existence of airstrips, and (b) cargo airplanes landing and disgorging huge amounts of consumer goods. They thought it was worth trying to see whether this relationship was causal: would building airstrips cause cargo planes to appear and land? They experimented... and found that causation ran the other way: it was the expectation on the part of the Seabees of the United Nations forces fighting the Japanese Empire that cargo planes would want to land on some island that prompted them to construct the airstrips.
Stephen Williamson reveals that New Monetarist Economics is isomorphic to cargo-cult science:
Stephen Williamson: New Monetarist Economics: How to Get Worked Up Over Nothing: Suppose a cash-in-advance model with a representative consumer, period utility u(c), discount factor b, constant aggregate endowment y. c is consumption. The consumer needs cash to buy c each period. Suppose y is a fixed quantity of output received by a firm, which is sold for cash within the period, and then the cash is paid as a dividend to the consumer at the end of the period. Have the money stock grow at a constant rate m. The real interest rate is constant at 1/b - 1. The nominal interest rate is (1+m)/b - 1, and the inflation rate is m. Constant m implies a constant nominal interest rate and a constant inflation rate. If m < 0, there is deflation, and the nominal interest rate is sufficiently low to support the deflation. I can think of the instrument the central bank sets as either the money growth rate or the nominal interest rate - that part is irrelevant.... What's the problem?
As Jed Harris pointed out, if Stephen Williamson had been in Paul Volcker's place in 1979-1983 he would have lowered rather than raised interest rates in order to reduce inflation. Williamson would then have been much surprised when inflation further accelerated. He would have been significantly more surprised than the cargo-cult airstrip diggers were when no planes arrived. They, after all, were simply testing a hypothesis about the direction of causation in an empirical regularity. They were not claiming a gold-plated theoretical warrant that the direction ran in his particular way.
As Milton Friedman liked to say, high nominal interest rates are a sign that money growth has been high in the past and is expected to be high in the future. But you can't lower expected future money growth by lowering interest rates. Let me look... ah, Scott Sumner has, I see, beaten me to it:
Friedman: Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy. [...] After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die...
But where Williamson really makes his play for the Stupidest Man AliveTM Runner-Up Prize is that he is not only wrong, but uses his wrongness to mock the people who are right:
Have at look at this: 1. Krugman. 2. Rowe 3.Harless 4. Thoma Is there something in the water, or did these guys sit through some funny macro classes? What they are objecting to in Kocherlakota's speech is one of the most innocuous things he said...
The problem, of course, is that Williamson does not have a model, but rather a set of conditions required for a steady-state equilibrium path. But in order to figure out whether an economy is or can be expected to be evolving along a steady-state equilibrium path, you need a model. And he ain't got one.
The standard, conventional model can be drawn on a graph with the nominal interest rate i on the vertical axis and the inflation rate π on the horizontal axis. This model has a "Wicksellian balance" condition--Williamson's r* = i - π --that does not hold at all times but, rather, is a steady-state equilibrium condition: if the economy is to the left of and above the Wicksellian balance line so that the real interest rate will be high, inflation is falling; if the economy is to the right of and below the Wicksellian balance line so that the real interest rate is low, inflation will be rising. And the Federal Reserve will not make its target interest rate all the time either: if the interest rate i above the red policy rule line, the nominal interest rate will be falling as the Federal Reserve pumps out the money; if the economy is below the interest rate will be falling as the Fed sells bonds for cash.
In this model the point where the blue and the red curves cross--the point where Williamson says inflation and nominal interest rates are constant--ain't a point where inflation and nominal interest rates are constant: we do not expect the economy to be there. What we expect to happen is that if the economy starts to the left of the green line it heads off toward deflationary Valhalla at point C, and if it starts to the right of the green line it heads off to inflationary Valhalla.
Of course, nobody believes that when inflation reaches 120% per year the Fed will still maintain its policy of pegging the nominal interest rate at 2% and so pumping out the money at 120% per year. Instead, we all believe that at some point--when inflation is too high--the Fed will abandon its nominal interest peg and cut back on money growth, and so its policy rule line will have a kink in it, like so:
Then we expect that if the economy starts to the right of the green line it will ultimately head for point A--and that if it starts to the left it will still head for deflationary Valhalla at point C. In this model, lowering the leftmost constant-nominal-interest rate peg arm of the policy rule is not a way to reduce inflation. Instead, it is a way of moving the green line to the left and increasing the set of initial conditions for which the economy converges to point A.
I did talk about this before...
THE ORWELL PRIZE: The raid which occurred on the 24th was the first real raid on London so far as I am concerned, i.e. the first in which I could hear the bombs. We were watching at the front door when the East India docks were hit. No mention of the docks being hit in Sunday’s papers, so evidently they do conceal it when important objectives are hit . . . . . . It was a loudish bang but not alarming and gave no impression of making the earth tremble, so evidently these are not very large bombs that they are dropping. I remember the two big bombs that dropped near Huesca when I was in the hospital at Monflorite. The first, quite 4 kilometres away, made a terrific roar that shook the houses and sent us all fleeing out of our beds in alarm. Perhaps that was a 2000 lb. bomb and the ones at present being dropped are 500 lb. ones.
They will have to do something very soon about localising alarms. At present millions of people are kept awake or kept away from work every time an aeroplane appears over any part of London.
Download pdf: 20100826 Syllabus Economics 1 fall 2010.pdf
I guess Kocherlakota (and Williamson) made a wonderful discovery -- the fed can keep the inflation rate constant by just holding the fed funds rate constant, since the rate of real interest is constant. It's a mathematical certainty! And makes the job so much simpler... wonder why we never thought of it...
Paul Volcker's life in 1979-1982 would have been so much easier if only he had had access to Kocherlakota's and Williamson's brains--NOT!!!
Dingbat Kabuki http://www.eschatonblog.com/2010/08/next-steps.html #worthreading
Admittedly, this is a hard thing to do--the kind of thing that requires a highly trained incapacity--but Narayana has managed to do it when he writes:
over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation...
The claim is completely correct--but only when you replace "must lead to" with "is the result of."
It is the kind of thing that listening to Frank Fisher and Andreu Mas-Colell on stability of general equilibrium permanently inoculates one against.
Andy Harless and Mark Thoma and Nick Rowe are on the case at http://blog.andyharless.com/2010/08/do-umbrellas-cause-rain.html and http://economistsview.typepad.com/economistsview/2010/08/jaws-are-hardening.html and http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/08/why-everyone-should-be-forced-to-take-intro-economics.html and http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/08/what-standard-monetary-theory-says-about-the-relation-between-nominal-interest-rates-and-inflation.html
Articles for section 4 presentations:
“Thrifty families accused of prolonging the recession,” by Gráinne Gilmore. The Times December 23, 2009. http://business.timesonline.co.uk/tol/business/economics/article6965784.ece and “Can Consumers Spend Asia Out of Recession? Many Asian countries are handing out cash and vouchers to get people spending again. But real economic recovery may take a lot more,” by Frederik Balfour , Business Week (March 15, 2009). http://www.businessweek.com/globalbiz/content/mar2009/gb20090313_404180.htm
“Subprime Mortgages: A Primer,” by Mara Lee. NPR.org, March 23, 2007. http://www.npr.org/templates/story/story.php?storyId=9085408 and "The Menace of an Unchecked Housing Bubble," by Dean Baker. The Economists' Voice: 3 (March 2006). http://www.bepress.com/ev/vol3/iss4/art1
Articles for section 3 presentations:
“That 1937 Feeling,” by Paul Krugman. New York Times, January 4, 2010. http://www.nytimes.com/2010/01/04/opinion/04krugman.html and “Fed Will Hold Down Rates, Citing Tenuous Recovery,” by Catherine Rampell. New York Times, December 16, 2009 http://www.nytimes.com/2009/12/17/business/economy/17fed.html
“Four Ways Out," by Brad DeLong. The Economists' Voice, Vol. 6:2. (2009) http://www.bepress.com/ev/vol6/iss2/art4 pay attention to the comments from Wilson and Sumner; and “Shift to Saving May Be Downturn’s Lasting Impact,” by Catherine Rampell. New York Times, May 9, 2009. http://www.nytimes.com/2009/05/10/business/economy/10saving.html