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October 2011

Quote of the Day: October 26, 2011

"It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, is of a different opinion, it is because they only know their own side of the question. The other party to the comparison knows both sides."

--John Stuart Mill, Utilitarianism

Matthew Yglesias Wishes William Dudley Would Pay More Attention to Logical Implication

Matthew Yglesias:

Fed Governors Need To Get Their Story Straight: I basically welcome the dovish comments today from New York Federal Reserve Bank President William Dudley, but I do wish the sensible center Dudley/Bernanke/Tarullo bloc on the Fed would read their own statements more carefully:

“Clearly we’ve indicated our interest in supporting the housing market in keeping mortgage rate spreads, and spreads between mortgage rates and Treasury yields, from getting too elevated,” Dudley said.

“Depending on how the world evolves, we potentially could move to do more in that direction.”

Dudley, who as head of the New York Fed has a permanent voting seat on the Fed’s policy-setting committee, said the U.S. central bank will continue to do everything within its power to help the economic recovery.

If the Fed “will continue to do everything within its power,” that implies that they’re currently doing everything within their power. But if they “potentially could move to do more,” then they’re not currently doing everything within their power. They need to resolve this contradiction by actually starting to do everything within their power to help the recovery. They need to put themselves in a position where if somehow the recovery is still weak, their only answer is “there’s nothing more we can do. It’s just not possible.”

Twitterstorm delong: October 25, 2011

I Try to Be Good. I Try So Hard. But It Is So Very Difficult...

Bryan Caplan:

The Toothpick Problem: I posed the following hypothetical:

Suppose half of the sectors of the economy grow forever at 4%, while the rest completely stagnate.  I'm strongly tempted to say that this economy's growth rate equals 2% forever.  Anyone tempted to disagree?  If so, why?

Answers in the comments spanned the entire range.  Some said that the growth rate would asymptote to 4%.  Phil:

The growth rate will increase over time to approach 4% asymptotically as the 4% sector grows relative to the 0% sector.

Tyler, in contrast, said that the growth rate would asymptote to 0%:

Eventually the growth rate converges to zero or near-zero...the growing sectors become quite small in gdp terms and their future gains cease to matter very much.

My claim: Both the 4% and the 0% answers are vulnerable to a reductio ad absurdum that I call the Toothpick Problem.  Imagine an economy with a million goods.  One of them is toothpicks. 

Reductio ad absurdum for the 4%-ers:

Suppose toothpick production grows at 4% forever, and the rest of the economy stagnates.  Doesn't your position imply that "economic growth" asymptotes to 4% despite near-total stagnation?

Reductio ad absurdum for the 0%-ers:

Suppose toothpick production stagnates, but production of every other good grows at 4% forever.  Doesn't your position imply that "economic growth" asymptotes to 0% despite near-universal progress?

The absurdity of both extreme positions is what draws me so strongly to the 2% answer in my original hypothetical.  Weighing output using initial shares isn't perfect, but it's reasonable relative to the alternatives…

I read things like this, and I am reminded of something I once saw on Twitter: "My shoes give me a migraine. Every time I listen to [redacted], I take them off and bang myself on the head with them."

It's not a question that has "an" answer. To pose it as a question that does is to fail to grasp the issue. To propose that "the" answer is a split-the-difference 2%/year

isn't perfect, but it's reasonable relative to the alternatives

is an epic fail. For the only sane answer is: "it depends".

Look: the growth in real GDP from one year to the next is how much the measured flow of production would grow if all prices in the economy stayed the same from the one year to the next.

On what does that growth depend?

If the relative prices of the goods and services in the two sectors stay the same on average, as one grows by 4%/year and the other grows by 0%/years, then as time passes a larger and larger share of total expenditure is spent on the products of the fast-growing sector. The growth rate asymptotes to 4%/year.

If the relative prices of the goods and services in the fast-growing sector fall relative to the stagnant sector by 4%/year on average, then as time passes total expenditure remains divided 50-50 between the two sectors. The growth rate is always 2%/year.

If the relative prices of the goods and services in the fast-growing sector fall relative to the stagnant sector by more than 4%/year on average, then as time passes the fast-growing sector becomes a smaller and smaller part of total expenditure. The growth rate asymptotes to 0%/year.

"The" answer is not one number. "The" answer depends on what the elasticities of demand are. That in turn depends on who gets the income, and on what the people who get the income value as technological change proceeds.

I Try to Be Good. I Try So Hard. But It Is So Very Difficult...

T.B. Lee asks:

Twitter / @binarybits: Why is @mercatus publishin ...: "@binarybits Timothy B. Lee

Why is @mercatus publishing obvious nonsense? The economy is not shrinking at 5% a year.


Twitter: "

mercatus Mercatus Center

Is the current inflation rate 2.5% or 11.2%?:

in reply to @mercatus ↑

@ModeledBehavior Modeled Behavior

You're better than this, Mercatus Center RT @mercatus Is the current inflation rate 2.5% or 11.2%?:

I have one quibble: @ModeledBehavior. They are not "better than this". That is who they are. That is what they do.

As with so much of what is going on today, people who want to be "on the right" have to first disable their basic bullshit filter in order to fit the role they have chosen to fill.

Anthony B. Sanders | Oct 24, 2011 | Mercatus Center Senior Scholar

Macroeconomic Measuring May Obscure True GDP Growth, House Prices | Mercatus: This will be a busy week for economic and housing reporting. In a nutshell, most economic indicators are positive. This is indeed good news, but with one cautionary note: as I’ve noted previously, if we apply the alternate CPI measure as a deflator, real GDP growth is actually negative.

This is because the inflation deflator used by the federal government is very low.

According to Shadow Government Statistics, the inflation rate was actually 11.21% (compared to the implied inflation of 2.57% used by the U.S. Department of Commerce (Bureau of Economic Analysis).That means the +2.5 ‘real GDP growth’ estimate is actually -5.5% ‘real GDP growth’ when accounting for the old-fashioned inflation measure.

Look at ‘real GDP’ using SGS inflation. 2011’s second quarter real GDP growth was -7.23%, not 1.33% using the conservative inflation measure…

Quote of the Day: October 25, 2011

"By 2004, the richest 1 percent of Americans were earning about $1.35 trillion a year—greater than the total national incomes of France, Italy or Canada."

--Robert Frank, Richistan: A Journey Through the American Wealth Boom

A Note on Fiscal Policy in a Depressed Economy

Since the mid-eighteenth century, economists have recognized that changes in the pace at which economic agents spend induce changes in the level of prices and in the flow of production. We see this as early as David Hume's 1742 essay "On the Balance of Trade" In Hume (1742), changes in the economic environment or in economic policy--an import of gold resulting from a trade surplus or a financial reform that makes it easier for banks to accept deposits--that generates a change in in private agents' money holdings induces them to change the pace at which they spend, which then affects the level of prices and the pace of production.

Starting from this perspective, whether expansionary government fiscal policy would expand the nominal flow--and in a sticky-price world the real flow of spending--has an obvious answer: yes, it would. Expansionary monetary policy works by increasing the money stock and reducing interest rates, and so inducing economic agents to increase the pace at which they spend. Expansionary fiscal policy induces one very large economic agent--the government--to increase the pace at which it spends.

In this respect, at least the government's spending is as good as anybody else's spending.

Thus any economist who holds that expansionary monetary policy has real (or even nominal) effects is thereby committed to presuming that expansionary fiscal policy has similar effects as well.

In spite of this, only five years ago the majority of policy-oriented mainstream American economists, if asked whether fiscal policy had a role to play in stabilization policy, would have said that it did not--or that it had at most a very small role. Perhaps, they would have said, the automatic stabilizers built into the tax-and-transfer system were useful. But, they would have said, fiscal policy had no other stabilization policy role to play. Fiscal policy, they would have said, should focus on the long-run issues of ensuring confidence in intertemporal budget balance and rightsizing the public sector. Monetary policy can carry out the stabilization policy mission, we thought. And monetary policy should do so: it has a comparative advantage, we thought.

How differently do we think today? And to what extent is our difference in thought a loss of confidence in the institutional competence of the Federal Reserve, and to what extent is it a shift in our understanding of how the macroeconomy works (at least in extreme circumstances) that would affect our thinking even if we still had full confidence in the Federal Reserve?

Hoisted from the Archives: Evaluating Fiscal Stimulus

The Best Anti-Stimulus Argument: Kevin Murphy, January 16, 2009:

A Framework for Thinking about the Stimulus Package

  • Let G = increase in government spending
  • 1-α = value of a dollar of government spending (α measures the inefficiency of government)
  • Let f equal the fraction of the output produced using “idle” resources
  • Let λ be the relative value of “idle” resources
  • Let d be the deadweight cost per dollar of revenue from the taxation required to pay for the spending

When Will the Stimulus Add Value?

  • The net gain is the value of the output produced less the costs of the inputs and the deadweight loss
  • In terms of the previous notation we have:
    • Net Gain = (1-α)G – [(1-f)G + λfG] – dG
    • Net gain = (f(1-λ) – α – d)G
  • A positive net gain requires that: f(1-λ) > α+d

Difference of opinion comes from different assumptions about f, λ, α, and d: [Kevin's] View##

  • α likely to be large
    • Government in general is inefficient
    • The need to act quickly will make it more inefficient
    • The desire to spend a lot in a short period of time will make it more inefficient
    • Trying to be both stimulus and investment will make it even more inefficient
  • 1-f likely to be positive and may be large
    • With a large fraction of resources employed (roughly 93%) much will be drawn from other activities rather than “idle” resources
    • Ricardian equivalence implies that people will save to pay for future taxes reducing private spending
  • λ is non-zero and likely to be substantial
    • People place positive value on their time
    • Unemployed resources produce value through relocation (e.g. mobility & job search)
  • d is likely to be significant
    • Wide range of estimates of d * Estimates based on the analysis of taxable income imply d≈0.8
    • With these parameters the stimulus package is likely to be a bad idea

As I read it, Kevin thinks α = 1/2, f = 1/2, λ = 1/2, d = 0.8, and gets 0.25 < 1.3.

UPDATED: I would say that:

  • α = 0 (increasing income inequality and starvation of the non-health non-military public sector over the past generation have left a bunch of low hanging fruit)
  • f = 5 (there are multipliers out there, markets work if there is sufficient demand--and so as long as there are idle resources people will use them first as long as demand is available--and there is substantial hysteresis in employment)
  • λ = -1/5 (the cyclically unemployed are not having much fun, and are losing their skills and workforce attachment)
  • d = 0 (at the moment, there is no first order cost to financing government spending via borrowing)

So I get 6 > 0.

A Note on the Return of Depression Economics

Monster Island News Godzilla

Over the 1948-1990 period, the U.S. unemployment rate converged 1/3 of the way back to its sample average level each year. Thus the good that expansionary monetary and fiscal policy can do is limited: reduce unemployment by 0.1 percentage point this year through additional expansionary policies, and you reduce the integral of expected excess unemployment relative to trend by a total of 0.3 percentage point-years. And stimulative macroeconomic policies have costs: the policies implemented will not be the policies initially proposed, there will be reduced confidence in long-run price stability, there will be the tax wedge and tax uncertainty burdens of financing a higher national debt, and there will be the opportunity cost of not using the limited attention span and bandwidth of the political system for other policy goals.

FRED Graph  St Louis Fed

Over the 1990-2007 period, the point estimate is that the U.S. unemployment rate converges only 1/15 of the way back to its sample average level each year. Deviations of unemployment from its presumed natural rate are thus to a first approximation permanent. And taking action now to reduce the unemployment rate by 0.1 percentage points reduces the cumulative expected integral of future unemployment by 1.5 percentage points. Because there is no good reason to think that the market system will fix the problem in any reasonable span of time, the benefits to acting now are much greater than they were back before 1990: five times as great.

Thus whatever you thought the benefit-cost calculation for expansionary fiscal and monetary policies to fight high unemployment was over 1948-1990, you have to think that the benefits are much greater today.

And, analogously, you have to think that the costs are much lower today. The risk--very real in previous decades--that expansionary monetary policy would destabilize expectations and erode confidence in the Federal Reserve's commitment to effective price stability is simply not an issue today. And in previous decades the U.S. government had to pay to borrow, and so the cost of financing additional government debt was a real issue. Now investors pay the U.S. to take their money: the excess burden of debt finance is certainly no greater than zero.

You could argue in previous decades that the benefits and costs were such that a policy of macroeconomic neglect was benign, at least at the margin. I genuinely do not see how you can argue the same today.

Bleg for Help: Understanding the Right Opposition to Obama Macroeconomic Policy Department

This Friday my freshman seminar students are supposed to spend our hour-and-a-half discussing the Right Opposition's critique of Obama Administration microeconomic policy--those who argue that the U.S. government should be doing less right now: spending less, running smaller deficits, exerting less pressure to keep interest rates low, taking less risk onto its balance sheet. I have settled on assigning them four things to read:

Narayana Kocherlakota:

and Robert Lucas:

Are these the right four things to assign? What would be better? The object is to understand what they are saying and why, so that there can be an evaluation and a critique at a later stage. The object is not to mock...

Jan Eberly: Is Regulatory Uncertainty a Major Impediment to Job Growth? NO!

Is Regulatory Uncertainty a Major Impediment to Job Growth

The Assistant Secretary of the Treasury for Economic Policy:

Is Regulatory Uncertainty a Major Impediment to Job Growth?: If regulation was a significant drag on business today, we would expect to see profits constrained after recent regulatory reforms were passed into law.  However, corporate profits as a share of gross domestic income have about recovered their pre-recession peak, and earnings per share in industries most affected by recent regulatory changes, such as energy and health care, have among the highest earnings per share of those in the S&P 500.  This growth is inconsistent with a corporate sector held back by regulation…. If regulatory uncertainty was the primary problem facing businesses, firms would prefer to use their existing capacity and current workers as much as possible, while avoiding building additional capacity until they are more certain about the contours of future regulation…. [T]hey would increase the hours of the workers they already employ rather than hiring additional workers.  We have seen no evidence of this…. Low capacity utilization is inconsistent with concerns about future regulatory risk, but aligns with weak demand holding back current production….

Since the end of the first quarter of 2009, real investment in equipment and software has grown by 26 percent – about five times as fast as the economy as a whole….

Is Regulatory Uncertainty a Major Impediment to Job Growth 1

If regulatory uncertainty were having a significant impact on business performance, we would expect this to be reflected in capital markets.  However, financial indicators do not provide any evidence in favor of this hypothesis…. [C]orporate bond yields are low across a range of industries, suggesting that firms in industries facing greater regulatory risk, such as insurance and energy, are not being priced out of the market….

One commonly cited measure of uncertainty is the Chicago Board Options Exchange Market Volatility Index (known as the VIX), which measures the implied volatility of S&P 500 index options.  For most of the past year or so, the VIX has stood only a bit higher than in the pre-crisis period…. [T]he sharp increase in the VIX in August and previous sharp increases in late 2008 correspond to virtually identical movements in the VDAX, a similar measure calculated for the German stock market.  The correlation between these two indicators suggests that uncertainty in both countries primarily reflects global financial and economic conditions, rather than conditions specific to the United States, such as regulatory changes….

In an August survey of economists by the National Association for Business Economics, 80 percent of respondents described the current regulatory environment as “good” for American businesses and the overall economy. As noted above, in a recent Wall Street Journal survey of economists, 65 percent of respondents concluded that a lack of demand, not government policy, was the main impediment to increased hiring…

joe Gagnon Thinks That the Obama Administration's HARP II Plan Has Promise--If It Is Properly Supported

Joe Gagnon:

RealTime Economic Issues Watch: US policymakers are running out of options to solve our massive unemployment problem and get the economy growing again. The Administration’s jobs bill faces resistance in Congress. The best option that can be implemented without a vote of Congress is to work through the market that started this mess in the first place—housing. The Administration has made a good start by announcing that it plans to make it easier for underwater mortgagors to refinance and repair their balance sheets, but some of the details to be filled in will be important in determining the ultimate effectiveness of the program. In addition, to boost the overall economy and to maximize the benefits of mortgage refinance, the Federal Reserve should announce new large-scale purchases of agency guaranteed mortgage backed securities (MBS) with the goal of keeping the 30-year mortgage rate between 3 and 3.5 percent through the end of 2012. These purchases would have beneficial spillovers into almost all other financial markets….

Some have proposed that the Fed announce a desired path for the future price level (or future nominal GDP) that is higher than that currently expected by the markets. It is argued that such an announcement would raise inflation expectations, lower real interest rates, and stimulate economic activity. However, it is not clear that such an announcement, by itself, would have much effect. Indeed, during the past two years, there has been little tendency for market forecasts to move toward Fed forecasts. To increase its effectiveness, any such announcement should be accompanied by concrete actions to push market conditions in a supportive direction. The best option available is a massive program of MBS purchases….

The target ranges should be 3 to 3.5 percent for conforming 30-year mortgages, and 2.5 to 3 percent for conforming 15-year mortgages and 10/1 adjustable rate mortgages (ARMs). To achieve these targets for mortgage rates, the Fed should aim for current coupon 30-year MBS yields of 2.5 percent, and lower yields on MBS with shorter maturities. Because the spread of mortgage rates over MBS yields tends to jump up when yields decline, the primary mortgage rate would start close to 3.5 percent and gradually decline over the first few months of the program as the backlog of applications is run down.

The Federal Housing Finance Agency (FHFA) announced on October 24 that it plans to strengthen and extend the Home Affordable Refinance Program (HARP) through December 2013… to allow borrowers whose loans are currently guaranteed by the agencies to refinance despite having loan-to-value ratios above the normal 80 percent limit…. Details on the latter point will be released by November 15, and these details will be critical….

Judging from the pattern of previous refinancing waves, a sustained decline in mortgage rates of 2 to 2.5 percentage points in combination with reform of HARP likely would cause a surge of mortgage originations equal to more than half of the existing stock of agency-backed home mortgages. That would total at least $3 trillion. The median decline in the mortgage interest rate would be more than 2 percentage points, implying an overall reduction in household interest expense of $60 billion to $80 billion per year…. Because of the long-lasting nature of these savings, the total effect on household spending would be greater than that of an equivalent but temporary tax cut.4 In addition, the availability of record-low mortgage rates for a fixed period of time likely would spur potential new home buyers into the market and boost home building and sales.

Even more important, if the Federal Reserve supported the refinancing boom by purchasing $2 trillion of new MBS, for example, the existing MBS holders would have to find another market in which to invest $2 trillion. This avalanche of money would surely push up stock prices, push down bond yields, support real estate prices, and push up the value of foreign currencies. All of these financial developments would stimulate US economic activity. Based on a recent Fed study (Chung et al 2011) Fed purchases of this magnitude would increase US GDP by more than 2 percent after about two years, creating nearly 3 million additional jobs. This estimate includes only a small part of the effects operating through the mortgage refinance channel discussed above, so that the total effects on the economy would be even larger, perhaps creating 4 million extra jobs or more.

Twitterstorm delong: October 24, 2011

And Glenn Hubbard Is Also on the Side of More Expansion Via Fixing the Mortgage Market

For somebody who I suspect would dearly like to be Treasury Secretary in a future Republican administration, this strikes me as brave. Nice to see. I am grateful:

The false choice of stimulus versus austerity: The economic policy debate in Washington has come down to a boxing match between two opposing remedies – ‘stimulus’ in one corner and ‘austerity’ in the other. Unfortunately, considering each so-called solution in isolation has hampered both analysis and decision-making….

There are three tangible steps to boost growth. First, fundamental tax reform is essential. The US must reduce marginal tax rates on household and business earnings and on savings and investment, while broadening the tax base….

Second, a viable plan for medium and long-term fiscal consolidation is needed. The most straightforward would be a gradual slowing in the rate of growth of benefits in the Social Security and Medicare programmes…. The shift could be gradual, but if credible, would generate significant positive effects today.

Third, financial frictions make it difficult for households and businesses to respond positively to fiscal stimulus or to low interest rates. Policy actions need to mitigate this broken link in the chain. In particular, frictions in the mortgage market and low equity levels have restricted the ability of tens of millions of borrowers to take advantage of very low interest rates by refinancing their mortgages…. Household balance sheet repair would be accelerated if every homeowner with a mortgage through Fannie Mae and Freddie Mac who is current on payments were allowed to refinance their mortgage at the current very low rates…. Focusing just on monetary stimulus and temporary tax cuts misses these important links. The positive effects of low interest rates on refinancing, household incomes and wealth have been cancelled out by mortgage market imperfections that can be straightforwardly fixed. Additional fiscal stimulus for business investment can mimic very low interest rates in the cost of capital….

The proposed plan does not imply that short-term action by the government or the Federal Reserve is useless, but it should be consistent with the steps.

Finally!: Executive Branch Action Department

Matthew Yglesias:

Administration Seeking Unilateral Levers To Speed Deleveraging: While keeping one eye on Congress and the fate of the American Jobs Act, President Obama is also planning to move ahead with a few unilateral steps that it can take on its own authority…

new rules for federally guaranteed mortgages… policy changes to ease college graduates’ repayment of federal loans….

Targeted debt relief is not my favorite idea in the world. It raises fairness, moral hazard, and time-consistency problems that can be avoided with broader based stimulative ideas. But if congress won’t enact broad stimulatory policies, then the administration has to try to go forward with the levers it has at its disposal. As predicted by my personal moral values chart, I think it’s much more important to reduce the harm of mass unemployment than to try to have us all suffer together in a fair way.

Mark Thoma Reads Jesse Rothstein: Unemployment Insurance and Job Search in the Great Recession

Mark Thoma:

Economist's View: Unemployment Insurance and Job Search in the Great Recession: New research from Jesse Rothstein shows that, contrary to what you may have heard from those who are trying to blame our economic problems on government programs rather than malfeasance on Wall Street, unemployment insurance is not the cause of the slow recovery of employment…

Carmen Reinhart and M. Belen Sbrancia: The Liquidation of Government Debt

Berkeley Economic History Seminar:

You can liquidate government debt in six ways:

  • You can pay it off.
  • You can "restructure" it.
  • You can destroy the value of your currency.
  • You can let inflation nibble it away.
  • You can let growth nibble it away as a share of economic resources when investors are happy to hold it at sub-market interest rates.
  • You can let growth nibble it away as a sure of economic resources when your regulatory system forces investors to hold government debt at sub-market interest rates.

"Financial repression" as an effective tax on asset holders. Colbert: "the art of taxation is that of extracting the most feathers with the least hissing…"

"In the United States, for the puppies in the back, we had Regulation Q which prohibited the payment of interest on checking accounts and limited the payment of interest on savings accounts. In the U.K., up until the 1960s it was easier to acquire nuclear weapons than to acquire currency with which to travel abroad…"

"You will like this, Brad. When we wrote our book we said that Australia had never undertaken a debt restructuring. Not so, said people in the Australian Treasury: 1932. Anytime some investor "voluntarily" trades a short-term high-yield instrument for a long-run low-yield instrument alarm bells should ring. This time this was a "voluntary" conversion rather than an "involuntary" restructuring because if you didn't do the conversion you faced a 40% tax…"

Monetary Constitution of the Eurozone Blogging: A History Lesson for the Grandees of the ECB

The Grandees of today's ECB bear a weighty responsibility. They need to carry it well.

A short history lesson should help them:

In the statutes of the mid-nineteenth century United Kingdom there was a law--7&8 Vict. ¶32--that expressly prohibited the Bank of England from expanding the country's high-powered money stock except as the consequence of a gold or silver inflow:

Be it enacted by the Queen's most Excellent Majesty, by and with the Advice and Consent of the Lords Spiritual and Temporal, and Commons, in this Parliament assembled, and by the Authority of the same... [that] it shall not be lawful for the said Governor and Company to issue Bank of England Notes... to any Persons whatsoever, save in exchange for other Bank of England Notes, or for Gold Coin or for Gold or Silver Bullion received or purchased for the said Issue Department under the Provisions of this Act...

Here we have the strictest black-letter legal prohibition against the Bank of England's acting like a proper central bank as a lender of last resort during a financial crisis.

Nevertheless, in the mid-nineteenth century the Bank of England did act like a proper central bank and did serve as a lender of last resort in financial crises. It did print up bank notes unbacked by any gold or silver bullion and did use them to buy dodgy and impaired securities from banks. It did so on three mid-century occasions: in 1847, 1858, and 1866.

How did the Bank of England dare break the law? How did it dare violate the express and direct command of its Dread Sovereign Lord and Excellent Majesty Victoria of Hanover, given with the Advice and Consent of her Lords Spiritual and Temporal, and Commons, in Parliament assembled?

The Bank of England got up the nerve to break the law in these three cases because the then-Chancellors of the Exchequer asked it to do so. In 1847 Lord John Russell, in 1858 Sir G.C. Lewis, and in 1866 William Gladstone wrote letters to the then-Governors of the Bank of England suspending the provision of the Bank Charter Act banning the Bank of England from issuing additional unbacked bank notes. From what place did Russell, Lewis, and Gladstone get their authority to countermand their Queen Victoria's commands? From out of thin air. They grabbed the power on the grounds that salus populi suprema lex, and then went and told Parliament what they had done.

John Ramsey McCulloch in 1858 explained why the mid-nineteenth century British ruling class thought that this spectacle--having the Chancellor of the Exchequer periodically beg the Governor of the Bank of England to break the law, and the Governor then doing so--was a good system:

The [Bank of England Charter] Act of 1844 is a rule to be enforced in all but extraordinary and unforseen emergencies, the urgency of which cannot be appreciated beforehand, but must be determined at the moment. But when theese occur, it may, like the Habeas Corpus Act be properly suspended. It is... not applicable [when] the convertibility paper into coin... [creates] a state of internal discredit or panic... its suspensions in 1847 and 1857 are... justified by the state of our domestic affairs making an adherence to principle inexpedient and impracticable....

Inasmuch, however, as the Act of 1844 has been suspended in caes of emergency, and as there can be no doubt that it will be supended if occasion require in tie to come... such suspension [could] be effected as hitherto by the pro re nata interference of ministers, or.... [by adding] a suspensive power... embodied in the Act. We believe, however, that the present plan [of extra-legal ministerial action] is much the best....

When government interferes to suspend the Act the necessity under which they are now placed of applying to Parliament for an indemnity, and the discussions thence arising, are the best securities that can be obtained for the measure not being resorted to rashly, or without a reasonably good cause. But it would be quite another thing did the Act contain a clause authorising suspensions. This would show that they were expected, and, indeed, almost invited. Under such circumstances, they would soon be regarded as matters of course, and to be resorted whenever a complaint or cry of monetary pressure was got up. And were such the case, it would be idle to suppose that either the Act or the convertibility of notes should be maintained for any considerable period. The millennium of the paper-mongers would be at hand. When the checks which with difficulty restrain over-issue, depreciation, and fraud, are repealed or rendered inefficient, what are we to expect but that they should extend their baleful influence on all sides?...

[T]he Act of 1844 should be indefinitely continued with little or no alteration. We are well-convinced that all the most important interests of the country will be best secured by such a proceeding...

The Grandees of today's European Central Bank claim that the terms of their charter prohibit them from acting to promote any objective other than a rate of consumer price increase in the eurozone of less than 2% per year.

The implications of this short history lesson for the Grandees of today's ECB are obvious.

Quote of the Day: October 24, 2011

"Men lose their high aspirations as they lose their intellectual tastes, because they have not time or opportunity for indulging them; and they addict themselves to inferior pleasures, not because they deliberately prefer them, but because they are either the only ones to which they have access, or the only ones which they are any longer capable of enjoying."

--John Stuart Mill, Utilitarianism

Paul Krugman in February 2009 on the Inadequacy of Stimulative Policy

"The croaking of a Cassandra who could never influence the course of events of time." I would not, however, say "never"--I would say "sometimes, and we all hope more in the future than in the past":

Paul Krugman:

Who’ll Stop the Pain? (February 20, 2009): Earlier this week, the Federal Reserve released the minutes of the most recent meeting of its open market committee… [M]y eye was caught by the following chilling passage….

All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.

So people at the Fed are troubled by the same question I’ve been obsessing on lately: What’s supposed to end this slump?… [T]his isn’t your father’s recession. It’s your grandfather’s, or maybe even (as I’ll explain) your great-great-grandfather’s…. Your grandfather’s recession, on the other hand, was something like the Great Depression, which happened in spite of the Fed’s efforts, not because of them. When a stock market bubble and a credit boom collapsed, bringing down much of the banking system with them, the Fed tried to revive the economy with low interest rates — but even rates barely above zero weren’t low enough to end a prolonged era of high unemployment. Now we’re in the midst of a crisis that bears an eerie, troubling resemblance to the onset of the Depression; interest rates are already near zero, and still the economy plunges. How and when will it all end?…

[T]he Obama administration is… trying to mitigate the slump, not end it. The stimulus bill, on the administration’s own estimates, will limit the rise in unemployment but fall far short of restoring full employment. The housing plan announced this week looks good in the sense that it will help many homeowners, but it won’t spur a new housing boom.

What, then, will actually end the slump?…

[D]urable goods [will wear out and need to be replaced]… given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming. The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873. That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later.

You can see, then, why some Fed officials are so pessimistic.

Let’s be clear: the Obama administration’s policy initiatives will help in this difficult period — especially if the administration bites the bullet and takes over weak banks. But still I wonder: Who’ll stop the pain?

Twitterstorm delong: October 23, 2011

  • RT @mattyglesias: @drfarls Even in retrospect the case for Clinton's inevitability is rock solid. We're living in an unlikely mirror universe

  • RT @jbarro: Also: by keeping the UK out of the Eurozone, Gordon Brown probably did more for Britain's prosperity than anyone else alive.

  • Wolfgang Munchau: Europe is now leveraging for a catastrophe -

  • RT @interfluidity: "Leverage can have different economic functions, but [here] it simply disguises a lack of money." HTTP://

  • @mattyglesias @RyanBleek Senator James Reed (D-MO). Key Senate Banking Ctte member in 1913...

  • RT @mattyglesias: I think labor's declining share of compensation is mostly a macroeconomic management failure:

  • RT @mattyglesias: Policy point about Rubio is his parents were standard economic migrants, not political refugees. Very relevant to immi ...

  • @zachdcarter Indeed. But "Time Considered as a Helix of Semi-Precious Stones" gives it a very good run for it money...

  • RT @dsquareddigest: Since it is economically impossible to enforce US immigration policy (fruit would rot in the fields), isnt that a cl ...

  • RT @EricBoehlert: Those crickets you hear is RW media (not) responding to Rick Perry's gruesome birther turn today;

  • RT @thinkprogress: Cain: If a pro-life constitutional amdt "comes to my desk I’ll sign it." Problem: Prez doesnt sign constitutional amd ... about 4 hours ago from web

  • Hoisted from Comments: Bork, Bork, Bork Edition

  • James A. Reed (D-MO)

  • @JustinWolfers Does TNR have a similar list of most over-rated pseudo-magazines?

  • RT @rortybomb: "[United States] ending up like Greece is essentially impossible." rt @ModeledBehavior Greg Mankiw on Fiscal Policy

  • RT @JustinWolfers: Greg Mankiw's false equivalence: For the US, P(Japan-style lost decade)=25%. P(Zimbabwe-style hyperinflation)=0.0001% ...

  • RT @TheStalwart: Krugman is correct: "It really has to be the ECB, for this to have any chance of working."

  • @PatrickOsgood Indeed, as @jbarro says, Britain owes more than it can repay to Gordon Brown and Mervyn King for keeping it out of the euro

  • Daniel Kahnemann: The Hazards of Confidence

  • Lawrence Summers: For a More Aggressive Cleanup of Housing Finance

For a More Aggressive Cleanup of Housing Finance

Lawrence Summers:

Why the housing burden stalls America’s economic recovery: The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending--and more spending.

Most policy failures in the US stem from a failure to appreciate this truism, and therefore from taking steps that would have been productive pre-crisis but are counterproductive now with the economy severely constrained by lack of confidence and demand.

Thus even as the gap between the economy’s production and its capacity increases, fiscal policy turns contractionary, financial regulation focuses on discouraging risk-taking and monetary policy is constrained by concerns about excess liquidity.

Most significantly US housing policies--especially with regard to Fannie Mae and Freddie Mac, institutions whose purpose is to mitigate cyclicality--have become a case of disastrous procyclical policy.

Construction of new single family homes has plummeted from about 1.7m in the middle of the last decade to about 450,000 at present. With housing starts averaging well over a million during the 1990s, the shortfall in housing construction now dwarfs the excess during the bubble and is the largest single component of the shortfall in gross domestic product.

Losses on owner-occupied housing have reduced consumers’ wealth by more than $7,000bn over the past five years, and uncertainty about the future value of their homes and the inability to refinance at reasonable rates deters household outlays on durable goods. The continuing weakness of the housing sector is a major risk for US financial institutions, raising significantly the costs of the loans they offer.

In retrospect it would have been better if financial institutions and those involved in regulating them, especially the Federal Housing Finance Agency, recognised that house prices can go down as well as up, if more rigour had been applied in providing credit, if the government-sponsored enterprises (GSEs) had been more careful in monitoring those originating and servicing loans, and if there had been more vigilance about fraudulent behaviour. The question now is what should be done…. [T]he FHFA… has taken a narrow view of the public interest… has not acted to ensure the GSEs stabilise the US housing market, and taken no account that the narrow financial interest of the GSEs depends on a national housing recovery…. A better approach would involve several changes in policy.

First… credit standards for those seeking to buy homes [now] are too high and rigorous….

Second… those on GSE-guaranteed mortgages should… be able to take advantage of lower rates….

Third, stabilising the housing market will require doing something about the large and growing inventory of foreclosed properties….

Fourth… [while] the Obama administration’s home affordability modification programme has been criticised for overly restrictive eligibility criteria, the reality is that a large fraction of those receiving assistance have ultimately been unable to meet even their reduced obligations…. Surely there is a strong case for experimentation with principal reduction strategies at the local level. The GSEs should be required to drop their posture of opposition to experimentation and move to a more constructive position.

Fifth… allowing negotiation over the past to dominate present policy creates overhangs of uncertainty that impose huge costs on the financial system and inhibits lending….

With a constructive approach by independent regulators, far better policies could be in place six months from now. The anticipation of a change to supportive policies could change the tone of the market even sooner. There is nothing else on the feasible political horizon that can make as large a difference in driving American economic recovery.

Daniel Kahnemann: The Hazards of Confidence


Don’t Blink! The Hazards of Confidence: I first visited a Wall Street firm in 1984…. I remember one exchange. “When you sell a stock,” I asked him, “who buys it?” He answered with a wave in the vague direction of the window, indicating that he expected the buyer to be someone else very much like him. That was odd: because most buyers and sellers know that they have the same information as one another, what made one person buy and the other sell? Buyers think the price is too low and likely to rise; sellers think the price is high and likely to drop. The puzzle is why buyers and sellers alike think that the current price is wrong.

Most people in the investment business have read Burton Malkiel’s wonderful book “A Random Walk Down Wall Street.”… If all assets in a market are correctly priced, no one can expect either to gain or to lose by trading. We now know, however, that the theory is not quite right. Many individual investors lose consistently by trading, an achievement that a dart-throwing chimp could not match. The first demonstration of this startling conclusion was put forward by Terry Odean, a former student of mine who is now a finance professor at the University of California, Berkeley…. In a paper titled “Trading Is Hazardous to Your Wealth,” Odean and his colleague Brad Barber showed that, on average, the most active traders had the poorest results, while those who traded the least earned the highest returns. In another paper, “Boys Will Be Boys,” they reported that men act on their useless ideas significantly more often than women do, and that as a result women achieve better investment results than men.

Of course, there is always someone on the other side of a transaction; in general, it’s a financial institution or professional investor, ready to take advantage of the mistakes that individual traders make. Further research by Barber and Odean has shed light on these mistakes. Individual investors like to lock in their gains; they sell “winners,” stocks whose prices have gone up, and they hang on to their losers. Unfortunately for them, in the short run going forward recent winners tend to do better than recent losers, so individuals sell the wrong stocks. They also buy the wrong stocks. Individual investors predictably flock to stocks in companies that are in the news….

Mutual funds are run by highly experienced and hard-working professionals who buy and sell stocks to achieve the best possible results for their clients. Nevertheless, the evidence from more than 50 years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. At least two out of every three mutual funds underperform the overall market in any given year.

More important, the year-to-year correlation among the outcomes of mutual funds is very small, barely different from zero. The funds that were successful in any given year were mostly lucky; they had a good roll of the dice…. The subjective experience of traders is that they are making sensible, educated guesses in a situation of great uncertainty. In highly efficient markets, however, educated guesses are not more accurate than blind guesses….

We often interact with professionals who exercise their judgment with evident confidence, sometimes priding themselves on the power of their intuition. In a world rife with illusions of validity and skill, can we trust them?… [P]eople come up with coherent stories and confident predictions even when they know little or nothing. Overconfidence arises because people are often blind to their own blindness. True intuitive expertise is learned from prolonged experience with good feedback on mistakes…. To know whether you can trust a particular intuitive judgment, there are two questions you should ask: Is the environment in which the judgment is made sufficiently regular to enable predictions from the available evidence? The answer is yes for diagnosticians, no for stock pickers. Do the professionals have an adequate opportunity to learn the cues and the regularities? The answer here depends on the professionals’ experience and on the quality and speed with which they discover their mistakes….

In general, however, you should not take assertive and confident people at their own evaluation unless you have independent reason to believe that they know what they are talking about. Unfortunately, this advice is difficult to follow: overconfident professionals sincerely believe they have expertise, act as experts and look like experts. You will have to struggle to remind yourself that they may be in the grip of an illusion.

Wolfgang Munchau: Titanic, Meet Iceberg

Wolfgang Munchau:

Europe is now leveraging for a catastrophe: A leveraged EFSF is attractive to politicians for the same reason that subprime mortgages once appeared attractive to borrowers. Leverage can have different economic functions, but in these cases it simply disguises a lack of money. The idea is to turn the EFSF into a monoline insurer for sovereign bonds. It is worth recalling that the role of those monolines during the bubble was to insure toxic credit products. They ended up as a crisis amplifier….

The simple reason why there can be no technical quick fix is that the crisis is, at its heart, political. The triple A-rated countries have left no doubt that they are willing to support the system, but only up to a certain point. And we are well beyond that point now. If Germany continued to reject an increase in its own liabilities, debt monetisation through the European Central Bank and eurobonds, the crisis would logically end in a break-up. There is no way the member states of the eurozone’s periphery can sustainably service their private and public debts, and adjust their economies at the same time.

Each of Germany’s red lines has some justification on its own. But together they are toxic…. The politics is not getting any easier. The behaviour of the Bundestag underlines the political nature of the crisis….

A monetary union may require more than just a eurobond and a small fiscal union. It may require a formal, if partial, transfer of sovereignty to the centre – that includes the rights to levy certain taxes, impose regulation in product, labour and financial markets, and to set fiscal rules for member states.

Under normal circumstances, European electorates would not accept such a massive transfer of sovereignty. I would not completely exclude the possibility that they might accept it if the alternative was a breakdown of the euro. Even then, I would not bet on such an outcome. Current policy is leading us straight towards this bifurcation point, which may only be a few weeks or months away.

The biggest danger now is the large number of politicians drawing red lines in the sand, and the lack of even a single EU authority willing and capable of cutting through them…

In Which Greg Mankiw Annoys Karl Smith…

I see that Greg Mankiw annoys Karl Smith:

Greg Mankiw on Fiscal Policy: Greg’s analysis is a bit off in his recent NYT column but most notably here.

The more we rely on deficit spending to keep the economy afloat, the more we risk the kind of sovereign debt crisis we have witnessed in Greece over the past year…. To be sure, the bond market doesn’t seem particularly worried about the solvency of the federal government. It is still willing to lend to the United States at low rates of interest. But the same thing was true of Greece four years ago. Once the bond market starts changing its mind, the verdict can be swift, and can lead to a vicious circle of rising interest rates, increasing debt service and budget deficits, and falling confidence…

Karl writes:

[I]n none of these [possible] cases does the United States end up like Greece. In order for that to happen the United States would have to abandon its own currency and conduct monetary policy using something other T-Bills. Given our current set, however, ending up like Greece is essentially impossible.

Karl is, of course, correct. A "Greece" can only happen to a country that does not control its own currency.

Hoisted from the Archives: The Barrington Moore Problematic and Its Discontents

The Barrington Moore Problematic and Its Discontents: September 25, 2010. As delivered in Harvard's Science Center B on Saturday morning:

John Stuart Mill was perhaps the last who was substantially at home in and competent in all the branches of moral philosophy.

Afterwards young scholars paying their dues found it impossible to learn everything and still have time to write anything. Since it is easier to teach undergraduates what you know, specialization in research drove specialization in curriculum. But dividing up the social sciences makes no sense for undergraduates: What use are economics B.A.s who know no political science or history? None at all. What good is a government department where, in my day, an undergraduate, without trying, could find himself assigned Graham Alison's Essence of Decision five times in five different classes?

But to try to construct an undergraduate education with its foundation as a simple injunction to read widely in the social sciences would be an enterprise doomed to failure. We think in patterns--analytical classifications and narratives. A program needs a backbone, something to give it enough structure to make sense to the minds of nineteen year-old East African Plains Apes, with our limited brains. Yet we do not want to reproduce the narrowing blinders of the disciplines? And how could such a program attract teachers when the incentives are all on the side of working on the core concerns of the disciplines in which they must eventually make their homes?

The project of building a Social Studies was "rescued," if that is the word, by history.

The Eurocentric view of the world before 1914 was of one in which the wonders of science drove prosperity, prosperity drove order, order allowed the spread of liberty, and liberty promoted peace and thought, and peace and thought drove science. All was not for the best in the best of all possible worlds but, in the words of Lennon and McCartney, getting better all the time,

Then came World War I. Lenin. Mussolini. Stalin. Hitler. Franco. Mao. Idi Amin. Augusto Pinochet. The virtuous circle turned out not to be the natural path but instead a fragile accident. No discipline was designed to or qualified to think how to get the North Atlantic world at least back to its happy place, back to something like the society of progress in which people once thought they had lived--that pre-WWI world in which the extra-judicial slaughter of thirty-five Europeans at Kishinev excited horror and condemnation, even if they were Jews.

Call this problematic presented by the history of the world from 1914 to 1945, or perhaps 1953 or perhaps 1975 or perhaps even 1989, the "Barrington Moore problematic": it is to understand the historical and social origins of dictatorship and democracy, of slavery and freedom, of ideology and rationality, of poverty and prosperity. Humanity had moved from societies of illiterate farmers producing little more than subsistence dominated by thugs with strong arms and sharp spears to urban, literate, industrial ones. That produced Abraham Lincoln but also Vladimir Lenin, Franklin Delano Roosevelt but also Mao Zedong, Konrad Adenauer but also Augusto Pinochet.

And Adolf Hitler as the sole historical member of the my-regime-killed-50-million club. Why? How? And what could be done to make it stop?

The Barrington Moore problematic provided the spine of the Social Studies major--and indeed of pretty much all the interdisciplinary social sciences majors on the North American continent for two generations. In their gallop through the issues of the Barrington Moore problematic students had, as Alexander Gerschenkron put it to those in his office he allowed to drink the good sherry, to read an awful lot of books that were very good to have read--if not fun in the moment or easyto read.

And so the major has been a great fifty-year success--and not just because budgetary restrictions capped it and the best Harvard students will gravitate like lemmings toward anything that promises to exclude some applicants.

Can the Barrington Moore problematic serve a role similar in the next generation to the one it has served in the past two?

Echoing Seyla, I would say not. For one thing, the era of modern history that the BMP was created to grapple with has indeed come to its end. For another thing, the Enlightenment preconditions for the BMP have not yet been secured.

First, Adolf Hitler is now sixty-five years in his grave. Societies in transition to urban-market-mass political-economic modernity and how to keep more Lenins and Hitlers from arising in them does not seem to be the globe's most urgent problem any more.

Second, our most recent modern monsters seem of a different and perhaps older kind: Saddam Hussein always reminded me more of the Caliph Uthman or of Mehmet II than of Hitler. Hamas, Al Qaeda, and Hezbollah seem more like updated versions of the Assassins of Syria plus plastic explosives rather than of the Comintern. Rwanda seems more like the Sicilian Vespers with radios than like the terror-famine of the Great Leap Forward.

Third, the Barrington Moore problematic assumes that we have consensus, at least within our own circle of debate, that the hard-won victories of the Enlightenment are the bedrock that we seek to protect and advance. Roosevelt had four freedoms. Freedom from want--that is, freedom to earn a living, freedom to not have to spend one's life frantically trying to avoid penury, what Locke called the right to property. Freedom from fear--that is, freedom from arbitrary arrest, from being beaten up on the street corner by people who don't like who one is, or who don't think you have a right to live here, what Locke called the right to life and liberty. Freedom of speech and expression--saying what you think and making the laws.

And, of course, there is the first of Roosevelt's four freedoms, the oldest of the Enlightenment freedoms, perhaps the most hard-won in the seventeenth century and the pattern for the others, John Locke's toleration, freedom of religion--freedom to peaceably assemble with one's fellow believers to worship one's own conception of God. You cannot even start thinking in the Barrington Moore problematic unless you start with consensus that the Enlightenment freedoms are the bedrock of what we want to protect and advance.

It is at this point in my argument that I found that I could not not notice Martin Peretz. Do I have to pretend," he asked, "that I think Muslims are worthy of the privileges of the First Amendment, which they are so likely to abuse?" That is a speech act that not only asserts that people called "Muslims" don't "deserve" the "privilege" of Lockean toleration, but also that he will be pretending if he ever says that they do.

To this the only appropriate response is: "What the fracking frack?"

So not only are the problems the BMP addresses not our biggest problems here in the North Atlantic--they appear to have been largely solved--and not only are our current monsters arising from other sources than contemplated, but we don't even have consensus in this room on the basic Lockean bedrock which has to serve as the foundation on which the whole structure was built. We thus need something more advanced--that deals with problems we have not yet solved rather than those we have--focused on very real but lesser threats to liberty and prosperity than the high totalitarianisms--but also something more basic as well. We are thus, historically, both too late and too early for that intellectual project to make sense. In his contribution to "A Critique of Pure Tolerance" Robert Paul Wolff could claim that basic Enlightenment issues were settled, that mere Lockean tolerance was not something at which we should aim--that we should aim "beyond pluralism and beyond tolerance." But surely we cannot aim beyond tolerance until and unless we have at least gotten into its neighborhood?

So how then should Social Studies organize itself for the next generations?

What intellectual thread should you follow as a guide through the labyrinth that is the study of human society? You need to expose students to the broadest range of ideas and perspectives. You need to avoid dissolving into a blooming, buzzing confusion. And yet you need to avoid the narrowing--I would say crippling--straightjackets of our current disciplinary perspectives. And you still need to allow individual students to find and study their own ultimate interest.

We out there at Berkeley face much the same problem.

We do not have good answers.

I occasionally play with "global history" a la Gellner, McNeill, and Diamond.

I occasionally play with a narrower dialogue of centralization vs. decentralization a la John Maynard Keynes, Karl Polanyi, Joseph Schumpeter, Friedrich Hayek, and James Scott.

I have had only one really good idea: that is to invite your Chair Richard Tuck out to Berkeley this fall for our internal review of our Political Economy major this fall, so that he can come down from the mountaintop, reveal the tablets, and tell us what the answer is and what we should do."

(Via .)

Hoisted from Comments: Implementing Nominal GDP Targeting without Actually Buying Any Assets Edition

Implementing Nominal GDP Targeting via Monetary Authorities Alone:

Andy Harless said...

Yes, it only works with the real Chuck Norris, and even then it won't work if he has a broken right arm. Which leaves us with 3 problems:

  1. A merely hypothetical Chuck Norris does us no good at all.

  2. Even at his most aggressive, Ben Bernanke is no Chuck Norris.

  3. The laws governing the Federal Reserve System may require Chuck Norris to break his arm before he becomes chairman. At least they will require him to wear a cast that makes it look like his arm might be broken. I'm guessing the cast would turn out to be a fake, but a lot of people are going to end up on the floor in the second room before everyone else moves to the first.

Also, it's not clear that a "clean" good equilibrium even exists. There is some "good" equilibrium, but it may require a much higher rate of nominal GDP growth than the market monetarists have in mind. With level targeting, we would get to this "good" equilibrium eventually, but it might not seem so good once we got there. Moreover, unless the underlying conditions change, the rate of NGDP growth for the target path would still not be an equilibrium, so even the "good" equilibrium would only be temporary. If the real interest rate associated with full employment is a big negative number, there's no way even Chuck Norris can give us a smooth 5% growth path for NGDP.

Nick Rowe said...

You wanna send Chuck Norris and Marlon Brando into the room together? They make exactly the same threat? Chuck does the hitting/printing; Marlon decides who gets hit/what gets bought? Couldn't hurt. Could only help, if they make a joint announcement of the same NGDP target. (Would be a credibility disaster if they announce different targets, because then Chuck and Marlon just end up fighting each other).

"Trouble is", Chuck whispers to Marlon, "you better not buy anything we can't sell back easily, because we're gonna have to reverse course damn' fast when people see we're serious".

And, of course, if you don't buy assets that you can't sell back easily, nobody will ever believe that you are serious.

Hoisted from Comments: Bork, Bork, Bork Edition

When Joe Nocera Became an Op-Ed Columnist, a Remarkably Good Long-Form Reporter Became a Flaneur of Unsurpassed Ignorance:

rootless_e said...

And bork's "scholarship" was deeply dishonest. If you are going to proclaim "originalism", but don't want to consider the intent of the Radical Republicans whose amendments radically changed the Constitution, you are confessing to being a fake.

smintheus said...

Bork had a long and bizarre history by the time he was nominated for the Supreme Court - a fact that Nocera does not acknowledge in any way. Indeed, Nocera goes so far as to deny it, implicitly ("Whatever you think of [his] views, they cannot be fairly characterized as extreme").

It's striking that the name "Nixon" does not get mentioned by Nocera. It may well be true that the "ugliness all started with Bork," if Nocera means that the Nixonians changed the whole nature of national politics for the late 20th century by institutionalizing their militant hyper-partisanship with its scorched-earth tactics.

Enlightened Layperson said...

I've read Bork's The Tempting of America, and Boyle's analysis is correct. Bork accuses his opponents of being moral relativists for believing that one individual's morality is just as good as any other's. He then takes the equally relativist position that one majority's view is just as good as any other's. He does not appear to notice the contradiction.

Tyrone Slothrop said...

Before Carter, federal appellate judges were chosen by the Senators from the state in question. Carter took this power from the Senate and tried to pick judges by merit. Reagan then used this newly centralized power to install conservative judges. This is when we first all learned about the Federalist Society. Reagan's efforts led to the appointment of Bork. To say that the blocking of Bork was the point when ideology upset the nonpartisan comity of American politics is to simply ignore what Reagan was up to. It wasn't a secret. There is a reason why conservatives want to put him on Mt Rushmore.

Altoid said...

Roger that, rootless, unless later amendments are somehow subject to limitations imposed by the original framers, or something . . .

But there's another aspect to the Bork nomination that I really don't think has ever gotten enough play. Bork was the stand-in who was promoted when a far better man resigned rather than follow Nixon's order to fire Archibald Cox, simply because he was willing to fire Cox. In other words, he was a political hack, and the fact that he was willing to carry his hackitude as far as he did was a primary impetus behind the (I believe now-defunct) special prosecutor law.

In the politics of the situation, nominating Bork was an in-your-face to anyone who believed Nixon had gone off the rails. It was kind of comparable to Jackson nominating Taney, because Taney was the hack who was willing to actually remove federal deposits from the second Bank of the US when the treasury secretary resigned. Except that Taney was able later to distinguish himself in the Dred Scott case because Jackson's senate allies had enough votes to award him the prize. What Bork would have done we can only guess at.

Are We Really in Danger of Turning into Zimbabwe?

I am disappointed in Greg Mankiw.

He won't say "no":

Financial Lessons From Four Nations: AS the economy languishes, politicians and pundits are debating what to do next. When we look around the world, it’s hard to find positive role models. But as we search for answers, it is useful to keep in mind those fates that we would like to avoid.

The recent economic histories of four nations are noteworthy: France, Greece, Japan and Zimbabwe. Each illustrates a kind of policy mistake that could, if we are not careful, presage the future of the United States economy. Think of them as the four horsemen of the economic apocalypse.

Let’s start with Zimbabwe. If there were an award for the world’s worst economic policy, it might well have won it several times over the past decade. In particular, in 2008 and 2009, it experienced truly spectacular hyperinflation. Prices rose so fast that the central bank eventually printed 100 trillion-dollar notes for people to carry. The nation has since abandoned using its own currency, but you can still buy one of those notes as a novelty item for about $5 (American, that is).

Some may find it hard to imagine that the United States would ever go down this route. But reckless money creation is apparently a concern of Gov. Rick Perry of Texas, who is seeking the Republican nomination for president. He suggested in August that it would be “almost treasonous” if Ben S. Bernanke, chairman of the Federal Reserve, were to print too much money before the election. Mr. Perry is not alone in his concerns. Many on the right fear that the Fed’s recent policies aimed at fighting high unemployment will mainly serve to ignite excessive inflation….

To be sure, the bond market doesn’t seem particularly worried about the solvency of the federal government. It is still willing to lend to the United States at low rates of interest. But the same thing was true of Greece four years ago. Once the bond market starts changing its mind, the verdict can be swift, and can lead to a vicious circle of rising interest rates, increasing debt service and budget deficits, and falling confidence…

When some are "crying 'Fire! Fire!' in Noah's Flood", a reality-based economist does not say: "Gee. It might be bone-dry in a decade. We should get ready!" A reality-based economist says: "Grab a bucket and a sandbag!"

DeLong Smackdown Watch: Nominal GDP Targeting Through Unconventional Monetary Policy and Through Fiscal Policy Edition

Eschaton Friday Cats Thread

Duncan Black complains because he thinks I have not been critical enough of nominal GDP targeting via unconventional monetary policy alone:

Eschaton: Why Don't They Lend Me $30 Billion On The Security Of My Cats?: If we're going to actually move to more "unconventional" monetary policy, can we please recognize that the reason to do so is largely because conventional monetary policy - acting through the banking system - isn't working? We should understand that it isn't working because it almost destroyed the world a few years ago and is about to do so again because, you know, nothing changed and the overpaid assholes who almost destroyed the world then are still in charge. If we're going to give out dodgy loans, how about giving dodgy loans to people who might do something with the money other than visiting the Great Casino?

Point taken.


I will report to the reeducation camp tomorrow, and if Duncan will send me pictures of his cats I will draw up plans for the DBCFRLF alongside the JDDFRLF…[1]

I have been saying that coordinated fiscal and monetary policy--jen-U-ine helicopter drops or simple government-print-and-buy-useful-stuff--is the superior way to accomplish nominal GDP targeting, and that doing so via monetary policy alone runs risks.

But I have not been saying so loudly enough.

Look: targeting the nominal GDP path via monetary policy alone in a liquidity trap is a bet that private-sector financiers will:

  • be confident that the policy will not be reversed when the economy emerges from its liquidity trap,

  • be confident that the policy will succeed and that they should start spending now in anticipation of the faster nominal GDP growth that the policy will produce, plus

  • a little bit of taking risk onto the Federal Reserve's balance sheet and so freeing up private financier risk-bearing capacity to expand their loan portfolio.

Mostly, that is, the policy is a policy that succeeds if it is generally expected to succeed and fails if it is generally expected to fail. It thus has the confidence fairy nature.

To the extent that the policy does not have the confidence fairy nature, it is because it changes asset supplies here and now and thus private financiers' incentives to lend and businesses' incentives to produce. It does so because the policy involves swapping one asset for another asset that is not the same.

Right now because we are in a liquidity trap short-term Treasury bills and cash are effectively, for the moment, the same asset: they are both short-term zero-yield safe nominal government liabilities. Very few believe that the Federal Reserve's buying Treasury bills for cash and saying: "See! We are doing something! Nominal GDP growth will be faster! You should raise your expectations of real growth and inflation and act accordingly!" would actually do anything. By contrast, if the Federal Reserve buys long-term Treasury or agency or private debt the assets it is buying carry an expectational term premium, duration risk, and (perhaps) default risk: they are not identical to the assets that they are selling. Because the private sector's asset holdings change, private-sector financiers and businesses have incentives to change their behavior even if they don't buy the appearance of the confidence fairy at all--and the fact that they will change their behavior even if they don't believe is a reason for people to believe.

The superiority of unconventional monetary policy thus works off of the fact that the assets the government is buying are different than the assets it is selling--and thus the more different the assets it buys from the assets it sells, the greater the non-confidence-fairy bang from the policy.

What asset is most different from cash?

With a helicopter drop, the Federal Reserve sells cash and it buys… nothing at all. Cash and nothing are pretty different assets. Add cash to private-sector portfolios and take nothing away, and portfolios have shifted in meaningful ways and people will change what they do.

With print-money-and-buy-useful-things, the government sells cash and buys… roads, bridges, research into public health, flu shots, killer robots--all kinds of things that are very very different indeed from cash.

Thus--as Milton Friedman's teacher Jacob Viner knew well back in 1933--coordinated fiscal and monetary expansion via printing money and buying useful stuff (or handing it out via helicopter drops) is a policy that really does not have the confidence fairy nature. Because it does not require confidence to start working, it will (probably) work much more rapidly and certainly.

[1] DBCFRLF: The Duncan Black's Cats' Federal Reserve Loan Facility. JDDFRLF: The Jamie Dimon's Dog Federal Reserve Loan Facility.

Quote of the Day: October 23, 2011

"When Columbus landed, Cook and Borah concluded, the central Mexican plateau alone had a population of 25.2 million. By contrast, Spain and Portugal together had fewer than ten million inhabitants. Central Mexico, they said, was the most densely populated place on earth, with more than twice as many people per square mile than China or India."

--Charles Mann, 1941

Twitterstorm delong October 22, 2011

  • RT @joshgreenman: Only shallow, stupid people who care nothing about real solutions will retweet this mistake. RT @newtgingrich: #

  • RT @jayrosen_nyu: It's called "harvesting." You admit your newspaper has no future. And you milk the remaining years of profit in print. ...

  • RT @BoingBoing: What a NATO airstrike looks like: Gaddafi's convoy reduced to scrap metal

  • RT @pwire: Has anyone polled an Obama vs. lawn gnome match up for 2012? HTTP://

  • Time to Vote with My Feet Against Google: Back to NetNewsWire, or Forward to Something Else?

  • RT @AmandaMarcotte: Things I learned in Lubbock: foxes are omnivores. They really like peaches. about 5 hours ago from web

  • RT @AndyHarless: Can Knut Wicksell beat up Chuck Norris?

  • RT @dangillmor: Climate change skeptic changes his mind, and deniers go ballistic. Surprised? I'm not, either.

  • John Holbo: Neoliberalism and OWS

  • RT @lhfang: Hah Washington Post bows to pressure from Koch's public relations team

  • RT @dsquareddigest: If the bank recap is to be mainly private sector it will take time. If the banks are given time, they will boost rat ...

  • RT @KD0IMH: @mattyglesias Hoenig was good at keeping lending standards high for banks in his region. DeLong praised him for such.

  • Why Oh Why Can't We Have a Better Press Corps? Yet Another New Republic Edition

  • Peter Orszag Pleads for Policies to Move the Distribution of Income in a Favorable Direction about 2 hours ago from TypePad

  • Jürgen Michels, Guillaume Menuet and Michael Saunders: The European credit crunch is on the way

  • RT @EmanuelDerman: Nobody seems to comment on the fact that if not for US UK French air attacks on convoy, Gaddafi would be safe in Niger.

  • RT @INETeconomics: NYC taxi medallions cost $1 million. They are getting expensive because they are licenses to print money - Felix Salm ...

  • RT @CatFoodBreath: I am a cat that has to choose between napping and sleeping every day. I am the 99 percent. Occupy the Couch.

  • RT @dangillmor: NPR's fear of its shadow is growing

  • Robert Waldmann: Questions About Nominal GDP Targeting

When Joe Nocera Became an Op-Ed Columnist, a Remarkably Good Long-Form Reporter Became a Flaneur of Unsurpassed Ignorance

Why oh why can't you have a better press corps?

Joe Nocera: quit your job, and get back to doing what you used to do very well.

Joe Nocera: The Ugliness All Started With Bork: On Oct. 23, 1987 — 24 years ago on Sunday — Robert Bork’s nomination to the Supreme Court was voted down by the Senate. All but two Democrats voted “nay.”

The rejection of a Supreme Court nominee is unusual but not unheard of (see Clement Haynsworth Jr.). But rarely has a failed nominee had the pedigree — and intellectual firepower — of Bork. He had been a law professor at Yale, the solicitor general of the United States and, at the time Ronald Reagan tapped him for the court, a federal appeals court judge.

Moreover, Bork was a legal intellectual, a proponent of original intent and judicial restraint…. Whatever you think of [his] views, they cannot be fairly characterized as extreme…

Six Republican Senators--John Chafee (R-RI), Bob Packwood (R-OR), Arlen Specter (then R-PA), Robert Stafford (R-VT), John Warner (R-VA) and Lowell P. Weicker, Jr.--thought that Bork's views were extreme enough that they broke party discipline and crossed their President to vote against Bork. Note that Bork wasn't filibustered: he was defeated. He only got 42 votes, with 58 Senators opposed. He only got 5 out of the 14 votes of the Judiciary Committee, losing all the Democrats--even the southern Democrats--as well as Republican Senator Specter.

But let me turn the microphone over to James Boyle, who writes:

A Process of Denial: Bork and Postmodern Conservatism: In 1963, when conservatives were worried that Congress might force white folks to open their hotels and restaurants to black folks, Mr. Bork was a libertarian with a high regard for individual freedom of association. He had this to say about the Interstate Accommodations Act:

The legislature would inform a substantial body of the citizenry that in order to carry on the trades in which they are established they must deal with and serve persons with whom they do not wish to associate.... The fact that the coerced scale of preferences is said to be rooted in a moral order does not alter the impact upon freedom. In a society that purports to value freedom as an end in itself, the simple argument from morality to law can be a dangerous non sequitur.... The principle of such legislation is that if I find your behavior ugly by my standards, moral or aesthetic, and if you prove stubborn about adopting my view of the situation, I am justified in having the state coerce you into more righteous paths. That is itself a principle of unsurpassed ugliness….

[Yet] by 1990, Mr. Bork will believe that a majority must legislate morality if it is not to "dissolve social bonds."…

[As of] 1971, the libertarian side of Mr. Bork's ideas had gone into decline…. Mr. Bork confessed nobly to his change of heart, at least insofar as it implied a reversal of his position over Griswold v. Connecticut. In 1968, together with other commentators, he had thought that case "a salutary demonstration of the Court's ability to protect fundamental human values."… By 1971 he felt it was an "unprincipled decision," both its derivation and its definition being "utterly specious."…

It is in his argument in favour of "legislated morality" that Bork's views become more complicated. He still seems to believe that moral decisions are not subject to proof or refutation and thus are unreviewable by the analytic techniques of judicial reason. Thus there is no alternative but to leave it to the democratic legislature and the majority view. This sounds like moral relativism to me. But Mr. Bork reserves the term "relativist" for those who disagree with him, particularly those who disagree with him about the propriety of "legislated morality." Liberals assume that if morals are subjective and relative, the state should not be allowed to legislate morality for its citizens. Mr. Bork draws rather different conclusions…

Robert Bork was always extreme. The extremes were different at different points in his career, but he was always far out there. No, the ugliness did not start with Bork's confirmation. The unsurpassed ugliness started with Bork's rejection of the Interstate Accommodations Act.

Robert Waldmann: Questions About Nominal GDP Targeting

RJW still cannot spell "targeting":

What is Nominal GDP targetting: [W]hat is the proposal? That the Fed have a target for 2012 nominal GDP or first quarter of 2012 nominal GDP? Even if it isn't measured, the Fed could try to get the November 2011 nominal GDP it wants….

I think Krugman understates his case when he claims that the Fed can't target nominal GDP when we are in a liquidity trap. I would define targeting X as making the conditional expected value of X equal to the target…. The concept of daily GDP is meaningful (although it would be crazy to try to measure it and correct accounting for inventories would be key). Do quasi-monetarists really think that the Fed can make the expected value of tomorrow's nominal GDP whatever it wants?

I admit I am being fairly twitty, but I think this question isn't totally stupid, because I think it shows that they just don't think about what monetary policy can and can't do. The Fed can move the Fed funds rate very fast. The Fed can change the money supply quickly, at least if it wants to reduce it…. Can the Fed get the 2012 annual nominal GDP it wants by buying Treasuries. Jan Hatsius (and Brad DeLong) argue that the Fed should declare its intention of buying whatever quantity it takes of long-term Treasuries to achieve a nominal GDP target. But what if there is no such quantity? Then the announcement would be a false claim.

Is there any such quantity? I think not. Certainly not if one wants 2011-2012 growth to be well over the trend growth rate, say 10%….

[M]ega QE if needed to target nominal GDP levels might work if it massively affects expectations somehow, even though there is a rational expectations equilibrium with a small change in expectations. But that sure sounds a lot like the confidence fairy to me.

The government can buy more than Treasuries. After Treasuries, you buy GSE debt. And if that doesn't work, you buy bank and corporate debt. And if that doesn't work, you lend JPMorganChase $30 billion on the security of Jamie Dimon's dog. And if that doesn't work, you buy equities. And if that doesn't work, you buy the services of construction workers--by which time you are explicitly doing money printing-financed fiscal policy.

The thing that scares me is that I am not at all sure what or how much the Fed would have to buy. If you had asked me back at the start of 2008 how much the Fed would have to buy in order to keep nominal GDP on its pre-2008 growth trend, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet from $1 trillion to $1.5 trillion. And if you had asked me in the middle of 2008, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $2 trillion. And if you has asked me at the end of 209, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $3 trillion. Yet here we are with a Fed with a $3 trillion balance sheet...

Peter Orszag Pleads for Policies to Move the Distribution of Income in a Favorable Direction

I have three:

  1. A more progressive tax system.
  2. Free universal public education--as much and as long as people want--to increase the supply of educated and workers and decrease the education premium to create a more equal pretax distribution of income.
  3. More public investment to speed economic growth.

Peter Orszag:

As Kaldor’s Facts Fall, Occupy Wall Street Rises: Over the past two decades -- and especially since about 2000 -- the share of national income that flows into wages and other kinds of worker compensation has been plummeting…. In 1990, about 63 percent of business income in the U.S. took the form of wages and other types of labor compensation, according to data compiled by the Bureau of Labor Statistics. By 2005, that figure had dropped to 61 percent. And by the middle of this year, it had fallen to 58 percent…. The difference from 1990 to today -- about 5 percentage points or so of private-sector income -- amounts to more than $500 billion a year….

Why the drop? Part of the reason is that the advanced economies have been shifting toward certain types of services and advanced manufacturing that have lower shares of labor income. But that explains only a small part of the decline…. The two primary drivers are globalization and technological change. From 1980 to 2005, as the world became more integrated, the effective labor supply available on a global basis expanded….

Over the next decade, the global pool of labor is likely to expand rapidly…. Unless we are somehow going to cut ourselves off from the world, though, we face the prospect of a continued downward trend in the labor share. The trite response to this reality is to call for more education and better training for workers, and more investments in research and development as well as infrastructure. It’s true that all such actions would help. But they take time, and even then they would probably only take some of the edge off the decline, not fundamentally reverse it.

No wonder the frustrated Wall Street protesters lack any specific proposals for change: We are effectively missing $500 billion a year in wages, and no one has a credible set of ideas that would bring it back.

That education and investment are long-run policies and that income distributions are very hard things to move by policy may make them "trite". But they are still worth doing.

Why Oh Why Can't We Have a Better Press Corps? Yet Another New Republic Edition

Ta-Nehisi Coates:

List-Served: The New Republic's list of "DC's Most Overrated Thinkers" set off a lot of people for including Rachel Maddow and asserting that her show "is a great tribute to Fox, because it copies the Fox style exactly." This is the sort of thing you say when you want to sound sensible and sober, but don't feel like doing the actual work. Pema Levy, Jonathan Cohn and Matt Yglesias have more on the particulars of Maddow.

For my part the whole notion of The New Republic calling out "overrated thinkers" is sheer spectacle -- like watching Uwe Boll flailing at film criticism, but worse. How does The New Republic, with any semblance of a straight face, damn Fareed Zakaria because he was "for the Iraq war when almost everybody was for it, criticized it when almost everybody criticized it"? This a magazine whose steward drops gems like "Muslim life is cheap" and "many in the black population are afflicted by cultural deficiencies" and then skips off to Harvard to collect his honors. 

Bigotry is a species of intellectual sloth -- but some sloths have social capital.

Quote of the Day: October 22, 2011

"We wind a simple ring of iron with coils; we establish the connections to the generator, and with wonder and delight we note the effects of strange forces which we bring into play, which allow us to transform, to transmit and direct energy at will. We arrange the circuits properly, and we see the mass of iron and wires behave as though it were endowed with life, spinning a heavy armature, through invisible connections, with great speed and power--with the energy possibly conveyed from a great distance."

--Nikola Tesla, Experiments with Alternate Currents of High Potential and High Frequency

Time to Vote with My Feet Against Google: Back to NetNewsWire, or Forward to Something Else?

Google euthanizes its (well-working) reader:

Official Google Reader Blog: Upcoming changes to Reader: a new look, new Google+ features, and some clean-up: As a result of these changes, we also think it's important to clean things up a bit. Many of Reader's social features will soon be available via Google+, so in a week's time we'll be retiring things like friending, following and shared link blogs inside of Reader.

We think the end result is better than what's available today, and you can sign up for Google+ right now to start prepping Reader-specific circles. We recognize, however, that some of you may feel like the product is no longer for you. That's why we will also be extending Reader's subscription export feature to include the following items. Your data belongs to you, after all, and we want to make sure you can take it with you.

  • Your subscriptions
  • Your shared items
  • Your friends
  • Your likes
  • Your starred items…

Implementing Nominal GDP Targeting via Monetary Authorities Alone

Nick Rowe sends us to Bill Woolsey on implementing level nominal GDP targeting:

Monetary Freedom: Krugman Advocates Nominal GDP Targeting: I was much more guilty of ignoring the key role of expectations early on. The relationship between expected future nominal GDP and current nominal GDP played little role in my thinking. I certainly downplayed the problems associated with a liquidity trap.

On the other hand, I have never assumed that modest changes in the quantity of money would generate whatever nominal GDP the Fed wants. I have always thought that quantitative easing in heroic amounts might be needed to keep nominal GDP on target in a situation what would otherwise develop into a Depression….

There is no need for the Fed to say that it wants more inflation. However, it does need to be willing to accept higher inflation if that is the consequence of nominal GDP rising to the target growth path. The expectation that the Fed would respond to any increase in inflation that occurs by giving up on the target for nominal GDP would make it difficult and perhaps impossible to reach the target growth path.

The Fed cannot play at nominal GDP targeting. It must adopt the new regime. It should adopt the new regime--it is better.


Monetary Freedom: DeLong on Nominal GDP targeting: DeLong commented on Krugman's support of nominal GDP targeting. (He had already advocated the regime change, along with quantitative easing and negative interest rates on reserve balances.)

The thrust of his comment is that money creation and fiscal stimulus should be used together. Either monetary policy alone or fiscal policy alone have doubtful consequences, but by creating money and having the government spend it, there is no doubt it can work. I am much more confident that monetary policy can do it alone.

What are his doubts? What is the market process he describes?

If you are--as we are right now--in a liquidity trap, with extremely interest-elastic money demand, then expansionary monetary policy that involved the Federal Reserve buying financial assets for cash:

  1. will have next to no effect on the short-term safe nominal interest rate--it's already zero.
  2. will decrease the long-term safe nominal interest rate to the extent that your open-market operations today change people's expectations of what your target for the short-term safe nominal interest rate in the future. 3/ will decrease the long-term safe real interest rate to the extent that it decreases the short-term nominal interest rate and changes expectations today of what inflation will be in the future.
  3. will decrease the long-term risky real interest rate to the extent that it decreases the long-term safe real interest rate and to the extent that the assets purchased for cash by the Federal Reserve free up the risk-bearing capacity of private investors and lead to a reduction in risk spreads.
  4. will increase spending to the extent that it decreases the long-term risky real interest rate and to the extent that private spending responds positively to decreases in the long-term risky real interest rate.

Lots of steps here, some of which may well be weak….

An alternative process is that expectations of a higher future flow of money expenditures on output will result in an increase in the profit-maximizing level of output and employment. The increase in the future profit-maximizing level of output increases the demand for capital goods now…. The increase in the future profit maximizing level of employment decreases the risk of future involuntary unemployment. This results in a decrease in saving now…. Given the level of real interest rate… the present flow of money expenditures on output rises…. [T]he IS curve shifts to the right because of an increase in expectations of future real output and income…. Why is this process ignored? It does, of course, have a "confidence fairy" element. But so does the process based upon higher expected inflation. Expected inflation can only be created if, somehow, nominal expenditure is going to increase in the future.

Suppose that no one believes that nominal expenditure will rise. Sadly, this forecloses both the higher future real output and higher present natural interest rate path, as well as the higher expected inflation and lower real interest rate path. Does that only leave us with the pathways described above? Expectations about future policy rates and "free up the risk-bearing capacity of private investors and lead to a reduction in risk spreads?"

I believe that DeLong's approach is too deeply tied to the new Keynesian modeling strategy. The market monetarist approach is that the Fed must commit to purchase whatever quantity of assets needed to reach and stay on the target growth path….

Why is it that the effect on the "IS" curve is ignored?… [We] know that strong recoveries create strong credit demand which raises equilibrium real interest rates. In my view, the new Keynesian models are just too tied to a regime of a central bank that adjusts a short and safe interest rate according to output gaps and inflation. They are poorly suited to considering an alternative regime where current and future interest rates can be at any level, and what is stabilized is the growth path of nominal GDP.

I don't deny that if no one expects the policy will raise nominal GDP, then lower nominal interest rates are what make massive quantitative easing work despite perverse expectations…


Monetary Freedom: Williamson on NGDP targeting: Stephen Williamson has noticed nominal GDP targeting, but clearly hasn't paid much attention…. He tries to make sense of the proposal by discussing it in the context of the Taylor rule…. Nominal GDP targeting isn't about creating expectations about future short term rates and how those will impact output gaps and future inflation. It is about creating expectations about the future level of nominal GDP…. Williamson… e has described is a proposal to stabilize the growth rate of nominal GDP. The proposal is to target the growth path of nominal GDP….

Nominal GDP targeting doesn't require that output gaps be measured. Nor does it require choosing a measure of inflation. (By the way, the CBO estimate of potential output has been running below trend for more than five years. Williamson should get around a bit more.)

Williamson then comes to his conclusion:

Could the Fed actually achieve such a target, even if it wanted to? No. Under current circumstances, there are no actions the Fed can take that could necessarily achieve such an outcome. Indeed, it is possible that the Fed could promise to keep the policy rate at 0.25% for five years in the future, and NGDP growth could fall below the target.

Market monetarists don't… favor targeting interest rates at all. I suspect that in Williamson's model economies, the Fed really would have to purchase all assets, and if representative agents have the wrong preferences and technology, the price level would stay the same. But the problem is with his model…

And Nick Rowe:

Worthwhile Canadian Initiative: E(NGDP) level-path targeting for the people of the concrete steppes: You want me to tell you a story in which the central bank pulls a lever, and that lever causes another lever to move next, followed by another lever, then another, spelling out a causal chain from beginning to end, where the end is a higher level of NGDP. But economics isn't like that. Because people aren't like that. Sometimes the future causes the present, because people's expectations of the future affect what they do in the present….

The US economy is currently in equilibrium. It's not a market-clearing equilibrium. It's not a very good equilibrium. But it is an equilibrium. If it wasn't an equilibrium, it would be somewhere else. But it isn't somewhere else, so it must be. Given what people expect other people to do, both now and in the future, each person is choosing to do what he is currently doing.

But this isn't the only possible equilibrium. I can imagine a better equilibrium, in which Nominal GDP is higher and growing faster, and expected to remain higher and growing faster….It's a better equilibrium. And those of us who advocate E(NGDP) level-path targeting want the US economy to move to that better equilibrium.

What would the Fed be doing differently, in that other, better equilibrium? The Fed will be smaller than it is today, and the Fed's interest rate will be higher than it is today. Real interest rates will need to be higher, because consumption and investment demand will be higher, because consumers and investors will have higher expectations of future real income and real expenditure. Nominal interest rates will be higher because prices are expected to be growing faster. The Fed will be smaller, because people won't want to hold as much money, and banks won't want to hold as many reserves at the Fed, now the economy is growing and interest rates are higher.

So, all the Fed needs to do to get the economy to that new, better equilibrium is to pull the lever in the right direction, right? Raise interest rates, and reduce the money supply, right?

Of course not. If the Fed did that, without changing expectations, the result would be a a move even further away from the better equilibrium, as demand fell even further.

The Fed needs to change expectations. Get people to expect that NGDP will follow the higher path. That's what the "E" in "E(NGDP)" stands for.

"Right!" the people from the concrete steppes exclaim gruffly "and how exactly will the Fed do that?!"

  • The Fed clearly announces its target path for NGDP. That's by far the most important bit. Everything else is secondary. And if the Fed had credibility, that would be enough.

"Why should anyone believe the Fed can hit that path?"

  • The Fed makes a threat. On the first day the Fed will print $1 billion and use it to buy assets. On the second day the Fed will print $2 billion and use it to buy assets. On the third day the Fed will print $4 billion and use it to buy assets. And the Fed will keep on doubling the amount it prints and buys daily, forever and ever, until E(NGDP) rises to the target path. (And will go into reverse and sells assets if E(NGDP) rises above the target path).

"What assets will the Fed buy?"

  • The Fed puts on its best James Dean (oops, Marlon Brando, thanks Andy) voice and replies: "What have you got?"

There are two rooms at a party. The first room is nearly empty. The second room is nearly full. Because everyone wants to be where everyone else is. Then Chuck Norris enters the second room. He threatens to beat up 1 person at random in the first minute, 2 people in the second minute, 4 people in the third minute, and so on, until the room is empty. This is no longer an equilibrium.

A few people were nearly indifferent to being in the second room. So they leave even if the chance of them getting beaten up is tiny. That means there are fewer people left in the second room. This makes the second room slightly less attractive for those who want to be where everyone else is. And it slightly raises the probability of being beaten up by Chuck Norris. So more leave. Which repeats the process, so still more leave. And if you and I can see what's coming, so can the people in the room, who don't want to be the last to leave. There's a rush for the exits, and Chuck doesn't even have to lift a finger. OK, if someone didn't hear the threat, or doesn't recognise Chuck Norris, he might actually have to carry out his threat for a few minutes. But simply seeing all the others leave the room will be enough to induce most to leave the room very quickly.

Chuck Norris doesn't have to beat up everyone in the room. He just has to threaten to beat up as many as it takes to clear the room. The number of people he will actually beat up is a lot less than the number he threatens to beat up. If his threat is credible, and everyone hears it, he doesn't need to beat up anyone.

Eventually, if the Fed bought up every single asset in the economy, and swapped it for cash, NGDP would rise to the Fed's target path. Prices would rise without limit as the Fed bought up the last remaining assets because the sellers could name their price. And people would hire the unemployed to build factories which they could float on the stock and bond markets and sell to the Fed at any price they liked. Or sell to the people who had already sold all their assets to the Fed.

But there is no way it would ever get that far. That's like saying that Chuck Norris will eventually beat up everyone in the room. That's not an equilibrium.

Some people are just barely willing to hold cash in the current equilibrium. If they expect even the slightest rise in NGDP in even the distant future, they will get out of cash, and into real assets, or claims on real assets like commercial stocks and bonds. And this will increase the demand for goods today, either directly, or because firms find it easier to issue new stocks and bonds to finance investment. Which raises NGDP, and expected future NGDP, even if just a little. Which encourages additional people to exit cash too, and buy real assets and claims to real assets. Which raises NGDP and expected future NGDP still further. And so on. As soon as people figure out what's going on, and what's going to happen, expected NGDP rises to the target path. The Fed only has to carry out its threat until people catch on to what's happening. Then it has to reverse course and sell all the assets it bought, and then some more, to prevent the economy overshooting the new equilibrium…

The problem, I think, is that every time Nick Rowe writes "Chuck Norris won't have to lift a finger" he is changing the situation from one in which Chuck Norris enters the room into one where a six-foot cutout of Chuck Norris is carried into the room, and an economist says: "this cardboard cutout will beat you up unless you move." And people laugh.

Fiscal expansion financed by printing money is the better option.

Liveblogging World War II: October 22, 1941

The Odessa massacre;

1941 Odessa massacre - Wikipedia: "On October 16, the Germans and the Romanians captured Odessa following a two-month siege. On October 22, a delayed bomb set by the Soviets detonated in the Romanian HQ, killing 67 people including General Glogojeanu, the Romanian commander, 16 other Romanian officers, and 4 German naval officers.

Blaming the Jews and communists for the bomb, the Romanian troops began reprisals that same evening. By noon of the following day, October 23, 5,000 civilians had been seized and shot, most of them Jews. On the morning of October 23, over 19,000 Jews were assembled into a square near the port, sprayed with gasoline, and burnt alive.

That afternoon, over 20,000 were led out of the city in a long column in the direction of the village of Dalnik. When they reached Dalnik, they were tied together in groups of 40-50 people, thrown into an anti-tank ditch and shot. When the Romanians grew concerned that the killings would take too long, they moved the rest of the Jews into four large warehouses in which they made holes for machine guns. The doors were closed and the soldiers fired into the buildings. In order to make sure that all those inside the buildings were killed, at 17:00 hours on the following day, October 24, they set fire to three of the buildings, which were filled mainly with women and children. Those who tried to escape through windows or holes in the roofs were shot or met with hand grenades. On October 25, the fourth building, which was filled with men was shelled. These massacres were carried out under the orders of Lieutenant-Colonel Nicolae Deleanu and Lieutenant-Colonel C.D. Nicolescu. German soldiers also took part in the shooting.

Around 35,000 – 40,000 of the Jews that remained were moved into the ghetto in the suburb of Slobodka where most of the buildings were destroyed, and left outdoors for ten days, between October 25 and November 3, and many Jews froze to death.

Remember That There Is a Very Simple Solution to Europe's Current Financial Crisis?

Duncan Black:

Eschaton: Do I Hear 80%?: It isn't totally my preferred solution, but we should remember that the crisis and problems are fake, that there is a simple solution. Cancel Greece's debts and have the ECB give free money to the banks.

BRUSSELS — Eurozone finance ministers said Saturday that they have agreed that banks should accept substantially bigger losses on their Greek bonds, with a new report suggesting that writedowns of up to 60 percent may be necessary.

Alternatively, poor and middle class people can continue to suffer as Greece's economy is destroyed. Rich people across the world agree that the solution to every problem is more suffering for poor people.

And Paul Krugman:

There's A Hole In The Bucket: [A]t this point the urgent need is for a big Panzerfaust — a bailout fund big enough to head off a self-fulfilling liquidity crisis for Italy. But such a fund would be backed by the credit of the euro area’s remaining AAA governments, basically Germany and France — yet at this point the euro situation has deteriorated sufficiently that taking on another commitment would undermine French credit. There’s a hole in the bucket, and every attempt to fix that hole ends up being stymied because, well, there’s a hole in the bucket.

The answer to the whole conundrum is to back the rescue, not with French guarantees, but with the power of the printing press — to put the ECB behind the effort. But the ECB won’t and maybe can’t (under current rules) do that.

And meanwhile, austerity programs are leading to severe slumps in Greece and elsewhere. Who could have imagined that?

What a tragedy. A rich, productive continent, which has produced arguably the most decent societies in human history, is tearing itself apart because its elite insisted on embarking on a dubious monetary project, and now can’t bring itself to take the steps necessary to give that project a chance of working.

Rhetorical Calvinball Watch: NATO Role in Gaddafi's Death Edition

I saw last week that Chris Bertram was asking me to comment on his writings. Here's one that's appropriate for today.

Chris Bertram wrote:

The People Disarmed: "[T]he involvement of France, the UK, and the “international community”... fundamentally changes the nature of what’s going on [in Libya]…. [A] successful popular uprising is no longer a possibility…. Most of the Libyan people have now been cast into the role of passive victims.... [E]ven if Gaddafi falls (which I hope he will) the successor regime will lack the legitimacy it might have had…

And yet he protests that my summary of his position as: "Chris Bertram's claim that NATO support means that the Libyan Revolution is illegitimate"

is not a reasonable inference from "will lack the legitimacy it might have had", since legitimacy can be a matter of degree rather than all or nothing.

This leads to the natural question: If all that Bertram meant was that NATO's air support had the effect of somewhat diminishing the degree of legitimacy possessed by the Libyan successor regime, then it what sense did NATO air support (i) fundamentally change the nature of what is going on, (ii) cast the Libyan people into the role of passive victims, and (iii) eliminate the possibility of a successful popular uprising?

That fish simply won't swim. That bird simply don't fly. That dog simply won't hunt.