Saying More than "When the Storm Is Long Past the Ocean Is Flat"
Liveblogging World War II: May 5, 1943

Noted for May 5, 2103

  • Greg Ip: Lehman, PSI and the consequences of credit policy: The third lever of macroeconomics: Economics undergrads learn early on about two levers to manage the macroeconomy: fiscal policy and monetary policy. Events of the last five years make clear that there is a third lever that while poorly understood and difficult to model, it is at times critical: credit policy... anything that affects how the financial system influences aggregate demand. Of course, we've always known aggregate demand depends on both the central bank’s policy rate and the spread over that rate paid by households and firms. But before the cirisis the relationship between the policy rate and what borrowers paid was assumed to be either constant, or endogenous to monetary policy or the business cycle. That this is not always true is the greatest lesson macroeconomists have learned from the crisis.... Why is Europe now in recession? Some... blame excessively tight monetary policy.... Some... blame excessively tight fiscal policy.... Both, of course, might be at work. But credit policy may be more important than either. The credit crunch now suffocating peripheral Europe is not just the endogenous consequence of weak growth or the Greek crisis; it is also rooted in deliberate policy choices."

D.B. Echo: Original of: "Paul Krugman is tired of trying to reason with you people" | Tom Kostigen: Harvard Professor Niall Ferguson Trashes Keynes For Homosexuality | Donald John Markwell: John Maynard Keynes and International Relations: Economic Paths to War and Peace | Ezra Klein: "It’s… worth noting that Keynes’s remark had nothing to do with how families or governments should act in the present or in the future. It was about economists who comfort themselves with the assumption that economies self-correct over time rather than figuring out how to make those corrections shorter and less painful: 'In the long run we are all dead. Economists set themselves too easy, too useless a task if, in tempestuous seasons, they can only tell us that when the storm is long past the ocean is flat again.'" | Connor Simpson: "So there you have it. Ferguson is really sorry for saying this effete little gay boy didn't know how to think about numbers and money because of all the poetry he read and the boys he kissed. Except, you know, this isn't the first time Ferguson has made this argument. It's just the first time he's made it in such a large crowd that got blogged about later. University of Cambridge economist Michael Kitson says Ferguson has made the same argument for decades" | Joseph Schumpeter: Infamous Keynes Obituary ] Gertrude Himmelfarb: The War on Bloomsbury |

  • David Romer: Preventing The Next Catastrophe: Where Do We Stand?: "I found myself thinking about the conference from two perspectives. One is intellectual: Are we asking provocative questions? Are interesting ideas being proposed? Are we talking about important issues? By that standard, the conference was very successful: the discussion was extremely stimulating, and I learned a great deal. The second perspective is practical: Where do we stand in terms of averting another financial and macroeconomic disaster? By that standard, unfortunately, I fear we are not doing nearly as well. As I will describe, my reading of the evidence is that the events of the past few years are not an aberration, but just the most extreme manifestation of a broader pattern. And the relatively modest changes of the type discussed at the conference, and that in some cases policymakers are putting into place, are helpful but unlikely to be enough to prevent future financial shocks from inflicting large economic harms…. My view that we should think of financial shocks as closer to commonplace than to exceptional is based on history. Consider the United States over the past thirty or so years. By my count, there have been six distinct times over that period when financial developments posed important macroeconomic risks. In three of them, the risks were largely averted and the costs ended up being minor. In two, the costs were modest to moderate. And in one, the damage was enormous…. I was disappointed to see little consideration of much larger financial reforms…. Allan Meltzer noted that at one time 25 percent capital for was common for banks. Should we be moving to such a system? Amir Sufi and Adair Turner talked about the features of debt contracts that make them inherently prone to instability. Should we be working aggressively to promote more indexation of debt contracts, more equity-like contracts, and so on?… The fact that shocks emanating from the financial system sometimes impose large costs on the rest of the economy implies that there are negative externalities to some types of financial activities or financial structures, which suggests the possibility of Pigovian taxes…. The other way to make larger changes is to try to make the macroeconomy more resilient to financial shocks. I thought the lack of discussion of possible changes in this dimension was the largest gap in the conference…. The fact that we are making so little progress in terms of larger changes on the macro policy side appears to further strengthen the case for thinking about deeper financial reforms. But I also think we need broader thinking about the macro side. After five years of catastrophic macroeconomic performance, 'first steps and early lessons' – to quote the conference title – is not what we should be aiming for. Rather, we should be looking for solutions to the ongoing current crisis and strong measures to minimize the chances of anything similar happening again."

  • Joseph Stiglitz: The Lessons of the North Atlantic Crisis for Economic Theory and Policy: "With a century and half of clear, detailed information on crisis after crisis, the burning question is not How did this happen? but How did we ignore that long history, and think that we had solved the problems with the business cycle? Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris. The big lesson that  this crisis forcibly brought home—one we should have long known—is that economies are not necessarily efficient, stable or self-correcting…. [R]esponses to the crisis have not brought our economies anywhere near back to full employment.  The loss in GDP between our potential and our actual output is in the trillions of dollars. Of course, some will say that it could have been done worse, and that’s true. Considering that the people in charge of fixing the crisis included some of  the same ones who created it in the first place, it is perhaps  remarkable it hasn’t been a bigger catastrophe…. If we had begun our reform efforts with a focus on how to make our economy more efficient and more stable, there are other questions we would have naturally asked; other questions we would have posed…. We would, for instance, have asked what the fundamental roles of the financial sector are, and how we can get it to perform those roles better…. But failing to manage credit is not the only lacuna in our approach.  There is also a lack of understanding of different kinds of finance. A major area in the analysis of risk in financial markets is the difference between debt and equity. And in standard macroeconomics, we have barely given this any attention…. It should be clear that we could have done much more to prevent this crisis and to mitigate its effects. It should be clear too that we can do much more to prevent the next one…. To succeed, we must constantly remind ourselves that markets on their own are not going to solve these problems, and neither will a single intervention like short-term interest rates. Those facts have been proven time and again over the last century and a half."

  • Henry Blodget: Harvard Professor Niall Ferguson Reportedly Just Said Keynes Didn't Care About Future Because He Was Homosexual: "Professor Ferguson's reported remarks are bizarre and insulting to Keynes on two levels. First, this is the first time we have heard a respectable academic tie another economist's beliefs to his or her personal situation rather than his or her research. Saying that Keynes's economic philosophy was based on his being childless would be like saying that Ferguson's own economic philosophy is based on his being rich and famous and therefore not caring about the plight of poor unemployed people. Second, Keynes's policies did not suggest that he did not care about future generations. On the contrary… For the sake of both future generations and current generations, Keynes believed that governments should run deficits during recessions and then run surpluses during economic booms…. Professor Ferguson and other economists have been loudly and consistently warning the world for years that the deficit spending and debts of most developed countries will eventually end in disaster…. In the past 5 years, the experience of many countries suggests that Krugman's philosophy is correct, and, as yet, none of the doom predicted by Ferguson and other austerians has come to pass. Meanwhile, countries like the U.K. and Greece, which have cut spending to try to balance their budgets, have been mired in multiple recessions (or, in the case of Greece, a depression). And, notably, because lower economic output leads to less tax revenue, these countries have not made much progress in balancing their budgets. Ferguson's reported remarks would represent a new low in the war of words."

  • Paul Krugman: Playing Whack-a-Mole With Expansionary Austerity: "The rise and fall of Alesina-Ardagna didn’t make as much of a public splash as the Reinhart-Rogoff saga, but in a fundamental sense it was the same thing. An academic paper purported to show something austerians very much wanted to hear – in this case that slashing spending in a depressed economy would actually create jobs; the authors were immediately feted and the paper promoted to sacred status; but then the result fell apart under both intellectual scrutiny and the weight of real-world experience. Unlike R-R, however, A-A didn’t crash and burn, it just sort of quietly slunk offstage. And as a result, pieces of their story are still embedded in what all the Serious People know. In correspondence, Kevin O’Rourke points me to Mario Draghi admitting that fiscal consolidation is contractionary, after all, but claiming that it will be less contractionary if it takes the form of spending cuts rather than tax increases. Where is that coming from? Why, Alesina-Ardagna, of course. And as it happens, the IMF study (pdf) that debunked A-A also had something to say… it did… find that spending cuts were less contractionary. But why?…. Central bankers… were more likely to cut interest rates to offset spending cuts than to offset tax increases. So one way to read Draghi’s remarks is that he is saying that it’s better to cut spending, because he personally will reward spending cuts while punishing tax increases. I know, that’s a bit harsh – but remember, we’re talking serious business here, and Draghi is inserting himself into domestic policy in a way that he really shouldn’t."

  • Gillian Tett: The cost of hand-to-mouth living: A silent, dark underbelly of economic pain is stalking America’s current ‘recovery’: "A few weeks ago, when I was chatting with the head of one of America’s largest food and drink companies, he made a revealing comment about data flows…. Before 2007, this executive said, consumer spending on food and drink was fairly stable during the month in most US cities. But since 2007, spending patterns have become extremely volatile. More and more consumers appear to be living hand-to-mouth, buying goods only when their pay checks, food stamps or benefit money arrive. And this change has not simply occurred in the poorest areas: even middle-class districts are prone to these swings. Hence the need to study local pay and benefit cycles. 'We see a pronounced difference between how people are shopping today and before the recession', the executive explained. 'Consumers are living pay check by pay check, and they tend to spend accordingly. Then you have 50 million people on food stamps and that has cycles too. So for our business it has become critical to understand the cycle – when pay [and benefit] checks are arriving.'… The financial fragility of the poorer section of US society has risen sharply in recent years, as unemployment remains high and real incomes and household wealth fall…. Let us just hope that historians, sociologists and psychologists will be able to get access to that big data treasure trove in the not too distant future. It could be deeply revealing; if not poignant, too."

  • Scott Eric Kauffman: Thank you, Jonah Goldberg, for this new Internet Tradition: "According to Jonah in the article the Other Scott linked, Niall Ferguson should be forgiven because he 'was trafficking in an old theory that was perfectly within the bounds of intellectual discourse not very long ago'. Not since 'a very serious, thoughtful argument that has never been made in such detail or with such care' has Jonah provided us with a sentence of such valuable vapidity…. Thanks to Jonah’s brilliant formulation, conservatives can now blame recent historical traffic — of an unspecified age and purview — for every vile thought that leaks through their lips. It’s not their fault that we’re unfamiliar with social etiquette from whenever it was." herr doktor bimler says: "Anti-semitism? Rootless cosmopolitans? Racism?" N__B says: "Phrenology. And honestly, Smut, I don’t trust your bumps. Bill in Section 147 says: "Wasn’t long ago that one needn’t apologize for placement of the head of an enemy upon a pike." James E. Powell says: "We haven’t quite gotten to 'Ferguson and indeed all heterosexuals are the real victims here'. But they are working on it. They always do."