We Really Do Need a 4%/Year Inflation Target
Liveblogging World War II: May 26, 1943

Noted for May 26, 2013

Eduardo Porter: Despite Keynesians’ Victory, Economic Policy Holds | Social media in the 16th Century: How Luther went viral (2011) | Keith Humphreys: Weekend Film Recommendation: Tinker, Tailor, Soldier, Spy | Carl Zimmer: Dogs - From Fearsome Predator to Man’s Best Friend | Teresa Nielsen Hayden sends us to Molly Muses: Mormon Flow Chart for Your Soul | Kenneth Rogoff: Europe’s Lost Keynesians | Chris Blattman: Dear governments: Want to help the poor and transform your economy? Give people cash |

  • Mark Thoma: 'The Noble and Ancient Tradition of Moron-Baiting': "I'm still not fully convinced on this point. The internet may make bluffing harder, but it also makes it easier for 'bullshitting (to use the correct philosophical terminology)' to spread within conservative and/or liberal circles (which are relatively isolated). But perhaps those calling bullshit are, on average, prevailing over those spreading it -- I sure hope so."

  • Scott Lemieux: Good Motives Are Not Enough: 'For the most part, after seeing Kinsley’s latest I’m happy to defer to Drezner, Konczal, and Krugman. But… I should note that neither Krugman (nor me, in the linked post) “called [Kinsley] a neocon.” The point was just that Kinsley’s invocation of stagflation is comparable to neocon invocations of Munich…. And, again, the moralism that seems to be doing most of the work in Kinsley’s argument isn’t an invention of his critics; it’s entirely explicit…. "My fear is not the result of economic analysis. It’s more from the realm of psychology…. [...] But this cure has been one ice-cream sundae after another. It can’t be that easy, can it? The puritan in me says that there has to be some pain. That’s not to say that there hasn’t been plenty of economic pain. But that pain has come from the recession itself, not the cure." It’s not name-calling to say that moralism rather than economic analysis seems to underpin Kinsley’s belief in austerity.  It’s just an accurate description…. What makes this argument offensive, though, is Kinsley’s implicit assumption of shared sacrifice…. If you’re a liberal advocating policies that are certain to inflict immediate pain on people who are already in dire straits, you’d better have a damned good argument that this is justified by a clear long-term payoff. Boil off the puritain moralism, though, and Kinsley’s only substantive argument is the invocation of stagflation. And this argument is transparently wrong…. Which is presumably why Kinsley is unwilling to defend his claim on the merits and would prefer to discuss the purity of his motives… So, fine, let’s stipulate that Kinsley is a good liberal…. It just doesn’t matter because he doesn’t have any kind of serious argument to make in defense of austerity.'

  • Mark Thoma: Economist's View: 'The Hangover Theory': Robert Waldmann's comments on the response to Michael Kinsley remind me of this old article from Paul Krugman (I've posted this before, but it seems like a good time to post it again -- it was written in 1998 and it foreshadows/debunks many of the bad arguments used to justify austerity, etc.)

  • Paul Krugman (1998): The constantly occuring idea of helpful recessions is incoherent and faulty: "A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the 'Austrian theory' of the business cycle--a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well. But the incident set me thinking--not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or 'liquidationism,' or just call it the 'hangover theory'. It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion. The hangover theory is perversely seductive--not because it offers an easy way out, but because it doesn't. It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. And it offers adherents the special pleasure of dispensing painful advice with a clear conscience…. Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods--implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment? Most modern hangover theorists probably don't even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. (Hence their opposition to any attempt to increase demand: This would leave "part of the work of depression undone," since mass unemployment was part of the process of "adapting the structure of production.") But in that case, why doesn't the investment boom--which presumably requires a transfer of workers in the opposite direction--also generate mass unemployment? And anyway, this story bears little resemblance to what actually happens in a recession, when every industry--not just the investment sector--normally contracts. As is so often the case in economics (or for that matter in any intellectual endeavor), the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory."

  • Robert Waldmann: Robert's Stochastic thoughts: At The Ecoomists's Free Exchange, R.A. joins the flash e-mob critiquing Michael Kinsley's austerian article…. Too Much has been Written about Kinsley's Austerian Article, and I  wrote even more. The article was not worthy of attention and so it has been linked more times than I can count (I'm not technorati). Why? The level of debate is lowered when we choose to counter the worst arguments for the position we oppose, but it is easy and fun…. I'd rather think it is because Kinsley has added something of value… he is more honest than most pundits… willing to admit that he has opinions about austerity and that they are based on his gut not on careful analysis of data."

  • Mark Thoma sends us to Francesco Saraceno: Living in Terror of Dead Economists: "Kenneth Rogoff has a piece on the Project Syndicate that is revealing of today’s intellectual climate…. The question then arises. Who ever thought that a more expansionary stance in the eurozone would solve the French structural problems? And at the opposite, why would recognizing that France has structural problems make it less urgent to reverse the pro-cyclical fiscal stance of an eurozone that is desperately lacking domestic demand?… If anything, given that the fiscal expansion would mostly happen in the core, it would help, not hamper the necessary rebalancing between core and periphery. The question remains of why we keep observing eminent economists that bash Keynesian policies even when this is inconsistent with (or irrelevant to) their general argument. Barring bad faith, I can’t find any other explanation than an ancestral aversion to Keynes and to its policy prescriptions (a couple of years ago Paul Krugman coined the term of Keynesophobia): whatever argument you are making, just find a way to slip into it a couple of paragraphs claiming that Keynesian policies would not work. This will keep you safe from hell."

  • Felix Salmon: How does Tim Geithner change his mind?: "That line about the 'mistakes that we and others have made' is about as close to an apology as we’ve seen from Tim Geithner, for anything that he’s done. It doesn’t go nearly far enough, of course. As the president of the New York Fed from 2003 to 2009, he sat on the FOMC, happily signing off on Alan Greenspan’s bubble-inflating policies, and also ran the most important of the many institutions charged with regulating American banks and reining them in when they got too ebullient. Clearly he did badly in both respects. But the most obvious case in which Geithner has done a complete U-turn from his former views is that of Indonesia. The great Australian financial journalist Peter Hartcher explained this very well back in 2009, when Geithner took over as Treasury secretary. He quoted former Australian president Paul Keating explaining in a nutshell exactly what Geithner did wrong: 'Tim Geithner was the Treasury line officer who wrote the IMF program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.' With hindsight, Geithner did the exact opposite of what he is now prescribing…. Geithner thought Asia’s problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts. The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment. But the Asian crisis was completely different…. Now that Geithner is going to write a book, I very much hope he goes as far back as Indonesia, and covers his two-year tenure at the IMF as well, rather than glossing over those episodes on the way to the juicy stuff about the more recent crisis."

  • Mark Dow: Here’s Why the Titans of Finance and Economics Are Wrong: "Brad DeLong had an entertaining piece on whales, super whales and men who hate the Fed, but the answer is much simpler than the one he offers…. The bottom line is the Titans are working from the wrong playbook… slaves to… formative experiences, almost to a man… in the early 80s…. They internalized one dictum: real men have hard money. This understanding implies that an increase in bank reserves deposited at the Fed (i.e. 'printing') eventually feeds credit growth and thereby inflationary pressures; in other words, no base money increase, no credit growth. Only one problem: reality disagrees…. The Federal Reserve only provides liquidity. The amount of liquidity it puts in the reserve system has no direct impact on the issuance of credit by banks or shadow banks. Only banks and shadow banks can create credit. And they lend either out of cash on hand or by repo-ing treasuries, mortgages, or deposits, if cash on hand is insufficient. And collateral that is pledged once can be pledged over and over and over… If the Fed money is not directly propping up the stock market and the economy underneath has been healing, the much talked about wedge between 'Fed-induced valuations' and 'the fundamentals' is likely considerably smaller than the consensus seems to think. It’s less 'artificial'.” In short, what all this means is the day the Fed lets up off the gas might give us a blip, or maybe that long-awaited correction, but ultimately the Policy Bears will end up getting crushed, again."

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