Noted for June 18, 2013
- Ken Rogoff: Dornbusch's Overshooting Model After Twenty-Five Years, The Mundell-Fleming Lecture: "Now underlying Dornbusch's disarmingly simple result lies some truly radical thinking. At the time Rudi was working on his paper, the concept of sticky prices was under severe attack. In his elegant formalization of the Phelps islands model, Lucas (1973) suggested that one could understand the real effects of monetary policy without any appeal to Keynesian nominal rigidities, and by 1975, Lucas had many influential followers in Sargent, Barro and others. The Chicago-Minnesota School maintained that sticky prices were nonsense and continued to advance this view for at least another fifteen years. It was the dominant view in academic macroeconomics. Certainly, there was a long period in which the assumption of sticky prices was a recipe for instant rejection at many leading journals. Despite the religious conviction among macroeconomic theorists that prices cannot be sticky, the Dornbusch model remained compelling to most practical international macroeconomists. This divergence of views led to a long rift between macroeconomics and much of mainstream international finance. Of course, today, the pendulum has swung back entirely, and there is a broad consensus across schools of thought that some form of price rigidity is absolutely necessary to explain real-world data, in either closed or open economies. The new view can be found in many places, but certainly in the closed economy work of authors such as Rotemberg and Woodford (1997), Woodford (2002), and of course in New Open Economy Macroeconomics. The Phelps-Lucas islands paradigm for monetary policy is, for now, a footnote (albeit a very clever one) in the history of monetary theory."
Simon Wren-Lewis: mainly macro: Multipliers in a monetary union and at the ZLB: "I had earlier promised to talk about… Farhi and Werning… an excellent and very rich paper…. We all should know, from Woodford for example, that in a closed economy at the zero lower bound (ZLB) the (temporary) government spending multiplier is greater than one. It is tempting to apply the same logic to a member of a monetary union, because if they are small relative to the union as a whole they too face a fixed nominal interest rate. What Farhi and Werning show is that this is incorrect…. [Since] nominal exchange rates are fixed… the price level has to return to its original level to keep competitiveness unchanged. So if inflation rises today, it must fall (relative to the base case) later. With fixed nominal rates, we now have lower real rates followed by a matching period of higher real rates…. So this is another example of why you cannot assess the potency of fiscal policy without taking into account the monetary policy regime."
No More Mister Nice Blog: Once Again, Bush Policies Blamed on Obama: "The link (tweeted by Drudge and also at the Drudge Report) goes to this Gateway Pundit post: 'Just in case you want more Obama in your life... AT&T is loading iPhones with emergency alerts from Barack Obama... That you can't switch off.... Engadget reported: "AT&T has begun rolling out Wireless Emergency Alerts updates for iPhone 4S and 5, so you won't be the last folks to know if the entire northern hemisphere is about to be covered in ice à la Day After Tomorrow." You'll receive a notification from the carrier when your update is ready, but only if you're using iOS 6.1 or higher. Once installed, AMBER and Emergency alerts are automatically sent to your phone unless you switch them off via Settings. However, should you be tired of Obama, just know that there’s no way to switch off Presidential alerts. So now Barack can track your calls and send you messages, too….' A quick search of the Net reveals that right-wingers (Pam Geller, Alex Jones) have been flipping out about this for quite a while, although even Fox Business acknowledges that 'presidential alerts', which would be sent to all enabled recipients in the U.S., are intended to be for the direst of natural disasters and other emergencies. But isn't this just Obama megalomania? No, as the FCC explains: 'Why can't consumers block WEAs [Wireless Emergency Alerts] issued by the President? In passing the WARN Act, Congress allowed participating carriers to offer subscribers the capability to block all WEAs except those issued by the President.' The WARN Act is the Warning, Alert and Response Network Act, which was passed as part of a larger port security bill ... in 2006. That's 2006 as in 'when Republicans controlled the White House and both houses of Congress'. So, yeah, this is more Obama fascism that was actually a Bush-era idea."
Paul Krugman: Europe in Depression: "I’m in Paris for an economics conference, opening tonight with what is billed as a debate (although it’s more of a dialogue) over European economics with Mario Monti. So it’s worth looking at the ever-valuable Eurostat (pdf) for an update on Europe’s truly remarkable performance…. Actually, it’s not just the performance — with employment, after a slight uptick, back to declining 5 full years after the recession began — that’s remarkable; so is the fact that, as far as I can tell, European leaders don’t see this performance as a sign that there is anything fundamentally wrong with their policies, the structure of the euro system, or both."
Matt Steinglass: Inequality: The 1 percent needs better defenders: "APPARENTLY someone, perhaps John Kenneth Galbraith, once said that the way to debate Milton Friedman was to wait for him to say "'Let us assume…' and then immediately interrupt and say 'No, let's not assume that.' (Via Clay Shirky, via Dan Davies.) I thought of this quip on Saturday while reading a draft paper by Gregory Mankiw entitled 'Defending the 1 Percent'. Mr Mankiw begins with a thought experiment: 'Imagine a society with perfect economic equality… Then, one day, this egalitarian utopia is disturbed by an entrepreneur with an idea for a new product.…' Should the government shift to a progressive tax system to reduce the inequality? Obviously Mr Mankiw discovers that the answer is 'no', because that's the answer he has built his analogy to produce. But you don't even need to say 'No, let's not assume that' to see what's wrong with this analogy, because Mr Mankiw has done a strange job of selecting his John Galt figures…. Steve Jobs, J.K. Rowling and Steven Spielberg are about to create their staggeringly popular products, which will increase inequality because everyone wants to buy them. But now let's imagine that just before these geniuses are able to bring their creations into the world, they die. No iPod, no Harry Potter, no Jaws. What happens then? Here's what happens then. Instead of Apple dominating the market… Sony and Samsung do…. Instead of Harry Potter, some other children's fantasy book becomes the dominant franchise…. And instead of "Jaws", some other movie becomes the first immense blockbuster of the 1970s, and a different brilliant director's career is launched… just as much inequality as there is now…. Of the three Mr Mankiw proposes, only Steve Jobs plausibly had an irreducible, unique effect…. Mr Spielberg and Ms Rowling are acclaimed artists, but their startling wealth and prominence are entirely due to the increasing power of network effects in mass culture…. So why does Mr Mankiw pick three figures from the entertainment and computer industries, where everyone knows the 'superstar' phenomenon is strongest? Because if he used examples from other industries, it would be even more difficult to convince the reader that the immense rewards being reaped by those at the top had anything to do with their unique contributions…. I think the worst weakness in the paper comes in Mr Mankiw's brief treatment of the Rawlsian justification for redistribution. Rawls's argument is that if people were asked what kind of society they'd want to be part of, without knowing whether they'd be rich or poor (ie behind the 'veil of ignorance'), they would choose one where the rich paid taxes to fund social insurance for the poor. Mr Mankiw objects that this approach would also probably lead people to choose a society with mandatory organ donation, since they wouldn't know whether or not they'd need an organ. He thinks this a serious flaw in Rawls's argument: 'If imagining a hypothetical social insurance contract signed in an original position does not supersede the right of a person to his own organs, why should it supersede the right of a person to the fruits of his own labor?' Why indeed? And how come when I break your window it's just vandalism, whereas when I break your nose it's assault? Because your rights over your own body are more fundamental than other kinds of property rights, that's why. If Mr Mankiw is looking to dismiss the Rawlsian social-insurance argument, he's going to need a better argument than this." <-- Mankiw is also going to have to cite Robert Nozick in his paper as well…
Gavyn Davies: What the bond market is telling the Fed: "The nominal yield on 10-year treasuries has risen by 56 basis points since early May. This entire move, and more, has been due to a rise in the real bond yield, while the break-even rate of inflation has fallen fairly sharply. The rise in the real bond yield is a sign of normalisation in the economy, which had to happen sooner or later. Taken in isolation, that might be viewed as welcome. But the decline in inflation expectations is more troubling, especially since it has been accompanied by a sharp decline in the actual inflation rate itself. The Fed’s preferred measure of underlying inflation, based on the core PCE index, fell to 1.0 per cent in April, a rate which would normally result in serious concern about deflation risk at the FOMC. Yet, with the notable exception of James Bullard, no policy-maker has expressed much concern about this recently. It will be important to see whether the risk of low inflation is highlighted by the chairman this week."
John Mandle: Auschwitz | Julian Sanchez (2011): Nozick, Libertarianism, and Thought Experiments | James Kwak: The Politics of Intellectual Fashion | Brad DeLong says that Robert Allen is a tracking genius: The British Industrial Revolution in Global Perspective | Jared Bernstein: The Current U.S. Economy | Emmanuel Farhi and Iván Werning: Fiscal Multipliers, Liquidity Traps, and Currency Unions | Ta-Nehisi Coates: Revisiting the Moynihan Report |
