Grasping Reality on TypePad, by Brad DeLong

In 1980, the year Ronald Reagan won his first landslide presidential victory, pollsters at National Opinion Research Corporation asked Americans whether they thought, as Reagan did, that ‘too much’ was being spent on welfare, health, education, environmental, and urban programs. Only 21 percent did—the same percentage as had answered that way in 1976. The number that favored ‘keeping taxes and services about where they are’ was a healthy plurality, 45 percent—the exact same result as in 1975. READ MOAR

between 1840 and 1900 [had] a compounded rate of progress of about 7% per year.... 1848... speed... 60 miles per hour. A century later... 600... a rate of progress of only about 2% per year. By contrast, progress today comes rapidly... semiconductor technology has been progressing at a 40% rate for more than 50 years. These rates of progress are embedded in the creation of intelligent machines, from robots to automobiles to drones, that will soon dominate the global economy.... We will soon be looking at hordes of citizens of zero economic value. Figuring out how to deal with the impacts of this development will be the greatest challenge facing free market economies in this century...

...'developed’ in 1900 and ‘developing’ in 2000.... Financial development and institutional change are [probably] two main factors behind the unusual growth trajectory of Argentina over the last century.... Some argue that the decline started with the Great Depression (e.g. Diaz-Alejandro 1985)... Taylor (1992) argues for 1913.... Yet by 1947 Argentina was still ranked 10th in the world in terms of per capita income and della Paolera and Taylor (2003) estimate that the ratio of Argentina’s to the OECD’s income declined to 84% in 1950, to 65% in 1973, and then to 43% in 1987. It rebounded in the 1990s but with the run-up to the 2001 crisis again reverted....

The PGARCH multivariate analysis reveals a robust positive effect of the development of domestic financial institutions (private and savings bank deposits to GDP) as well as a negative growth effect from the instability of informal institutions (chiefly general strikes and guerilla warfare). As for the indirect effects on economic growth (through growth volatility), the results support negative roles for formal political instability (constitutional changes) and trade openness....

The main lesson... is one that economic historians already knew... institutions do matter but among them, political institutions and financial institutions seem fulcral...

...Many... economists... don’t know about an analytical approach that, it seems to me, lets you cut through most of the confusion.... An infinite-horizon model... all the action takes place in period 1.... P* is the period 2 price level, C* the period 2 consumption level... un-asterisked symbols refer to period 1... no investment, just consumption....

What determines period 1 consumption?... If we have rational expectations and frictionless capital markets--which we don’t, but let’s see what would happen if we did--the... ratio of marginal utilit[ies]... equal[s] the relative price of consumption in the two periods, where the relative price is the real discount rate.... Assume logarithmic utility, so that marginal utility is 1/C. Then... C = C*(P*/P)/(1+r).... [This] Euler equation... lets us read off current consumption from future consumption, current and future price levels, and the interest rate....

The 101st Airborne formed an all-round perimeter using the 502nd PIR on the northwest shoulder to block the 26th Volksgrenadier, the 506th PIR to block entry from Noville, the 501st PIR defending the eastern approach, and the 327th GIR scattered from Marvie in the southeast to Champs in the west along the southern perimeter, augmented by engineer and artillery units plugging gaps in the line. The division service area to the west of Bastogne had been raided the first night, causing the loss of almost its entire medical company, and numerous service troops were used as infantry to reinforce the thin lines. CCB of the 10th Armored Division, severely weakened by losses to its Team Desobry (Maj. William R. Desobry), Team Cherry (Lt. Col. Henry T. Cherry), and Team O'Hara (Lt. Col. James O'Hara) in delaying the Germans, formed a mobile 'fire brigade' of 40 light and medium tanks (including survivors of CCR 9th Armored Division and eight replacement tanks found unassigned in Bastogne).

...My first job out of college was as a junior editor for a small publication in Dublin, Ireland. When I moved back to the United States, I worked as a copy editor for a company many do not remember today called Bridge News. At the time, Bridge was one of the largest financial news providers in the world but was quickly displaced by a faster moving competitor, Bloomberg. It was the first of many times in my career when I witnessed a traditional media outlet upended by a new competitor on the landscape.

...than a generation or two ago. Too many families fear they are falling out of the middle class or will never get there due to a combination of stagnating wages, rising and high levels of income and wealth inequality, and an increase in jobs with unpredictable schedules and too few benefits. Yet, our workplaces are matched to a very different time. The foundation for labor standards in the United States are grounded in a set of policies implemented in the 1930s. They include the minimum wage, overtime provisions and unemployment insurance. This basket of social insurance programs presumes a specific kind of work and family structure that was prevalent then, but is not the norm now...

...will pick up.... Matt O’Brien argues that the bad news [for the Russian economy] won’t end any time soon.... Paul Krugman points to the large private-sector debts that Russia ran up.... Neil Irwin... countries with large social insurance states have the highest employment rates. Danielle Kurtzleben... the stark gender divide in low-wage work.... Dietz Vollrath... [on] the difficulty of calculating productivity growth in the service sector...

...since 2009 if not earlier, and have refused to change their views.... Inflation truthers insist that the government is hiding the real numbers.... Normally sensible conservative economists... see the non-inflationary story as somehow the result of very special circumstances.... Martin Feldstein and others have claimed that it’s all about the 0.25 percent... interest rate the Fed has been paying on excess reserves. Without that... quantitative easing would indeed have produced... big inflation....

So, can we talk about Switzerland?... Never paid interest on reserves... [now] charging banks 0.25 percent.... So has the Swiss National Bank’s huge increase in the monetary base, which dwarfs what the Fed has done, produced inflation?... Monetary base up by a factor of eight. Money supply up by much less, because banks didn’t lend the funds out. And consumer prices flat, indeed flirting with deflation. This is all exactly what a basic liquidity trap model--the one I laid out in 1998--predicted...

...having arrived here late at night on a flight from Beijing. It was a pleasant shock to wake this morning to see double-decker buses driving on the left-hand side of the road so far from home.

I came to Beijing for the launch of Bloomberg's Chinese-language service and to sit on a panel to discuss China's role in the new world order. The throng of Chinese tourists at the Forbidden City somehow made it more real to us that China is a country of 1.3 billion people. The highlight of the trip so far was a visit to the Great Wall - something I have always wanted to do. The most comprehensive archaeological survey has recently concluded that the entire Great Wall, with all of its branches, stretches for 5,500 miles. We didn't walk all of it.

...on deposits held by lenders at its central bank, moving to hold down the value of the Swiss franc amid turmoil in global currency markets and expectations that deflation is at hand. The Swiss National Bank said in a statement from Zurich on Thursday that it would begin charging banks 0.25 percent interest on bank deposits exceeding a certain threshold, effective Jan. 22...

...of health law critics and the business community, employers are not dropping coverage en masse and steering workers into the federally subsidized plans on the new Obamacare exchanges. In advance of the mandate finally kicking in, many are already increasing the number of employees offered coverage to ensure compliance. ‘The economic reality has changed,’ said Paul Fronstin, a senior associate at the Employee Benefit Resource Institute. Unemployment’s below 6 percent, down from the double-digit days in which the mandate was first debated. ‘Employers are remembering why they offered benefits in the first place--to compete for workers.’

The mandate is the Affordable Care Act’s last big piece of coverage expansion to be put into place. The Obama administration twice delayed it in the face of furious lobbying by the business community and repeated votes by the House to kill it.... ‘As we’ve gone along, I think there are other factors that have come into play – employee morale, retention of managers,’ said Michelle Neblett, director of labor and workforce policy for the National Restaurant Association. ‘I don’t hear people talking about dropping coverage, I hear about people figuring out how to afford to offer coverage.’...

...whose assumptions are known to be false[?]... Economists feel that they learn a great deal from such exercises.... Economists often analyze models that are 'theoretical cases', which help understand economic problems by drawing analogies between the model and the problem.... Models... data, experimental results, and other sources of knowledge... all provide cases to which a given problem can be compared. We offer complexity arguments that explain why case-based reasoning may sometimes be the method of choice and why economists prefer simple cases...

When the Financial Times's Martin Wolf asked former U.S. Treasury Secretary Lawrence Summers what in economics had proved useful in understanding the financial crisis and the recession, Summers answered:

There is a lot about the recent financial crisis in Bagehot...

“Bagehot” here is Walter Bagehot’s 1873 book, Lombard Street. How is it that a book written 150 years ago is still state-of-the- art in economists’ analysis of episodes like the one that we hope is just about to end?

There are three reasons:

The first is that modern academic economics has long possessed drives toward analyzing empirical issues that can be successfully treated statistically and theoretical issues that can be successfully modeled on the foundation of individual rationality. But those drives are disabilities in analyzing episodes like major financial crises that come too rarely for statistical tools to have much bite, and for which a major ex post question asked of wealth holders and their portfolios is: “just what were they thinking?”.

The second is that even though the causes of financial collapses like the one we saw in 2007-9 are diverse, the transmission mechanism in the form of the flight to liquidity and/or safety in asset holdings and the consequences for the real economy in the freezing-up of the spending flow and its implications have always been very similar since at least the first proper industrial business cycle in 1825.

Thus a nineteenth-century author like Walter Bagehot is in no wise at a disadvantage in analyzing the downward financial spiral.

The third is that the proposed cures for current financial crises still bear a remarkable family resemblance to those proposed by Walter Bagehot. And so he is remarkably close to the best we can do, even today.

...because I’ve been there.... I had my road-to-Damascus moment... in 1998.... Back in 1998 I... believed that the Bank of Japan could surely end deflation if it really tried. IS-LM said not, but I was sure that if you really worked it through carefully you could show... doubling the monetary base will always raise prices even if you’re at the zero lower bound.... (By the way, I screwed up the aside on fiscal policy. In that model, the multiplier is one.) READ MOAR

...because I’ve been there.... I had my road-to-Damascus moment... in 1998.... Back in 1998 I... believed that the Bank of Japan could surely end deflation if it really tried. IS-LM said not, but I was sure that if you really worked it through carefully you could show... doubling the monetary base will always raise prices even if you’re at the zero lower bound.... (By the way, I screwed up the aside on fiscal policy. In that model, the multiplier is one.)

To my own surprise, what the model actually said was that when you’re at the zero lower bound, the size of the current money supply does not matter at all.... Doubling the current money supply and all future money supplies will double prices. If the short-term interest rate is currently zero, changing the current money supply without changing future [money] supplies... matters not at all....

As a result, monetary traction is far from obvious. Central banks can change the monetary base now, but can they commit not to undo the expansion in the future, when inflation rises? Not obviously.... But, asks Evans-Pritchard, what if the central bank simply gives households money? Well, that is, as he notes, really fiscal policy.... I’m pretty sure that neither the Fed nor the Bank of England has the legal right to just give money away as opposed to lending it out; if I’m wrong about this, put me down for $10 million, OK?...

...with new instruments, central banks need to learn how to use them. This will not be easy since the exact effect depends on the specifics of a country’s financial system and there may be unintended consequences.... Macroprudential policy, just like monetary policy, is more art than science.... The high costs of financial crises suggest that it may be better to err on the side of a pro-active macroprudential policy stance....

Macroprudential policy requires complete independence from short-term political pressures to deal with the inherent conflict between the short and the long term. This is why independent agencies, such as the central bank or the financial supervisory authority, are made responsible for macroprudential policy. This requires adequate arrangements for democratic accountability, as macroprudential decisions, such as lowering the loan-to-value ratio, can have a major impact on citizens.

...punishment is communally imposed to get people to avoid unhealthy behaviors, such as drugs and broken families. Under a personal responsibility model, people are educated about the risks and dangers, and told that it is incumbent upon them to avoid doing the bad stuff.... Of course, this is a huge generalization, but I think you see this dynamic at work in the case of marriage and the case of drugs. The 'secret traditionalism' of upper-class liberals is no secret. It is simply the outcome of the repeated quiet exercise of personal responsibility....

Social conservatives, in my experience, often tend to argue that the lower classes of society are not smart enough to handle personal responsibility.... I am not a big fan of that idea.... But I suspect you'll find at least hints and threads of this idea throughout the arguments of many social conservatives. So that leaves the question: If personal responsibility works better than social censure, why?...

At the aggregate level we now have a bit of circumstantial evidence favoring the liberal, health-and-responsibility-based approach over the conservative, punishment-and-censure-based approach on both marriage and drug use.

1. A journalist needs to push Yellen on the secular stagnation issue.... Does she or the committee agree with Fischer?  And does she see any inconsistency with the SEP implied equilibrium Federal Funds rates and the current level of long bonds?....

2. The 5-year, 5-year forward breakeven measure of inflation expectations. Does she see this measure as important or too noisy to be used as a policy metric?  What is her preferred metric?...

3. Considering that recent updates of your optimal control framework now suggest that the normalization process should already be underway, how useful do you believe such a framework is for the conduct of monetary policy? What specific framework are you now using to dismiss the results of your previously preferred framework?...

4. St. Louis Federal Reserve President James Bullard has defined a specific metric to assess the Fed's current distance from its goals. What is your specific metric and by that metric how far is the Fed from it's goals?  What does this metric tell you about the likely timing of the first rate hike of this cycle?...

5. Why is the Fed setting the stage for raising interest rates next year while inflation measures remain below target? What is the risk, exactly, of explicitly committing to a zero interest rate policy until inflation reaches at least your target?...

6. High yield debt markets are currently under pressure from the decline in oil prices. Are you confident that macroprudential tools are sufficient to contain the damage to energy-related debt? If the damage cannot be contained and contagion to other markets spreads, what does this tell you about the ability to use low interest rate policy without engendering dangerous financial instabilities?

...wholesale gasoline distributors... will have to buy... one emissions allowance for every metric ton of greenhouse gases you emit when you burn the gasoline.... At the current price of allowances... that works out to about 10 cents per gallon of gas.... Unfortunately, as the date for expanding cap-and-trade to transportation fuels approaches, both the program's opponents and supporters have been exaggerating how much or little impact it will have....

The oil lobby... is claiming that the change will raise gas prices 16 to 76 cents... based on two analyses that were done many years ago.... The oil industry knows what allowances actually sell for today.... But they are choosing to stick with the outdated--and scarier--estimates.... Some proponents... are saying that Big Oil is not required by law to raise its prices, so it will be its own choice if it does, not the fault of the cap-and-trade program. This is just as disingenuous....

By establishing a price for emissions, California sends a signal to the rest of the country and the world that we recognize the risk of climate change and are willing to take actions to address it.... No one thinks California's climate change program alone will solve this global problem, but if advanced economies like ours aren't willing to step up, there will be no solution at all.

...that being a nominal rather than a real comparison.  If you are not convinced, try comparing $1 million or $1 billion (nominal) today to 1964. For some income level, we have seen net deflation. But here’s the catch: would you rather have net nominal 20k[/year] today or in 1964? I would opt for 1964, where you would be quite prosperous and could track the career of Miles Davis and hear the Horowitz comeback concert at Carnegie Hall. (To push along the scale a bit, $5 nominal in 1964 is clearly worth much more than $5 today nominal. Back then you might eat the world’s best piece of fish for that much.) So for people in the 20k a year income range, there has been net inflation.

Think about it: significant net deflation for the millionaires, but significant net inflation for those earning 20k a year.  In real terms income inequality has gone up much more than most of our numbers indicate.

...demonstrating what a liar Dick Cheney is.... Levin has been trying to get the CIA to declassify a March 13, 2003 cable.... Brennan still refuses to declassify the cable, but his letter does explain some of CIA’s assessment of that source:

On 13 March 2003, CIA headquarters received a communication from the field responding to a request that the field look into a single-source intelligence report indicating that Mohammed Atta met with former Iraqi intelligence officer al-Ani in Praque in April 2001. In that communication, the field expressed significant concern regarding the possibility of an official public statement by the United States Government indicating that such a meeting took place. The communication noted that information received after the single-source report raised serious doubts about that report’s accuracy....

Brennan’s letter goes on to quote on line from the report:

The field added that, to its knowledge, ‘there is not one USG [counterterrorism] or FBI expert that... has said they have evidence of ‘know’ that [Atta] was indeed [in Prague]. In fact, the analysis has been quite the opposite. [brackets original]

Four days after this report, Cheney fought mightily to make the Atta claim once more....

I raise all this when I should instead be talking about the torture report because it gets to the point.... This all was about exploitation, not intelligence. And for over a year, Dick Cheney’s goal for exploitation was to create a fraudulent case for the Iraq war, whether via torture or dubious single source claims in Prague. As Cheney complains that the torture report (which reported on the anal rape done in the guise of rectal rehydration done on his order) is ‘full of crap,’ we should never forget that one end result of this was the disastrous Iraq war...

...[Steven] Johnson picks six profound technologies and follows their path from earliest prehistory to the modern age... glass (from Venetian glassblowers to telescopes and microscopes); cold (from icehouses to modern refrigeration, and the way our food infrastructure, medical science, and geography have been transformed by the ability to manipulate heat); sound (from early chanted ritual to phonographs, to music, urban noise, and radar); hygiene (the key innovations that let cities grow without being destroyed by disease, the germ theory of medicine, and clean rooms in microprocessor factories); time (early astronomy, the age of navigation and the Longitude Prize, the industrial revolution and the timeclock, and microsecond timing in modern computers); and, finally, light (from candles to whaling; the changes to human sleep cycles thanks to artificial light, lasers and electron microscopy).

Each of these six lively stories is a tapestry worn of fascinating technical tid-bits and engrossing stories of personal sacrifice, genius, error, foolishness and difficulty from the cluster of inventors who are responsible for each one...

The revenge of the forty-seven Ronin (四十七士 Shi-jū-shichi-shi?, forty-seven samurai) took place in Japan at the start of the 18th century. One noted Japanese scholar described the tale, the best known example of the samurai code of honor, bushidō, as the country's 'national legend.'

...directly by legislatures can be imperfect, lamenting the role of Wall Street banks in shaping the 2010 Dodd-Frank financial overhaul law. ‘I thought that when Dodd-Frank started, that the banks would not succeed in influencing it, having lost all the prestige they lost,’ he told a crowd of several dozen at the Washington, D.C., think tank. ‘Boy, was I wrong.’ His remarks came less than a day after the House passed a spending bill that included a provision, long sought by banks, to scale back a Dodd-Frank requirement.

Mr. Fischer also recalled how... leading the Bank of Israel.... When his central bank colleagues asserted that the institution acted independently of the elected government, his reply was, ‘Yes. And we are two bad decisions away from not being an independent central bank.’

Mr. Fischer said he believes the Financial Stability Board, an organization of regulators set up to coordinate the global response to the financial crisis, has been ‘a great success,’ in part because it has been more inclusive than other international bodies...