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November 2016

Note to Self: I *Still* Fail to Understand Ken Rogoff's Medium-Long Term Macroeconomic Optimism...

Ken Rogoff: "In nine years, nobody will be talking about 'secular stagnation'. I've been debating Larry on this for a year, and I started saying 'in ten years..., and so for consistency I now say 'in nine years...".

10 Year Treasury Constant Maturity Rate FRED St Louis Fed

This is a wager that the full-employment long-run in which money and its associates are a veil that does not affect or disturb the Say's Law operation of the economy will come not more than 18 years after the shock of 2017--or at least that whatever remnants of the effects of that shock on the business cycle come 2025 will be dwarfed the effects of other business cycle shocks subsequent to now.

I do know from experience that one disagrees with Ken Rogoff at one's grave intellectual peril. But is he correct here? I really cannot follow him to the conclusion he wants me to reach...

Things to reread and chew over:

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Must-Read: I dissent from one of Jared and Ben's points here: it is not at all clear to me that a lower national debt is always and everywhere a better thing. At current interest rates--and until interest rates "normalize", if they ever do--there are major plusses from a higher debt, and no minuses I can see. And if a high debt stops being optimal because interest rates normalize? Then we can (and should) pay it down.

The argument that we should not have a higher debt now is an argument about political disfunction when it comes time that it is appropriate to pay it down, not an argument about the economics:

Jared Bernstein and Ben Spielberg: Preparing for the Next Recession: Lessons from the American Recovery and Reinvestment Act: "Moving forward... a stronger set of automatic stabilizers would help...

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Should-Read: Noah Smith applies standard economic logic to declare that Peak Finance has passed. The problem is that standard economic logic would not have predicted the hypertrophy of finance in the first place, especially given the zero sum nature of active portfolio management:

Noah Smith: Peak Finance Looks Like It's Over: "How much of the financial industry will soon be obsolete?...

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Should-Read: IMHO, the phrase "structural reform" should be banned from discussion. It is as close to being completely uninformative as a phrase could possibly be. But Carney's main point--that monetary policy has been the only thing "keeping the patient alive" is certainly very true:

Mehreen Khan: Carney: world at risk of low rate ‘trap’ for decades: "The world economy risks being stuck in a low interest rate “trap” for decades without efforts to boost growth through structural reforms...

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Procrastinating on November 15, 2016...


Over at Equitable Growth: Should-Reads:

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A Note on the Jeffersonian Road Not Taken in American Economic History

Slaves of monticello Google Search

Whether Thomas Jefferson's vision of the future of America was coherent was unclear then and remains unclear now.

Jefferson, like most of his founding-father contemporaries, was steeped in one version of classical history: Roman history as a morality play. Jefferson and many, many of his revolutionary peers assumed that yeoman farmers--Cincinnati--were the only possible social class that could maintain a free republic. They all believed that Rome was a great, free Republic because of its fiercely-independent farmers who nevertheless loved their city and would--like Cincinnatus--drop their ploughs and instantly take up their swords to defend (and conquer), and then return to their ploughs after the war was over.

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Monday Smackdown: There Is Something Very Wrong with the People Who Write for the Washington Post...

Weblogging was supposed to bring informed expert voices into the public sphere. Yet in the hands of the Washington Post it has all gone horribly wrong:

Chris Cillizza: The FBI controversy is the latest example of how we don’t believe in anything anymore: "

The FBI has long been an iconic institution in American life. From Eliot Ness to Clarice Starling, the image of the FBI -- unflappable, smart, and relentlessly fair--has been sterling. After...

Now it just reads:

The FBI has long been an iconic institution in American life. After...

Fiscal Expansion Needs to Be Done Right

10 Year Treasury Constant Maturity Rate FRED St Louis Fed

Fiscal expansion now is really a no-brainer:

  • borrow at unbelievably low rates;
  • use it to put people to work doing useful things to make America more productive;
  • if we are near full employment, it will also push up interest rates, restore equilibrium to the banking sectors, and reduce the chances of future bubbly financial vulnerabilities;
  • if we are not near full employment, it will pull people back into the labor force and raise production and employment now as well as in the future.

What's the downside?


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Links for the Week of November 13, 2016

Most-Recent Must-Reads:

Most-Recent Links:

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Must-Read: I am not sure that this is right. Rapid economic growth in the emerging-market economies--actual catch-up--is a phenomenon limited to 1980-2015, and is driven by China and India. Otherwise the rest have merely kept pace with the Global North + Pacific Rim. And the rest have fallen behind Global North + Pacific Rim + China + India. The future global between-country income distribution picture looks very cloudy to me...

Tomas Hellebrandt and Paolo Mauro: The Future of Worldwide Income Distribution: "Over the next two decades the structure of world population and income will undergo profound changes...

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Must-Read: If we think that the task of expansionary fiscal policy is to allow for tighter monetary policy and so raise nominal interest rates by 300 basis points to get asset prices back to what we think of as appropriate levels, then we need a big fiscal stimulus: $400 billion a year of increased deficits, largely via higher spending, seems called for.

That is a largely independent question of what the level and direction of national investment should be. There are two big issues here:

  • How do we rebalance asset prices--i.e., how do we fund private and public investment?
  • What should the level of investment be?

Jared Bernstein: The Macro-Economy Doesn’t Care Which Party Signs the Stimulus Check: "I yield to no one in my concerns about the damage...

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Procrastinating on November 13, 2016


Over at Equitable Growth: Must-Reads:

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Must-Read: A very nice exercise. The only complaint I have with the paper is that I do wish they would highlight the comparison of their measure to NIPA government purchases--where is it different, how is it different, why is it different, etc.?

David Cashin, Jamie Lenney, Byron Lutz and William Peterman: Fiscal Policy Changes and Aggregate Demand in the U.S. Before, During and Following the Great Recession: "We examine the effect of federal and subnational fiscal policy changes on aggregate demand in the U.S....

Https editorialexpress com cgi bin conference download cgi db name NTA2016 paper id 51

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Must-Read: There is a big problem with Elmendorf and Sheiner...

What we as economists want to do and have been trained to do is to:

  • take quantities and prices,
  • interpret the prices as costate variables that the market and the current régime are using to currently solve their own peculiar and suboptimal dubious social welfare maximization problem,
  • switch over from the market and the current régime's to the real, sensible social welfare maximization problem,
  • solve that problem under perfect foresight to figure out what good policies would be,
  • and then adjust for uncertainty and risk.

The problem is that this requires that prices be coherent--that they actually be the costate values for the peculiar and suboptimal dubious social welfare maximization that the market and the current régime are solving. But if we know one thing now, it is that current asset prices are not coherent: the equity risk premium; the level of safe interest rates in a world with productive capital; etc...

Thus we fact a huge problem in interpreting Elmendorf and Sheiner.

And then there are the other problems with the paper as well:

  • the metaphysical status of CBO estimates that it uses as a springboard:
    • The R&E tax credit...
    • The Medicare provider cuts...
    • The Cadillac Tax...
    • The Special Assistant to the Secretary of HHS for Exercising the Powers of the IPAB...
  • r < g
  • what is the price of a consol?
  • how is this possible?
  • financial repression
  • risk premium--equity vs. bonds...
  • how to adjust perfect-foresight results for uncertainty?

I do not want to criticize the paper as bad--it is very good. But I do want to say that it is grossly inadequate, and we desperately need--somehow--to do better.

Douglas Elmendorf and Louise Sheiner: Federal Budget Policy with an Aging Population and Persistently Low Interest Rates: "Debt is rising in part because of a major demographic shift as the baby boom generation retires...

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Must-Read: It is important that fiscal stimulus (a) not include too much of giveaways of monopoly rights over what should be public infrastructure to plutocrats allied with the régime, and (b) be debt-financed--I would say long-term debt financed. It is also important that Treasury, Fed, OCC, and company gear up to prepare to use reserve requirements of various kinds to manage the Treasury market. Such is only prudent when venturing into the unknown policy space that secular stagnation seems to call for.

That said, backup for my fiscal principles:

Four from the Fiscal Expansion File: Summers, Krugman, Yellen, and Romer and Romer:

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Must-Read: Welcome to Jason Kuznicki. Very happy to have another social-libertarian and pro-freedom voice in the Democratic Party.

And on the economics... Jason: if you are locked in a cage it doesn't matter much whether you are locked in by force--somebody else has taken the key and locked you in--or by poverty--you don't have enough money to buy a key. In economic matters, the distinction between negative liberty and positive liberty quickly becomes meaningless.

And Jason... The world is rife with externalities and increasing returns. Assigning absolute property rights and letting things rip produces a good society only when goods are rival and excludible, returns-to-scale are constant, and the initial wealth distribution is acceptable. Otherwise, making the market works requires much more than a night-watchman state.

Read your Fredric Bastiat!

Jason Kuznicki: Becoming a Democrat: "I am registering as a Democrat. Mom, dad, I’m sorry...

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Must-Read: Frederic Bastiat is a very good economist--concerned with properly analyzing things in general equilibrium. He works hard to make sure to include distant and indirect but inevitable consequences of policies as well as immediate and obvious ones in his benefit-cost analyses. But for Bastiat the question to be answered is: is the market or the government more likely to perform this mission most efficiently?

Frederic Bastiat is a liberal in the modern sense--concerned with positive as much as negative liberty, eager to use government to boost people's power to accomplish their purposes (when it can effectively do so) as well as to preserve individuals' freedom of action from pointless regulatory meddling:

Frederic Bastiat: [As a Modern Liberal][]: "[O]ften, nearly always if you will, the government official [receives his salary and] renders an equivalent service to Jacques Bonhomme...

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Must-Read: The fact that the rest of the economy pays the financial sector 2% of net asset value a year for "managing" our money indicates an enormous market failure. So does the current 7%-point/year gap between the S&P 500 earnings yield and short-term safe bond rates. Moving your portfolio from active to passive management almost surely--unless you are invested with Renaissance, Bridgwater, or one of the few other hedge funds that has an edge--helps you avoid the costs of these market failures. But does it raise or lower them for the economy as a whole?

I ought to have an informed view about this. I am distressed to find that I do not:

Robin Wigglesworth: Buy The Dip: The Death of Active Asset Management?: "The WSJ has run an annoyingly good series on the whole active versus passive asset management theme...

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Weekend Reading: Psuedoerasmus: State Capacity and the Sino-Japanese Divergence

Must-Read: I would add Mongkut and Chulalongkorn in Thailand, and Mohammed Ali in Egypt, to Pseudoerasmus's list here...

In a good world, this would be not a blogpost but a symposium. This would be a conference. Admittedly, since Pseudoerasmus is and probably must remain anonymous, he/she would have to teleconference in her/his disguised-voice avatar:

Pseudoerasmus: State Capacity & the Sino-Japanese Divergence: "Why China did not industrialise before Western Europe may be a tantalising and irresistible subject, but frankly it’s a parlour game...

...What remains underexplored, however, is the more tractable issue of why Japan managed, but China failed, to initiate an early transition to modern growth and convergence with the West. A recent paper argues that the gap in state capacity between Qing China and Tokugawa Japan was responsible for the divergence.

Please note, this blogpost disputes that argument:

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Weekend Reading: Hoisted from Fourteen Years Ago: The Execrable Michael Kelly

Michael Kelly: Wishful in Defeat: The Democratic Party Has Come to Believe Its Own Propaganda: "Our Democratic story so far: George W. Bush is a usurper of power, an incompetent frat-boy fool and a radical extremist (or the incompetent frat-boy-fool pawn of the radical extremists who control him and his White House)...

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Weekend Reading: Joachim Voth: Differences and Similarities: Trump and Hitler

Joachim Voth: Differences and Similarities: Trump and Hitler: "Here is my attempt to think through the troubling parallels with 1933...

...Trump is no Hitler, and history doesn't repeat itself.... [But] this is my small checklist of things that look, broadly speaking, similar - and those that do not:

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Must-Read: The divide between Democrats and Republicans in the United States in 2016 is best conceptualized as a divide between those who think that an America in which black, brown, yellow, red, etc. people vote is great and in which they have a great deal to gain and those who think that an America in which black, brown, yellow, red, etc. people vote is no longer great and in which they have something--maybe not a great deal, but something--to lose:

Francis Wilkinson: [Race, Not Class, Dictates Republican Future][]: "The class compositions of the Republican and Democratic parties keep evolving...

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Concrete Economics: Presentation Slides (Short Present-Focused Talk)

Stephen Cohen and J. Bradford DeLong (2016): Concrete Economics: The Hamilton Approach to Economic Policy (Cambridge: Harvard University Press) | Keynote


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Must-Read: The lowest-hanging fruit in terms of improving the conditions of life of the working class was... ObamaCare: the system that Mitt Romney had set up in Massachusetts generalized to the nation as a whole. But the next lowest-hanging fruit is Social Security expansion, as Jesse Rothstein points out:

Ben Steverman: Advice for the Next President: Expand Social Security: "Is expanding Social Security the right thing to do? Is it even possible? Yes and yes, Jesse Rothstein argues...

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Electoral College Fail Number Six...

As of now, an estimated 2.2 million vote edge for Hillary Clinton...

And that's without adding in the effects of 2nd Jim Crow voter suppression...

The big stories of last Tuesday are two:

  1. Big Story: Hillary Rodham Clinton won the vote--more Americans chose her for their leader than chose Donald Trump.

  2. Big Story: The electoral college failed to do its proper democratic job for the sixth time in 58 elections--and a 10.6% failure rate is much too high.

Anybody who does not focus on those two big stories is not being your friend.

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Must-Read: Philip Stephens: America Can Survive Trump. Not so the West: "History can veer off course... in 1914... the first age of globalisation was consumed in the flames of the Great War... [in] the 1930s when economic hardship, protectionism and nationalism nurtured the rise of fascism...

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Must-Read: As I said yesterday, President-elect Trump is probably a Schwarzenegger--in which case the next four years will see for the most part a loss of opportunity to make America greater, which is a disappointment but not a total disaster. Trump is perhaps a Berlusconi--which would be a disaster: think of the damage Berlusconi's bunga-bunga rent-seeking rule did to Italy. And Trump is highly unlikely to be a Mussolini.

But there are Mussolinis out there, and worse. And, as Ezra Klein notes, the rise of Trump reveals that our political system is frighteningly vulnerable to them:

Ezra Klein: Donald Trump’s Success Reveals a Frightening Weakness in American Democracy: "The belief that Trump is a predictable reaction to acute economic duress crumbled before the finding that his primary voters had a median household income of $72,000 — well above both the national average and that of Clinton supporters...

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Must-Read: It's not just progressive NIMBYism. The conservative Republican Jarvis-Gann--Proposition 13--changed the balance of local public finances, and makes it expensive to develop. Thus the standard boosterist orientation of municipal governments that offsets NIMBYism has now been gone in California for more than a generation:

Matthew Kahn: Did California Zoning Cause the Trump Win? A Counter-Factual of My State's Electoral Count if Housing Supply is Elastic: "If California had Texas style housing regulations, then 80 million people would live in California and the state would have 100 electoral votes...

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Must-Read: The bad thing about President-elect Donald Trump is that he has no clue about policy debates. The good thing is that he has, in the past, taken every single possible policy position on both sides in an off-the-cuff fashion. Thus there may be opportunities, depending on who can convince Jared Kushner that his father-in-law needs policies that will actually work:

James Kwak: The Last Chapter Problem: "Bernstein, to his credit, gets the description of the problem out of the way in the first two chapters...

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