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Dealing with Coronavirus: The Hunker Down and the Jubilee

Coronavirus

The problem of dealing with the economic policy consequences of the current coronavirus public health emergency is best analyzed in two pieces: the Jubilee, and the Hunker Down.

 

Bringing the Jubilee

What is the Jubilee? It happens after we have managed to get the virus under control, so that normal public health measures of (1) testing a random panel sample periodically to understand where we are, (2) testing the symptomatic, (3) tracing and testing their contacts, and (4) hospitalizing patients with serious illnesses can manage the situation as best as it can be managed.

Note: I say “managed” rather than eliminated. The extent of asymptomatic transmission means that this disease will not be eliminated. It will become endemic. The task is to delay until our virologists can work their miracles. The task is to delay so that the medical care system is not overwhelmed so that we can keep mortality from the disease at 1% rather than 5% or more.

Once the virus is under control—by June 1, say—we will want every job that existed on February 1 and every business that was running on February 1 to resume. We will want no business to have received a “bankruptcy shut down“ from the market system. We will want no worker to have a received a “you are not wanted“ signal from the market economy.

There is a side constraint on the Jubilee: whatever policies we adopt need to be crafted to minimize unjust enrichment. Perhaps the second biggest economic policy mistake committed by the Obama administration was that its policies to deal with the great recession were both inadequate out of the fear of being perceived to contribute to unjust enrichment, and yet somehow also managed to generate a huge amount of unjust enrichment for the financial sector.

 

Hunkering Down

Then there is the question of how to manage the Hunker Down. In the Hunker Down, social distancing needs to reach a level that reduces the caseload to what the medical system can currently handle, but should not be pushed far beyond that point. Beyond that point, the benefits of generating a situation in which our ICUs and emergency rooms have excess capacity are low and the costs are high. In the Hunker Down, as many people as possible need to be given financial incentives to move into new productive occupations that provide useful goods and services without disrupting social distance. And in the hunker down, everyone needs to receive the income flow they need to pay their bills.

Managing the Hunker Down and bringing the Jubilee are two separate problems that need to be designed and implemented separately. We need to think about both. We need to keep worries about bringing the Jubilee from damaging our ability to undertake the Hunker Down. We need to keep inplementing the Hunker Down from impairing our power to bring the Jubilee.

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Bloomberg-BNN TalkIng Points on Economic Situation

  • At the moment, we have a huge negative supply shock
  • But as people lose their jobs as a result of this negative supply shock, it is going to turn into a demand shock
  • And we also have a very powerful distribution shock as well
  • We want to offset the demand shock without overdoing it
  • We want to let the prices of goods and services in high demand rise to encourage people to produce more of them
  • Hence an interesting policy problem:
    • The right inflation rate for the next 3 months is not 2%
    • The right inflation rate for the next 3 months is 2% + (share of the economy in high demand) x (how much prices need to rise to boost supply of commoditeis in high mand)/4
    • The right monetary policy is... stimulative, but uncertain...
    • The right fiscal policy is... stimulative, but uncertain...
    • The right distribution policy is... massive boost to unemployment insurance: 100% replacement for those who lose their jobs
    • The right lending policy is... lend enough on easy enough terms that businesses stay afloat, but not enough that stockholders make out like bandits—they are risk bearers, aren't they? Handsomely paid. Now is when they earn the money they earn in normal times...

  • I really wish the public health people were being louder and more forthcoming...
  • Because we do not know where we are
  • At the moment, 200 deaths in USA
    • Takes 4 weeks to die
    • At a 1% death rate, that means 20000 cases in U.S. on Feb 20
    • At a 3.33% death rate, that means 6000 cases in U.S. on Feb 20
  • If cases have been doubling every 7 days...
    • Then at least 100000 cases in the U.S. right now (and our testing is missing 6 out of 7)
  • If cases have been doubling every 4 days...
    • Then at most 2000000 cases in the U.S. right now (and our current testing is missing nearly everybody)
  • We don't know which it is, because Trump said he didn't want bad numbers
    • At the moment, 12% of those being tested are coming out as positive
    • But to get the true fraction, you need to multiply that 12% by (those who have it who got tested)/(those who have it), and then divide the result by (those who don't have it who got tested)/(those who don't have it).
      • & because are testing is messed up AF, we have no idea what those two key ratios are...
  • And the Trumpists saluted and slow-walked building up testing capacity
  • He should have been impeached and removed from office last week for this High Crime alone...

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Time to Bang My Head Against the Wall Some More (Pre-Elementary Monetary Economics Department): Hoisted from the Archives from 2009

Hoisted from the Archives: Time to Bang My Head Against the Wall Some More (Pre-Elementary Monetary Economics Department) https://delong.typepad.com/sdj/2009/01/time-to-bang-my-head-against-the-wall-some-more-pre-elementary-monetary-economics-department.html: Oh boy. John Cochrane does not know something that David Hume did--that the velocity of monetary circulation is an economic variable rather than a technological constant. Cochrane:

Fiscal Fallacies: First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending.  Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out”...

Let us take this slowly.

  1. Suppose that we have four agents: Alice, Beverly, Carol, and Deborah.

  2. Suppose that Beverly has $500 in cash that she owes Carol, due in two months. Suppose that Alice and Carol are both unemployed and idle.

  3. In one scenario in two months Beverly goes to Carol and pays her the $500. End of story.

  4. In a second scenario Beverly says to Alice: "I have a house. Why don't you build a deck--I will pay you $500 after the work is done. Here is the contract." Alice takes the contract and goes to Carol. She shows the contract to Carol and says: "See. I will be good for the debt. Cook me meals so I will have the strength to build the deck--here's another contract in which I promise to pay you $500 within 90 days if you cook for me." Carol agrees.

  5. Two months pass. Carol cooks and feeds Alice. Alice goes and builds the deck.

  6. Alice then asks Beverly for payment. Beverly says: "Wait a minute." She goes to Carol and says: "Here is the the $500 cash I owe you." Beverly pays the money to Carol. Beverly then says: "But now could I borrow the cash back by offering you a long-term mortgage at an attractive interest rate secured with an interest in my newly more-valuable house?" Carol says: "Sure." Beverly files an amended deed showing Carol's mortgage lien with the town office. Carol gives Beverly back the $500. Beverly then goes to Alice and pays her the $500. Alice then goes to Carol and pays her the $500.

  7. The net result? (a) Alice who would otherwise have been idle has been employed--has traded her labor for meals. (b) Carol who would otherwise have been idle has been employed--has traded her labor for a secured lien on Beverly's house. (c) Beverly has taken out a mortgage on her house and in exchange has gotten a deck built. (d) Carol has the $500 cash that Beverly owed her in the first place.

  8. Alice has more income and consumption expenditure than if she hadn't taken Beverly's job offer. Carol has more income and saving than if she hadn't cooked for Alice and then invested her earnings with Beverly. Beverly has an extra capital asset (the deck) and an extra financial liability (the mortgage) than if she had never offered to hire Alice.

  9. A deck has gotten built. Meals have been cooked and eaten. Two women have been employed. And all this has happened without printing any extra money.

John Cochrane would say that this is impossible.

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Weekend Reading: John Maynard Keynes: On Speculation, from The General Theory of Employment, Interest and Money

Michael-vs-lucifer

Weekend Reading: John Maynard Keynes: On Speculation, from The General Theory of Employment, Interest and Money https://www.bradford-delong.com/2015/02/weekend-reading-john-maynard-keynes-the-general-theory-of-employment-interest-and-money-by-john-maynard-keynes-1.html: 'The professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called ‘liquidity’. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of ‘liquid’ securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is ‘to beat the gun’, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow...

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Note to Self: The Two Faces of Jean-Baptiste Say... https://www.bradford-delong.com/2010/04/the-two-faces-of-jean-baptiste-say.html: Say I (1803): A Treatise on Political Economy Book I, Chapter XV:

To say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause; an error that proceeds from the circumstance, that almost all produce is in the first instance exchanged for money, before it is ultimately converted into other produce: and the commodity, which recurs so repeatedly in use, appears to vulgar apprehensions the most important of commodities, and the end and object of all transactions, whereas it is only the medium. Sales cannot be said to be dull because money is scarce, but because other products are so. There is always money enough to conduct the circulation and mutual interchange of other values, when those values really exist. Should the increase of traffic require more money to facilitate it, the want is easily supplied, and is a strong indication of prosperity—a proof that a great abundance of values has been created, which it is wished to exchange for other values. In such cases, merchants know well enough how to find substitutes for the product serving as the medium of exchange or money...

 

Say II (1829): Cours Complet d'Economie Politique Pratique:

The Bank [of England], legally obliged to redeem its banknotes in specie, regarded itself as obliged to buy gold back at any price, and to coin money at a loss and at considerable expense. To limit its losses, it forced the return of its banknotes, and ceased to put new notes into circulation. It was then obliged to cease to discount commercial bills. Provincial banks were in consequence obliged to follow the same course, and commerce found itself deprived at a stroke of the advances on which it had counted, be it to create new businesses, or to give a lease of life to the old. As the bills that businessmen had discounted came to maturity, they were obliged to meet them, and finding no more advances from the bankers, each was forced to use up all the resources at his disposal. They sold goods for half what they had cost. Business assets could not be sold at any price. As every type of merchandise had sunk below its costs of production, a multitude of workers were without work. Many bankruptcies were declared among merchants and among bankers, who having placed more bills in circulation than their personal wealth could cover, could no longer find guarantees to cover their issues beyond the undertakings of individuals, many of whom had themselves become bankrupt...

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Executive Summary of Obama Transition Economic Policy Work: Hoisted from the Archives

Obama-plans

Hoisted from the Archives: Note that if 600 billion in fiscal stimulus would have reduced the expected unemployment rate as of the end of 2010 from 9.5% to 8%, 900 billion would still have left the economy with an expected end-of-2010 unemployment rate of 7.25%. And, of course, the memo ought to have highlighted that things had a 50% chance of being worse than expected—even considerably worse, which they were: the end of 2010 unemployment rate was 9.3%. To seek as your economic policy goal a set of policies that would might well have—and did—leave the unemployment rate two years hence above 9% seemed like malpractice on the part of the Obama-Emmanuel-Biden team then. It still seems like it was malpractice now: Obama National Economic Council Presumptive (December 2008): EXECUTIVE SUMMARY OF ECONOMIC POLICY WORK https://delong.typepad.com/20091215-obama-economic-policy-memo.pdf: 'In the absence of fiscal stimulus the economy is projected to lose 3 to 4 million jobs in 2009. Together with the jobs we have already lost and population growth, we will be 7 million jobs short of full employment. The unemployment rate is projected to rise above 9 percent and not projected to start falling until 2011. We believe that $600 billion in stimulus over two years would create 2.5 million jobs relative to what would happen in the absence of stimulus. However, this falls well short of filling the job shortfall and would leave the unemployment rate at 8 percent two years from now. This has convinced the economic team that a considerably larger package is justified.... The memo outlines four alternative plan ranging from $550 billion to $890 billion...

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Brad DeLong Says More...: Project Syndicate

Project Syndicate: [Brad DeLong Says More...](htt*PS*: //us10.campaign-archive.com/?u=9116789a51839e0f88fa29b83&id=646c7b19aa&e=a7192bc790): Project Syndicate: One forgotten lesson of the Great Depression, you wrote last month, is that “persistent ultra-low interest rates mean the economy is still short of safe, liquid stores of value, and thus in need of further monetary expansion”...

...Since then, the US Federal Reserve has cut the federal funds rate – a move that you argued in March could either stave off a recession or drastically undermine the Fed’s capacity to respond to one. What steps should the Fed take to help encourage the former and prevent the latter? At a time of growing political pressure on the Fed, what approach is it likely to take?

Brad DeLong: Back in 1992, Larry Summers and I warned participants at the Fed’s annual symposium in Jackson Hole, Wyoming, that low inflation and high equity-return and bond-risk premiums do not play well together. Dealing with a typical recession had, historically, required that the Fed cut the federal funds rate by five full percentage points. A large recession would require even larger cuts.

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Stop Inflating the Inflation Threat: Project Syndicate

Inflating-the-inflation-threat

Project Syndicate: Stop Inflating the Inflation Threat https://www.project-syndicate.org/commentary/us-inflation-flat-phillips-curve-by-j-bradford-delong-2019-10: Given the scale and severity of inflation in America in the 1970s, it is understandable that US monetary policymakers developed a deep-seated fear of it. But, nearly a half-century later, the conditions that justified such worries no longer apply, and it is past time that we stopped denying what the data are telling us.: I remember September 2014: That month the U.S. unemployment rate dropped below 6%, and I was assured by very many that that meant that the Phillips Curve predicted that inflation would soon be on the rise, and that it was time for the Federal Reserve to begin to—rapidly—normalize monetary policy—to begin shrinking the monetary base, and raising interest rates back into a "normal" range. Today unemployment is 2.5%-points lower than what I was then assured was the "natural" rate of unemployment. According to the rule-of-thumb as they stood back when I was an assistant professor in 1990, such a low unemployment rate should lead annual inflation to climb by 1.3%-points every year: if this year inflation were to be 2.0%, next year's would be 3.3%, and—if unemployment stayed this low—the year after that's would be 4.6%, and the year after that 5.9%.

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No, We Don’t “Need” a Recession

No__We_Don’t_“Need”_a_Recession_by_J__Bradford_DeLong_-_Project_Syndicate

Project Syndicate: No, We Don’t “Need” a Recession https://www.project-syndicate.org/commentary/myth-of-needed-recession-by-j-bradford-delong-2019-10: Business cycles can end with a "rolling readjustment" in which asset values are marked back down to reflect underlying fundamentals, or they can end in depression and mass unemployment. There is never any good reason why the second option should prevail: BERKELEY – I recently received an email from my friend Mark Thoma of the University of Oregon, asking if I had noticed an increase in commentaries suggesting that a recession would be a good and healthy purge for the economy (or something along those lines). In fact, I, too, have noticed more commentators expressing the view that “recessions, painful as they are, are a necessary growth input.” I am rather surprised by it.

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Time for Another Rate Cut by the Federal Reserve!: Wednesday Forecasting

My rule-of-thumb, the result of my degree in forecasting from Parker Brothers University, is that the best estimate of the current state of the labor market is to average the ADP number that came out this morning with the BLS number that will come out on Friday. And my rule-of-thumb is that the BLS number is likely to be 1/3 of the way from the current trend to the ADP number. With the current trend at about 130,000 jobs per month, and with today’s ADP number at 70,000, I now think that the economy added only 90,000 payroll jobs last month. I think that is enough of a warning light that it ought to trigger another Federal Reserve rate cut, given the tail risk generated by the chaos monkey in Washington:

ADP: November Employment Report http://www.adpemploymentreport.com/2019/November/NER/docs/ADP-NATIONAL-EMPLOYMENT-REPORT-November2019-Final-Press-Release.pdf:

Adp-2019-11

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I do confess that I am sad that §7.6 of my "Smith, Marx, Keynes" lecture notes https://www.icloud.com/keynote/0osOOsPvSrTaiK4__D5MghPVA is still just huge honking quotes from Paul Krugman's Mr. Keynes and the Moderns https://delong.typepad.com/files/keynes-moderns.pdf. I kinda want to say "just read the whole thing". But here are the passages I chose:

Chapter 12 is, of course, the wonderful, brilliant chapter on long-term expectations, with its acute observations on investor psychology, its analogies to beauty contests, and more. Its essential message is that investment decisions must be made in the face of radical uncertainty to which there is no rational answer, and that the conventions men use to pretend that they know what they are doing are subject to occasional drastic revisions, giving rise to economic instability. What Chapter 12ers insist is that this is the real message of Keynes, that all those who have invoked the great man’s name on behalf of quasi-equilibrium models that push this insight into the background, from John Hicks to Paul Samuelson to Mike Woodford, have violated his true legacy...

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Lecture Notes: Smith, Marx, Keynes: Thanksgiving 2019 DRAFT

I have finished (a draft of) my "Smith, Marx, Keynes" lecture notes—well, I have not written 7.6 and 8.2. For 7.6, I have simply dumped in (much of) Paul Krugman's Mr. Keynes and the Moderns. 8.2 I have not written anything on. But what it is, it is...

https://www.icloud.com/pages/0howtV7CndvjkSCCLmtjmq_SA

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Contra Raghu Rajan: Economic Stimulus Has Not Failed, It Has Not Been Tried (on a Large Enough Scale)

Hoisted from the Archives from 2013: Contra Raghu Rajan: Economic Stimulus Has Not Failed, It Has Not Been Tried (on a Large Enough Scale): "Back in 2007 I would have said that every macroeconomist who has done any homework at all believes that coordinated monetary and fiscal expansion together increase at least the flow of nominal GDP. Now comes the very smart Raghu Rajan to say, apparently, not so.... From my perspective... Raghu is... saying that if we were to undertake more aggressive coordinated monetary and fiscal expansion we would hit the inflation wall sooner than I think likely--that the difficulties of retraining and readjustment mean that the division of the increase in the flow of spending would soon shift to 100% inflation, 0% extra production. Perhaps it will. But we have not gotten there yet. We are still in a world where the flow of nominal GDP in the North Atlantic is some six percentage points below its pre-2008 trend. Fix that trend of nominal GDP first via coordinated monetary and fiscal expansion, and then we will examine the division at the margin of PY into P and Y, and talk…...

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Hoisted from the Archives: From Eight Years Ago: The Way the World Looked to Me in the Summer of 2011

Hoisted from the Archives: The Way the World Looked to Me in the Summer of 2011: Back in the summer of 2009, Barack Obama had five economic policy principals on the Treasury Bench:

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How Damaging Is Plutocracy for Economic Policy?

Is Plutocracy Really the Problem by J Bradford DeLong Project Syndicate

No Longer Fresh at Project Syndicate: Is Plutocracy Really the Problem?: After the 2008 financial crisis, economic policymakers in the United States did enough to avert another Great Depression, but fell far short of what was needed to ensure a strong recovery. Attributing that failure to the malign influence of the plutocracy is tempting, but it misses the root of the problem.... In fact, big money does not always find a way, nor does its influence necessarily increase as the top 0.01% captures a larger share of total income.... The larger issue...is an absence of alternative voices. If the 2010s had been anything like the 1930s, the National Association of Manufacturers and the Conference Board would have been aggressively calling for more investment in America, and these arguments would have commanded the attention of the press. Labor unions would have had a prominent voice as advocates for a high-pressure economy. Both would have had very powerful voices inside the political process through their support of candidates. Did the top 0.01% put something in the water to make the media freeze out such voices after 2008?... Read MOAR at Project Syndicate

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Weekend Reading: John Stuart Mill (1829): Of the Influence of Consumption on Production

Living Wage report shows economy is based on Victorian workhouse Goldsmiths University of London

Weekend Reading: The birth of macroeconomics as we know it back in 1829. But Mill gets one big thing wrong: a depression happens whenever there is an uncompensated sharp rise in the demand for money, and such sharp rises can and do have many causes—nominal illusion in a time of inflation leading to "over investment" is only one of them. And, of course, Mill as absolutely hopeless with respect to the cure: John Stuart Mill (1829): Of the Influence of Consumption on Production https://delong.typepad.com/mill-questions.pdf: "Periods of 'brisk demand' are also the periods of greatest production: the national capital is never called into full employment but at those periods. This, however, is no reason for desiring such times; it is not desirable that the whole capital of the country should be in full employment. For, the calculations of producers and traders being of necessity imperfect, there are always some commodities which are more or less in excess, as there are always some which are in deficiency. If, therefore, the whole truth were known, there would always be some classes of producers contracting, not extending, their operations. If all are endeavouring to extend them, it is a certain proof that some general delusion is afloat...

...The commonest cause of such delusion is some general, or very extensive, rise of prices (whether caused by speculation or by the currency) which persuades all dealers that they are growing rich. And hence, an increase of production really takes place during the progress of depreciation, as long as the existence of depreciation is not suspected; and it is this which gives to the fallacies of the currency school.... But when the delusion vanishes and the truth is disclosed, those whose commodities are relatively in excess must diminish their production or be ruined: and if during the high prices they have built mills and erected machinery, they will be likely to repent at leisure. In the present state of the commercial world... unreasonable hopes and unreasonable fears alternately rule with tyrannical sway... general eagerness to buy and general reluctance to buy succeed one another... at brief intervals.

Except during short periods of transition, there is almost always either great briskness of business or great stagnation; either the principal producers of almost all the leading articles of industry have as many orders as they can possibly execute, or the dealers in almost all commodities have their warehouses full of unsold goods....

It may very well occur, that there may be... a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible....It is true that this state can be only temporary, and must even be succeeded by a reaction of corresponding violence, since those who have sold without buying will certainly buy at last, and there will then be more buyers than sellers. But although the general over-supply is of necessity only temporary, this is no more than may be said of every partial over-supply. An overstocked state of the market is always temporary, and is generally followed by a more than common briskness of demand...


#macro #weekendreading

Hoisted from the Archives: Department of "Huh!?": Raghu Rajan Is a Member of the Pain Caucus, and I Don't Understand Why...

stacks and stacks of books

Department of "Huh!?": Back in 2010, there were a great many people for whom I had immense respect who were members of the Pain Caucus. And I still cannot follow what they were thinking at all. Construction had already shrunk fully by late 2007. It remains a great mystery—was it just a Chicago echo chamber in which people did not look at data?:

Raghu Rajan Is a Member of the Pain Caucus, and I Don't Understand Why...: Raghu Rajan: "this recession is not a 'usual' recession. It followed a period of ultra-low interest rates when interest sensitive segments of the economy got a tremendous boost. The United States had far too much productive capacity devoted to durable goods and houses, because consumers could obtain financing for them easily. With households recovering slowly from the overhang of debt resulting from the binge, and with lenders extremely risk averse, it is unrealistic to expect households to spend beyond their means again, and unwise to try to tempt them to do so...

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This From Dan Alpert Still Makes Immense Sense

Note to Self: 30-Year Treasury bonds continue astonishingly, bizarrely low:

30 Year Treasury Constant Maturity Rate DGS30 FRED St Louis Fed

It is no longer the case that they are at their lowest levels ever, but this from Dan Alpert still makes immense sense: Dan Alpert: "We awake this morning to an all-time low yield on 30 year US Treasury bond: 2.107%. This is nearly 40 basis points below the average interest rate on all marketable treasury securities https://t.co/j3trQPFxfN. It is time to borrow and invest in infrastructure #LockItIn:

EB2JgxQXkAIztq0

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Solow Growth Model: Python Class/Notebook

CANDIDATE: Solow Growth Model Derived and modified from Stachurski-Sargent http://quantecon.org. A Python class for simulations using the Solow Growth Model, with additional code for performing simulations with baseline- and alternative-scenario parameter values. Focuses on the capital-output ratio κ as the key state variable, as it is (a) observable, and (b) with constant growth-model parameter values converges exactly (in continuous time at least) as an exponential. Now ready to hand over to others for tightening and additions:

https://nbviewer.jupyter.org/github/braddelong/LS2019/blob/master/2019-08-08-Sargent-Stachurski.ipynb

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August 16, 2019: Weekly Forecasting Update

Industrial Production Manufacturing NAICS IPMAN FRED St Louis Fed

The market has now delivered 100 basis points of easing in the ten-year Treasury window since the end of last October. On the 30-year bond, you would have made a 20% profit if you both it last October and sold it today, compared to a 3.5% profit on the S&P Composite over the same period. That is a major, major sentiment shift. That means that a number of people short debt with riskier operations than the S&P Composite are about to face margin calls and rollover difficulties. We will shortly see how solvent the market judges them.

Meanwhile, There was essentially no news about real GDP last week: The Federal Reserve Bank of New York nowcast stands at 1.8% for 2019:Q3.

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The Flight to Safety in Asset Markets Has Now Become a Thing in Itself...

Note to Self: The market has now delivered 100 basis points of easing in the ten-year Treasury window since the end of last October. On the 30-year bond, you would have made a 20% profit if you bought it last October and sold it today, compared to a 3.5% profit on the S&P Composite over the same period. That is a major, major sentiment shift. That means that a number of people short debt with riskier operations than the S&P Composite are about to face margin calls and rollover difficulties. We will shortly see how solvent the market judges them.

No, it is not yet August 2007. But it is much closer to August 2007 than I expected to see for another generation:

Daily Treasury Yield Curve Rates

Daily Treasury Real Yield Curve Rates

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August 9, 2019: Weekly Forecasting Update

FRED Graph FRED St Louis Fed

There was essentially no news about real GDP last week: The Federal Reserve Bank of New York nowcast continues to stand at 1.6% for 2019:Q3. We did see another fifteen basis points of market easing at the long end of the yield. Curve: the 10-Year TIPS yield is now 0.09%. And that, of course, makes equity stock market investments a deal. Patrick Chovanec is worth reading:

Patrick Chovanec: Outlook: "Besides consumption and government spending... the rest was negative in Q2...

...Exports fell by −5.2% while imports were flat... business investment fell by −0.6%, its first quarterly decline in over three years.... Durable goods orders in Q2 were down −2.1% from a year ago.... (The slowdown in U.S. manufacturing matches similar purchasing manager surveys in Europe, Japan, and China, which are all in outright contraction).... Residential investment fell −1.5% in Q2.... New housing permits... were down −4.5% in Q2, from a year ago...

The new tariffs on China—10% on virtually all imports that aren’t already tariffed at 25%, scheduled to take effect in September—are exactly what U.S. companies across multiple sectors have worried and warned about for nearly a year now. Though their direct impact may be limited, the prospect of further escalation hangs like a cloud over business confidence....

Given these uncertainties, U.S. share prices may look daunting even at a 12-month trailing P/E ratio of 19.1x operating earnings, which is far from excessive by historical terms. But they look better compared to U.S. Treasuries at an implied P/E ratio of 60x, returning little more than inflation, or the nearly $15 trillion in bonds around the world selling at negative yields. Safe harbors are expensive, and likely to prove costly over the longer term, even if the economy could stumble in the meantime. With an equity risk premium at 5.6%—before the latest dip in share prices and bond yields—the prospective rewards to riding out the storm, as opposed to running for cover at any price, are too high for an investor who can endure a few bumps along the way to ignore...

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DeLong Smackdown: Why I Was Wrong Over 2006-2010...

Smackdown/Hoisted: Why I Was Wrong...: Calculated Risk issued an invitation:

Calculated Risk: Hoocoodanode?: Earlier today, I saw Greg "Bush economist" Mankiw was a little touchy about a Krugman blog comment. My reaction was that Mankiw has some explaining to do. A key embarrassment for the economics profession in general, and Bush economists Greg Mankiw and Eddie Lazear in particular, is how they missed the biggest economic story of our times.... This was a typical response from the right (this is from a post by Professor Arnold Kling) in August 2006:

Apparently, the echo chamber of left-wing macro pundits has pronounced a recession to be imminent. For example, Nouriel Roubini writes, "Given the recent flow of dismal economic indicators, I now believe that the odds of a U.S. recession by year end have increased from 50% to 70%." For these pundits, the most dismal indicator is that we have a Republican Administration. They have been gloomy for six years now...

Sure Roubini was early (I thought so at the time), but show me someone who has been more right! And this brings me to Krugman's column:

... Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories? Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world? Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

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Reflections 11 Years After the Crash

Idle factories in 2010 Google Search

1) If there hadn't been any of the kind of panic we got post-Lehman, how severe you think the U.S. recession would have been? Would it have been like a slightly worse S&L crisis, or is that underselling it?

I think the smart money in June 2008 was that the recession was or was about to be over. Housing investment had already rebalanced: the construction sector was back to a sustainable share of GDP. There were only about 500 billion of mortgage losses to be distributed around the world or to be bailed out by governments—really, trivial amounts in a world economy with 80 trillion of traded financial assets. And with Bear-Stearns the U.S. government had guaranteed the debt but not the equty of too big to fail institutions. Banks were still having trouble raising equity. But as long as people were confident that the 500 billion of bad mortgage debt would ultimately land on somebody who could absorb it, the only thing that would make a bad recession was if people anticipated a bad recession. And with no Lehman panic—if Bernanke, Paulson, and Geithner had not caused everybody to say quote what the fuck is going on" by allowing Lehman's bankruptcy uncontrolled and then justifying their actions by claiming that they were forbidden by law to support a too-big-to-fail institution that was insolvent and not just illiquid... Without that, no reason to fear even as bad as the S&L crisis.

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August 2, 2019: Weekly Forecasting Update

Nowcasting Report FEDERAL RESERVE BANK of NEW YORK

Federal Reserve Bank of New York: Nowcasting Report: "The New York Fed Staff Nowcast stands at 1.6% for 2019:Q3. News from this week's data releases decreased the nowcast for 2019:Q3 by 0.6 percentage point. Negative surprises from ISM manufacturing data and lower than expected trade data drove most of the decrease...

These past two weeks have seen three pieces of real news that have altered the outlook: it is not true to say that little has changed:

  1. A large twenty basis-point reduction in ten-year Treasury interest rates.
  2. Trump's relaunching and intensification of his trade war.
  3. New data pushing down out our estimate of the level of manufacturing production in the third quarter of 2019 by almost a full percentage point.

Nevertheless, the United States is not in or even likely to be on the verge of a recession. Germany, however, appears to be in recession.

Daily Treasury Yield Curve Rates

Daily Treasury Yield Curve Rates

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What Is the Federal Reserve Thinking Right Now?

The Federal Reserve is not an intelligence: it does not think. Individual members of the Federal Open Market Committee, however, do think. And the center of gravity of their individual thoughts now runs something like this:

1980-1985 was a disaster: 3 x 6 x 0.5 = 9%-point-years of lost jobs for Americans, jobs that would not have been lost had the Federal Reserve done its proper job and kept inflation under control in the 1970s:

Employment Rate Aged 25 54 All Persons for the United States FRED St Louis Fed

Inflation exploded in the 1970s because of demand-pull: the Federal Reserve let employment get above full employment, and outgo workers and firms rapidly concluded that this was a permanent situation in which they had to act first to boost their incomes:

Consumer Price Index for All Urban Consumers All Items Less Food and Energy FRED St Louis Fed

We cannot let this happen again: hence three times since 2010—in 2013, 2016, and 2018—we have used our policy tools of rates, quantities, and jawboning to push interest rates higher because we thought we were rapidly closing in on the full employment point at which inflation would start to move up substantially:

Real Gross Domestic Product FRED St Louis Fed

All three times we were wrong: we were not rapidly closing in on the full employment point at which inflation would start to move up substantially.

Real Gross Domestic Product FRED St Louis Fed

Now the inverted yield curve tells us that the market thinks that we have overdone interest rate increases, and will be substantially cutting rates by 100 basis points over the next two years:

FRED Graph FRED St Louis Fed

The market could be right and it could be wrong. An inverted yield curve has been a reliable warning signal in the past, but the world is different now, and perhaps that matters. However, failing to begin to validate market expectations now would shake confidence and raise uncertainty. We have no warrant for believing that our models are more knowledgeable right now than the market. And there is pronounced asymmetry here: we can always deal with too-high inflation via tighter money, but it is not obvious what we could do to fix the situation if a negative demand shock were to push the prime-age employment rate down two or four percentage-points.

Hence we will validate market expectations and drop our policy rates by 25 basis points at our next meeting. What will follow that... will be data-dependent...

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July 26, 2019: Weekly Forecasting Update

Back in late 2017 the Trump Administration, the Republicans in the Congress, and their tame economists were all claiming that passing the Ryan-McConnell-Trump upper-income tax cut would permanently boost investment in America by as much as the Clinton economic program of the 1990s had done, and would do so much more quickly—Clinton program was phased-in over five years, while Ryan-McConnell-Trump was phased-in immediately and had been affecting investment behavior even before it was passed.

It is simply not happening.

Gross Private Domestic Investment Nominal Potential Gross Domestic Product FRED St Louis Fed

Yet I have heard no explanations for why not. For example, a Tyler Cowen would write, in November 2017, that: Yes, a Corporate Tax Cut Would Increase Investment - Bloomberg: "Republicans have science on their side when it comes to this part of their tax plans.... The most likely result is that lower corporate tax rates will lead to more investment projects and thus more aggregate economic activity.... [The] worry... that companies will take their cash windfalls and simply return them to investors.... The evidence doesn’t support this fear.... When the critics allege that corporate tax rate cuts won’t boost investment, that’s going against basic economics..."

Has there been a peep from him since marking his beliefs to market? No.

The Ryan-McConnell-Trump tax cut did nothing other than make America even more unequal. Macroeconomically, we are where we were three years ago: Relatively stable growth at a trend a bit above 2% per year, with slowly rising employment, and no signs of rising inflation or a rising labor share.

The only significant difference that the Fed has now recognized that its hope of normalizing the Fed Funds rate in the foreseeable future is vain, and has now recognized that its confidence over the past six years that we were close to full employment was simply wrong.

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Karl Marx, First Real Business Cycle Theorist: Hoisted from the Archives

J Bradford DeLong s Awesome Presentation On The History Of The Bank Bailout Business Insider

Hoisted from the Archives: Nine years ago: Karl Marx, First Real Business Cycle Theorist: We see the affinity between Karl Marx and the Pain Caucus in his notes on crises in Theories of Surplus Value. Negative supply shocks and missed collective guesses on what the extent of the market will be in the future create overaccumulation and overproduction. Marx is very clear that the monetary crisis theorists--like John Stuart Mill--must be wrong, and that the system cannot run itself without crises.

In Marx this is one of the reasons why the system is abominable and must be overthrown. For the Pain Caucus the conclusion is opposite: because the system is good crises must be suffered.

Karl Marx:

Theories of Surplus-Value, Chapter 17: "When speaking of the destruction of capital through crises, one must distinguish between two factors...

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Note to Self: The question is whether our current market values are in fact "Pangloss" values, and are going to come back to earth at some point, with the shock provided by that return to earth providing a nasty expectational shock that will cause a depression—but with that return to earth delayed long enough to plausibly reelect Trump—or whether current values are appropriate given underlying fundamentals, and are in fact about the only thing keeping us out of a depression right now...

My sense is that "we need to raise reserve requirements in a boom" is very good policy; but that "we need to pop this bubble" is almost always very bad policy.

And we do not appear to have any (large) equity bubble. The weirdness is all in bond prices:

S P 500 PE Ratio 90 Year Historical Chart MacroTrends

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Monday Smackdown/Hoisted from the Archives: Scott Sumner Knew Better than to Do This!

Smackdown

Hoisted from 2011: Sumner really knew better than to do this, and really ought to have restrained himself:

Scott Sumner: A Slightly Off-Center Perspective on Monetary Problems: "They are both basically saying: 'if we hold nominal spending constant, fiscal policy can’t fix it.'... [I]t’s really rather sad when people like Krugman and Brad DeLong keep insisting that these guys don’t understand basic macro principles.... I don’t know for sure that Fama was using the same implicit assumption... [but] I think it quite likely that Fama was also cutting corners.... Lots of brilliant people talking past each other.... Welcome to elite macroeconomics, circa 2011.... If I was going to assign blame I’d single out Krugman/DeLong for rudeness and Fama/Cochrane for poor communication skills...

Me:

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July 19, 2019: Weekly Forecasting Update

Cursor and FRED Graph FRED St Louis Fed

The right response to almost all economic data releases is: Next to nothing has changed. We are where we were a year ago: Stable growth at 2% per year with no signs of rising inflation or a rising labor share.

The only significant difference that the Fed has recognized that its hope of normalizing the Fed Funds rate in the foreseeable future is vain, and has now recognized that its confidence over the past six years that we were close to full employment was simply wrong:

Federal Reserve Bank of New York: Nowcasting Report: Jul 19, 2019: "1.4% for 2019:Q2 and 1.9% for 2019:Q3.News from this week's data releases decreased the nowcast for 2019:Q2 by 0.1 percentage point and increased the nowcast for 2019:Q3 by 0.1 percentage point. Negative surprises from housing data accounted for most of the decline for 2019:Q2, while positive surprises from survey data accounted for most of the increase in 2019:Q3...

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July 12, 2019: Weekly Forecasting Update

FRED Graph FRED St Louis Fed

The right response to almost all economic data releases is: Next to nothing has changed. We are where we were a year ago: Stable growth at 2% per year with no signs of rising inflation or a rising labor share.

The only significant difference that the Fed has recognized that its hope of normalizing the Fed Funds rate in the foreseeable future is vain, and has now recognized that its confidence over the past six years that we were close to full employment was simply wrong:

Federal Reserve Bank of New York: Nowcasting Report: Junly 5, 2019: "The... Nowcast stands at 1.5% for 2019:Q2 and 1.8% for 2019:Q3. News from the JOLTS, CPI, and PPI releases were small, leaving the nowcast for both quarters broadly unchanged...

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Note to Self: The establishment-survey payroll-employment number (red line) contain within them a guess as to how many newly-formed forms there are that have not yet caught up to and entered the payroll system. When a recession starts, that guess at the fudge factor can be way high.

On the other hand, the household-survey employment number (blue line) has a lot more statistical noise in it.

The bet right now is that late last year the household survey interviewers just happened by luck on a bunch of people enthusiastic about working, but nothing is guaranteed. It might be that the firm birth-death guess is leading the establishment survey (red line) astray:

Civilian Employment Level FRED St Louis Fed

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Risks of Debt: The Real Flaw in Reinhart-Rogoff: Hoisted from the Archives

There never was a 90% cliff. And most of the downward slope in teh scatter came not from debt accumulation but from growth that had been slow for other reasons. See Owen Zidar (2013): Debt to GDP & Future Economic Growth:

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Hoisted from the Archives: Risks of Debt: The Real Flaw in Reinhart-Rogoff: 2013: A country that spends and spends and spends and spends and does not tax sufficiently will eventually run into debt-generated trouble. Its nominal interest rates will rise as bondholders fear inflation. Its business leaders will hunker down and try to move their wealth out of the corporations they run for fear of high future taxes on business. Real interest rates will rise because of policy uncertainty, and make many investments that are truly socially productive unprofitable. When inflation takes hold, the web of the division of labor will shrink from a global web he'd together by thin monetary ties to a very small web solidified by social bonds of trust and obligation—and a small division of labor means low productivity. All of this is bound to happen. Eventually. If a government spends and spends and spends but does not tax sufficiently.

But can this happen as long as interest rates remain low? As long as stock prices remain buoyant? As long as inflation remains subdued. My faction of economists—including Larry Summers, Laura Tyson, Paul Krugman, and many many others—believe that it will not...

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July 5, 2019: Weekly Forecasting Update

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The right response to almost all economic data releases is: Next to nothing has changed. We are where we were a year ago: Stable growth at 2% per year with no signs of rising inflation or a rising labor share. The only significant difference that the Fed has recognized that its hope of normalizing the Fed Funds rate in the foreseeable future is vain. We are one year closer to full employment, yes. But we have extended our view of when we will reach full employment by nine months:

Federal Reserve Bank of New York: Nowcasting Report: Junly 5, 2019: "The... Nowcast stands at 1.5% for 2019:Q2 and 1.7% for 2019:Q3.... Higher than expected exports and imports data, the ISM manufacturing survey, and employment data...

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June 28, 2019: Weekly Forecasting Update

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The right response to almost all economic data releases is: Next to nothing has changed with respect to the forecast. Worth noting is that the ten-year CPI inflation breakeven is now 1.6%. If investors were risk neutral with respect to bearing this particular inflation risk, this breakeven ought to be 2.5% if investors expected the Federal Reserve to meet its 2.0% PCE inflation target over the next decade:

Federal Reserve Bank of New York: Nowcasting Report: June 28, 2019: "The... Staff Nowcast stands at 1.3% for 2019:Q2 and 1.2% for 2019:Q3...

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It is macro: recession, weak recovery, catastrophe, and then superweak recovery...

I confess I do not get this from Paul Krugman.

Yes, the trade deficit crowds-out traditionally-male blue-collar import-substituting manufacturing jobs, but imports crowd-in traditionally-male blue-collar wholesale trade jobs, and finance traditionally-male blue-collar construction (and capital-goods manufacturing) jobs. If you look at all traditionally-male blue-collar—wholesale, construction, manufacturing, and mining)–what you get is not a story of the trade deficit, but rather a story of (a) macro shocks to aggregate demand, and (b) the long-run technology-and-preferences trend—some of which is automation.

NAFTA is nowhere.

The 2002-2007 bilateral-trade "China shock" is simply not a terribly big deal for the country as a whole: employment in traditionally-male blue-collar occupations was flat. A big deal for places that found their manufactures competing with new imports from China, yes. But not for blue-collar traditionally-male employment in the country as a whole.

For the country as a whole, it is aggregate demand—2001-3 recession, weak recovery, 2007-9 catastrophe, and then superweak recovery—with a supporting role for technology-and-preferences:

Https fred stlouisfed org graph graph id 577417 rn 817

Paul Krugman: "Yang asserts that automation destroyed lots of manufacturing in the midwest, [but] you don't have to be a protectionist to realize that the acceleration of job loss after 2000 was mainly about the surging trade deficit:

18 Paul Krugman on Twitter And while Yang asserts that automation destroyed lots of manufacturing in the midwest you don t have to be a protectionist to realize that the acceleration of job loss after 2000 was mainly about the surging

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Weekend Reading: Discussion of J. Bradford DeLong and Lawrence H. Summers: "Fiscal Policy in a Depressed Economy

Il Quarto Stato

Weekend Reading: Discussion of J. Bradford DeLong and Lawrence H. Summers (2012): "Fiscal Policy in a Depressed Economy:

Robert Hall observed that a better title for the paper would be “Eta,” since the paper’s surprising results all stem from the authors’ beliefs about the value of their hysteresis parameter η. The other parameter values the authors used for their simulations seemed mostly reasonable and uncontroversial to Hall. He noted that although Valerie Ramey had estimated a relatively low value for the multiplier on fiscal spending, the standard error on her estimate was large and did not rule out the possibility that the authors’ baseline value of 1.5 was correct. Hall also observed that some alternative ways of analyzing government spending data from World War II generated higher estimates of the multiplier. He found the authors’ value for the growth rate reasonable, and although he shared Ramey’s concern about the authors’ real interest rate assumptions, he thought their baseline value might be reasonable as well.

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June 21, 2019: Weekly Forecasting Update

Outlook Slides: https://www.icloud.com/keynote/0iqGf9C1E8-9mHJVeQdy1U7YQ

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The right response to almost all economic data releases is: Next to nothing has changed with respect to the forecast—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways.

About the only news in the past week or so is that the Federal Reserve has—behind the curve—become convinced that it raised interest rates too much in 2018. To the extent they attribute their change of view to news, the news is that President Trump is a chaos monkey with respect to international trade—but that was well known back in 2015.

Worth noting is that the ten-year CPI inflation breakeven is now 1.6%. If investors were risk neutral with respect to bearing this particular inflation risk, this breakeven ought to be 2.5% if investors expected the Federal Resrve to meet its 2.0% PCE inflation target over the next decade:

Federal Reserve Bank of New York: Nowcasting Report: June 21, 2019: "The New York Fed Staff Nowcast stands at 1.4% for 2019:Q2 and 1.3% for 2019:Q3. News from this week's data releases left the nowcast for 2019:Q2 largely unchanged and decreased the nowcast for 2019:Q3 by 0.4 percentage point. For 2019:Q3, negative surprises from regional survey data drove most of the decrease...

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Federal Reserve Talking Points for Bloomberg: June 19, 2019

For ten years now, the Federal Reserve has:

  • overestimated how fast the economy will grow without exceptional support.
  • underestimated how many people the US can put to work at "full employment"—the point beyond which inflationary pressures start to build.
  • overestimated how fast an inflationary spiral could take hold.
  • underestimated the dangers of renewed recession.

 

And the result has been the worst economic recovery in American history. For example:

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  • The unwillingness of the Federal Reserve to change its 2%-going-forward inflation target deprived the economy of the usual faster-than-trend bounce-back from the depths of a depression.

  • The Federal Reserve's decision to treat 2%-going-forward as a ceiling rather than a target left banks with little incentive to lend out the massive reserves that quantitative easing had led them to hold.

  • The Federal Reserve's mid-2010s decision to announce that the time of extraordinary support would soon end nearly brought on a recession.

  • The Federal Reserve's end-of-2016 decision to initiate a tightening cycle has left it in it current situation, with the 10-year inflation breakeven for the PCE at 1.3%/year—0.75-points below the Federal Reserve's formal target, in which it dearly wishes the interest rates it controls were lower than they are but does not quite dare take steps to reduce them yet.

3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

 

More generally:

  • The Trump-McConnell-Ryan tax cut has been a complete failure at boosting the American economy through increased investment in America.
    • But it has been a success in making the rich richer and thus America more unequal.
    • And it delivered a short-term demand-side Keynesian fiscal stimulus to growth that has now ebbed.
  • The past month has seen an 0.8%-point decrease in our estimate in what seasonally adjusted annual-rate production growth was comparing April-June to January March.
    • This is in part an impact of Trump's attempt to fight a trade war with China
    • Plus Trump's attempts to add a trade war with Mexico to the mix.
  • But this is mostly due to what Larry Summers calls "secular stagnation":
    • Financial markets are failing to mobilize the risk-bearing capacity of American society.
    • Thus even very low safe government-debt interest rates have not made capital affordable enough to induce the investment boom we would like to see.

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More than Two Decades of Macroeconomic History Through the Lens of Four Key Components of Aggregate Demand

It is remarkable the extent to which you can tell the story of the U.S. macroeconomy over the past twenty-five years through the reactions of four components of aggregate demand to policies and shocks:

  1. The dot-com boom unleashed by the Clinton deficit-reduction program and high-tech innovation.
  2. The dot-com bust.
  3. The housing boom.
  4. The successful rebalancing of aggregate demand—housing sits down, while exports and business investment stand up as money flows are successfully redirected.
  5. The Fed well behind the financial-stability curve: the financial crisis and the collapse.
  6. Inadequate recovery: The Geithner Treasury and the Obama White House's failure to do anything to promote a recovery of residential construction.
  7. Inadequate recovery: Republican (and Obama) fiscal austerity.
  8. Inadequate recovery: Bernanke's highly premature taper tantrum.
  9. The Trump rebound.

 

Dot-Com Boom:

FRED Graph FRED St Louis Fed

 

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June 14, 2019: Weekly Forecasting Update

JOLTS Day Graphs April 2019 Report Edition Equitable Growth

The right response to almost all economic data releases is: Next to nothing has changed with respect to the forecast—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways. About the only news is that over the past month we have seen an 0.8%-point decrease in our estimate in what production will be over April-June, largely driven by reductions in durable goods orders, capacity utilization, net exports, and this morning employment. This might be an impact of Trump's attempt to fight a trade war with China, plus Trump's attempts to add a trade war with Mexico to the mix.

Federal Reserve Bank of New York: Jun 14, 2019: Nowcast: "1.4% for 2019:Q2 and 1.7% for 2019:Q3. News from this week's data releases increased the nowcast for both 2019:Q2 and 2019:Q3 by 0.4 percentage point. Positive surprises from retail sales, capacity utilization, and industrial production...

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The Intergenerational Burden of the Debt: Nick Rowe Tempts Fate Weblogging: Hoisted from the Archives

Cursor and 30 Year Treasury Inflation Indexed Security Constant Maturity FRED St Louis Fed

Until secular stagnation ends—until the yield on U.S. government debt exceeds the growth rate of the economy—worry about reducing of even stabilizing the debt-to-GDP ratio of a country like the U.S. that has assume running room via financial repression to stabilize demand for its debt is premature. Thus the takeaway is this: It would be much more productive right now to worry about how do we maintain normal levels of net investment in a high government debt post-interest rate normalization environment than to propose sending the economy back into recession in order to reduce government debt accumulation. Recession and high unemployment in the short- and medium-run are problems. Low investment in the medium- and long-run are problems. Government debt is a tool to avoid the first and a source of risk of the second. But it is better to keep your mind focused on the things that are real problems:

Hoisted from the Archives: The Intergenerational Burden of the Debt: Nick Rowe Tempts Fate Weblogging...: Nick Rowe:

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DeLong Smackdown Watch: Yield Curve: Hoisted from the Archives from 2006

Ooh boy. Was I wrong in 2006. I am not betting against the yield curve again:

From 2006: DeLong Smackdown Watch: Yield Curve: Worthwhile Canadian Initiative thinks I'm wrong when I write: Yes, we should be worrying about the US yield curve: This inversion of the yield curve, however, is generated not by domestic investors' thinking that a recession is on the way, but by foreign central banks' desires to keep buying lots of dollar-denominated bonds in order to keep their currencies from appreciating. Thus while an inverted yield curve is usually a sign that a bunch of people are trading bonds on their belief that a recession is likely, that is not what is going on in this case...

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Joseph Schumpeter on "Liquidationism": Hoisted from the Archives

Il Quarto Stato

Hoisted from the Archives: Joseph Schumpeter on "Liquidationism": Hoisted from the Archives: "The problems presented by periods of depression may be grouped as follows: First, removal of extra economic injuries to the economic mechanism: Mostly impossible on political grounds. Second, relief: Not only imperative on moral and social grounds, but also an important means to keep up the current of economic life and to steady demand, although no cure for fundamental cases. Third, remedies: The chief difficulty of which lies in the fact that depressions are not simply evils, which we might attempt to suppress, but—perhaps undesirable—forms of something which has to be done, namely, adjustment to previous economic change. Most of what would be effective in remedying a depression would be equally effective in preventing this adjustment. This is especially true of inflation, which would, if pushed far enough, undoubtedly turn depression in to the sham prosperity so familiar from European postwar [i.e., World War I] experience, but which, if it be carried to that point, would, in the end, lead to a collapse worse than the one it was called in to remedy...

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June 7, 2019: Weekly Forecasting Update

The right response to almost all economic data releases is: Next to nothing has changed with respect to the forecast—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways. About the only news is that over the past month we have seen a 1.2%-point decrease in our estimate in what production will be over April-June, largely driven by reductions in durable goods orders, capacity utilization, net exports, and—this morning—employment growth. This might be an impact of Trump's attempt to fight a trade war with China, plus Trump's attempts to add a trade war with Mexico to the mix:

Federal Reserve Bank of New York: Jun 07, 2019: Nowcast: "1.0% for 2019:Q2 and 1.3% for 2019:Q3. News from this week's data releases decreased the nowcast for 2019:Q2 by 0.5 percentage point and decreased the nowcast for 2019:Q3 by 0.7 percentage point. Negative surprises from the ISM manufacturing survey, employment data, and international trade data drove most of the decrease...

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May 31, 2019: No Significant Changes: Weekly Forecasting Update

The right response to almost all economic data releases is: Next to nothing has changed with respect to the forecast—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways. About the only news these past three weeks is an 0.7%-point decrease in our estimate in what production will be over April-June, driven by a reduction in estimated durable goods orders and capacity utilization. This might be an impact o Trump's trade war, plus Trump's attempts to add a trad ar with Mexico to the mix:

Federal Reserve Bank of New York: Nowcasting Report: "May 31, 2019.... The New York Fed Staff Nowcast stands at 1.5% for 2019:Q2. News from this week's data releases increased the nowcast for 2019:Q2 by 0.1 percentage point...

 

Key Points:

Specifically, it is still the case that:

  • The Trump-McConnell-Ryan tax cut has been a complete failure at boosting the American economy through increased investment in America.
    • But it has been a success in making the rich richer and thus America more unequal.
    • And it delivered a short-term demand-side Kerynesian fiscal stimulus to growth that has now ebbed.
  • U.S. potential economic growth continues to be around 2%/year.
  • There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating.
  • There are still no signs of interest rate normalization: secular stagnation continues to reign.
  • There are still no signs the the U.S. is at "overfull employment" in any meaningful sense.

  • A change from 3 months ago: The U.S. grew at 3.2%/year in the first quarter of 2019—1.6%-points higher than had been nowcast—but the growth number you want to put in your head in assessing the strength of the economy is the 1.6%/year number that had been nowcast. The falling-apart of Trump's trade negotiating strategy with China will harm Americans and may disrupt value chains, and the might be becoming visible in the data flow.

  • Changes from 1 month ago: Industrial production appears to be falling as new durable goods orders come in below expectations. Industrial production may have peaked last December:
     
    Industrial Production Index FRED St Louis Fed

  • A change from 1 week ago: Trump has now added a possible trade war with Mexico to the mix...

  • Over the past 20 years: United States manufacturers are ordering no more in the way of the nominal value of capital goods than they order two decades ago. Deflators here are very hazardous, but I believe that translates to a zero increase in real orders as well. This is unprecedented for the U.S. economy: nothing like it has happened before:
     
    Manufacturers New Orders Durable Goods FRED St Louis Fed

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James Buchanan (1997): Has Economics Lost Its Way?: Hoisted from the Archives

Hoisted from the Archives: This serves as a good index of how much Milton Friedman's redefinition of "neutral monetary policy" to mean "whatever monetary policy keeps nominal GDP on its trend growth path" led people prone to motivated reasoning in a laissez-faire direction completely and horribly astray. It also serves as an example of an astonishing failure to mark one's beliefs to market. Never mind that the rough constant of M2 velocity before 1980 had been an obvious example of Goodhart's Law, and never mind that even before 1980 forecasts of the state of the economy one and two years out based on M2 were inferior to other forecasts, by 1997 James Buchanan had just seen a remarkable five-year 30% runup in M2 velocity. and the complete ditching of monetary aggregates not just as targets but even as indicators by Alan Greenspan in favor of a neo-Wicksellian "neutral interest rate" approach that had nothing whatsoever to do with an "effective monetary constitution" of any type:

FRED Graph FRED St Louis Fed

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