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The Federal Reserve in 2011 Debates Christina Romer's Ideas About the Need for "Regime Change": Weekend Reading

Weekend Reading: The Federal Reserve in 2011 Debates Christina Romer's Ideas About the Need for "Regime Change": https://www.federalreserve.gov/monetarypolicy/files/FOMC20111102meeting.pdf

I believe that in a generation or two the histories of the Bernanke Fed are overwhelmingly likely to concentrate on two puzzles:

  1. The failure to seek an environment in which inflation was high enough to allow a Federal Funds rate of 5% or so at the [peak of the business cycle, so that Bernanke's successors would have room to respond to a downturn in aggregate demand.

  2. The failure to use the credibility of its commitment to low inflation long and painfully built up by Volcker and Greenspan to support policies to rapidly return prime-age employment to its normal share of the population.

In late 2011, in a context in which prime-age employment was severely depressed and not going anywhere, the failure to see these two as policy priorities that called for, well, "regime change" is likely to appear largely inexplicable, and to be judged harshly:

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

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Still Haunted by the Shadow of the Greater Recession...


key: https://www.icloud.com/keynote/0UtILjGfChXSFFUBSCJ3PTf1g
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html: http://www.bradford-delong.com/2019/02/haunted-by-the-shadow-of-the-greater-recession.html

#highlighted #presentations #greatrecession #macro #economicgrowth #economichistory #economics #finance #monetaryeconomicss

Note to Self: Thinking About Blanchard's Presidential Address...: Blanchard's calculations of the effect of debt on welfare in his AEA Presidential Address all take the form of evaluating the welfare of a generation of economic agents young in some period t after the resolution of all period-t stochastic elements. That is a fine thing to do. That is not quite the same thing as the effect on expected well-being behind the veil of ignorance, from the nunc stans, taken without any knowledge of the resolution of period-t or indeed of any earlier stochastic elements. But I have not yet been able to wrap my head around what the differences are, or how they matter for conclusions. My notes...

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Debt Derangement Syndrome: Fresh at Project Syndicate

Debt Derangement Syndrome by J Bradford DeLong Project Syndicate

Project Syndicate: Debt Derangement Syndrome: Standard policy economics dictates that the public sector needs to fill the gap in aggregate demand when the private sector is not spending enough. After a decade of denial, the Global North may finally be returning to economic basics: For the past decade, politics in the Global North has been in a state of high madness owing to excessive fear of government debts and deficits. But two recent straws in the wind suggest that this may at long last be changing.... Ken Rogoff.... Brendan Greeley... reported... “a panicked email” from the Committee for a Responsible Federal Budget (CRFB)... Olivier Blanchard.... What Rogoff and Blanchard are saying today is standard policy economics. In fact, I always found it hard to believe–and still do–that anybody can take exception to it. Whenever the private sector stops spending enough to keep unemployment low and jobs easy to find, the public sector needs to fill the gap in aggregate demand... Read MOAR at Project Syndicate

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Note to Self: Trying and failing to gain conceptual clarity about and work my way through the algebra involved in a minor point in Blanchard's excellent and stimulating presidential address: Public Debt and Low Interest Rates: https://nbviewer.jupyter.org/github/braddelong/WS2019/blob/master/Thinking_About_Blanchard%27s_Presidential_Address....ipynb?flushcache=true...

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Increasing attention to leverage cycles and collateral valuations as sources of macroeconomic risk seems to be very welcome. Leverage and trend-chasing are the two major sources of demand-for-assets curves that slope the wrong way: when prices drop demand falls, either because you need to liquidate in order to repay now-undercollateralized loans or because you do not want to be long in a bear market. And there is every reason to think the government need to take very strong steps to make effective demand curves slope the proper way: Felix Martin: Will there be another crash in 2019?: "One important detail is that this effect is achieved not only directly, by adjusting the cost of borrowing, but also indirectly by making assets cheaper or more expensive...

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By Popular Demand: What Is “Modern Monetary Theory”?

Brad DeLong s Grasping Reality

What Is “Modern Monetary Theory”?

Ever since the Great Depression it has been settled doctrine in the nations of the North Atlantic that the government has a responsibility to keep the macroeconomy in balance: The circular flow of spending, production, and incomes should be high enough to keep there from being unnecessary unemployment while also being low enough so that prices and inflation are not surprisingly and distressingly high.

To accomplish this, governments use fiscal policy—the purchase of goods and services, the imposition of taxes, and the provision of transfer payments—and monetary policy—the provision by the central bank to the system of those liquid assets called “money” and its consequent nudging up and down of interest rates and asset prices—to attempt to keep the circular flow of spending, etc., in balance with the economy‘s sustainable productive potential at the expected rate of inflation .

Modern Monetary Theory says (1) that that is all there is to worry about, and (2) that fiscal policy should play the principal role in this balancing process.

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Costs and Benefits of International Capital Mobility: Reply to Bhagwati: Hoisted from 20 Years Ago

Needless to say, time has left me a lot wiser: We need to design economies so that they can operate without disaster even when deregulatory clowns like those of the George W. Bush or the Donald J. Trump administrations are in control of the levers of policy at key moments. How to do that is not so clear. What is clear is that only a fool today would think that our political economy would support a clever technocracy so that we might have our cake and eat it too. Indeed, the most likely scenario seems to be that we will be unable to eat our cake, and then the kleptocrats will steal it out from under our noses so that we will not have it either. In short: I should have listened harder to Jagdish 20 years ago...

2000s_financial_deregulation_republican_congressmen_-_Google_Search.png


Hoisted from the Archives: Reply to Bhagwati: "I open my May/June [1998] issue of Foreign Affairs to discover myself pilloried in an article by Jagdish Bhagwati between Paul Krugman and Roger C. Altman (excellent company to be in, by the way: much better than I am used to) as a banner-waving proponent of international capital mobility, guilty of "assum[ing] that free capital mobility is enormously beneficial while simultaneously failing to evaluate its crisis-prone downside."

I rub my eyes in surprise. I had not thought of myself as a banner-waving proponent of international capital mobility.

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What Will Cause the Next US Recession?: Live at Project Syndicate

The Digital Research Library of Illinois History Journal™ The Panic of 1893 in Illinois and Chicago

Live at Project Syndicate: U.S. Recession No Longer Improbable: The next recession most likely will not be due to a sudden shift by the Fed from a growth-nurturing to an inflation-fighting policy. Given that visible inflationary pressures probably will not build up by much over the next half-decade, it is more likely that something else will trigger the next downturn.... The culprit will probably be a sudden, sharp “flight to safety” following the revelation of a fundamental weakness in financial markets. That... is the pattern that has been generating downturns since at least 1825, when England’s canal-stock boom collapsed.

Needless to say, the particular nature and form of the next financial shock will be unanticipated. Investors, speculators, and financial institutions are generally hedged against the foreseeable shocks.... The death blow to the global economy in 2008-2009 came not from global imbalances or from the collapse of the mid-2000s housing bubble, but from the concentration of ownership of mortgage-backed securities... Read MOAR at Project Syndicat

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Note to Self: I need to resolve this. I am profoundly dissatisfied with teaching the origin of business cycles and "general gluts" via John Stuart Mill's 1829 "excess demand for money is excess supply of everything else", and in an economy of sticky prices, wages, and debts produces the recessions and depressions that we all know and love so well. It is a quick way to get into the subject. It is a convincing way. But it is not a correct way. There are, however, two problems:

  1. What is the "correct" way, exactly?
  2. How can we teach something closer to the "correct" way than Mill's "excess demand for money is excess supply of everything else" without losing our audience?

In the meanwhile, think upon:

Daniel Kuehn: Whack-A-Mole General Gluts and Money: The interest rate is really one price functioning in two markets.... You can arbitrage your way out of whack-a-mole gluts. You cannot arbitrage your way out of an overdetermined system...

Nick Rowe: Walras' Law vs Monetary Disequilibrium: "Walras' Law says that a general glut (excess supply) of newly-produced goods (and services) has to be matched by an excess demand for... money... bonds; land; old masters; used furniture; unobtainium; whatever.... Monetary Disequilibrium Theory says that a general glut of newly-produced goods can only be matched by an excess demand for money. There's only one mole to whack. Money is special. A general glut is always and everywhere a monetary phenomenon...

Paul Krugman: There's Something About Macro: "Money as an ordinary good begs many questions: surely money plays a special sort of role.... [Plus] there is something not quite right about pretending that prices and interest rates are determined by a static equilibrium problem.... Finally, sticky prices play a crucial role... [but] the assumption of at least temporarily rigid nominal prices is one of those things that works beautifully in practice but very badly in theory...

And please tell me what to do instead of Mill (1829)!

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No. The Fed Was Wrong to Raise Interest Rates

Measuring the Natural Rate of Interest FEDERAL RESERVE BANK of NEW YORK

I see this argument a bunch of places. Here it is from the sharp Felix Salmon. But I think it is wrong: Felix Salmon: Why the Fed Was Right to Hike: "When interest rates stay very low for an extended period of time, that has the effect of creating asset bubbles like the credit and housing boom of the mid-2000s.... If your stocks, bonds and real estate holdings were worth the same today, relative to GDP, that they were worth in 1995, they would have to crash in value by 33%, or $43 trillion. That's more than enough to trigger another financial crisis...

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The Great American Tax Heist Turns One: No Longer Live at Project Syndicate

Let me hammer this point again: the failure of any of Barro, Bhagwati, Boskin, Calomiris, Cogan, Holtz-Eakin, Hubbard, Lazear, Lindsey, Mankiw, Rosen, Shultz, Taylor, and a hundred-odd others to write about—or even express curiosity about why—their confident predictions of a year ago that the Trump-McConnell-Ryan corporate tax cut would generate a huge investment boom—that silence speaks very loudly about the genre in which they viewed their forecasts back at the time:

Clowns (ICP)

A year ago there were a substantial number of economists who were assuring us that the Trump-McConnell-Ryan corporate tax cut was not just a giveaway to rich stockholders but would provide a sustained and substantial boost to investment in America that would boost productivity by:

And Kevin Hassett and Greg Mankiw told us that these productivity gains would primarily boost wages not profits—because the relevant model was not one in which the tax cut raised after tax profit and interest rates but rather one in which foreigners would flood America with savings, lending to and investing in this country on a large scale to finance the bulk of this surge and investment.

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The Fed ought to pursue a symmetric 4%/year inflation target. It cannot even successfully communicate and pursue a 2%/year symmetric inflation target. And Tim Duy is an unhappy camper: Tim Duy: Fed Hikes Rates, Market Tumbles: "The implication here is that there is substantial downside risk to the economy. So much that the Fed is reducing its forecasts across the board. So much so that the Fed anticipates they will fall short of their inflation target yet again. And yet they continue to hike rates and signal more rate hikes to come. It is an unnecessarily and explicit hawkish message that is an artifact of a communications strategy that only made sense when you could reasonably promise zero rates for an extended period...

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If the Fed had had a 4%/year inflation target for the past decade, odds are that right now the Federal Reserve would be in a situation without great worries. But it hasn't, and it isn't: Mohamed A. El-Erian: Fed Rate Hike: Powell Tries to Balance Growth and Volatility: "Fed’s No-Win.... Powell increasingly must make the best of factors mostly outside his control, increasing fears of a policy mistake...

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The Democrats’ Deficit Line in the Sand: Hoisted from the Archives

Federal Surplus or Deficit as Percent of Gross Domestic Product FRED St Louis Fed

From ten years ago: J. Bradford DeLong: The Democrats’ Line in the Sand: "A dilemma for Democratic deficit-hawk economists trying to determine what good economic policies would be should Barack Obama become president.... A chain is only as strong as its weakest link, and it seems pointless to work to strengthen the Democratic links of the chain of fiscal responsibility when the Republican links are not just weak but absent...

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Fama's Fallacy: Hoisted from Ten Years Ago

Clowns (ICP)

I was profoundly embarrassed by and ashamed of the Swedish Nobel Committee and of being an economist when they awarded the Nobel Prize to Eugene Fama.

You see, the economists who cheerled for the Trump-McConnell-Ryan tax cut and claimed it would rapidly and permanently boost annual investment in America by 800 billion had arguments—bad arguments. The economists who condemned Benanke's quantitative easing and claimed it would soon lead to high inflation and a debased dollar had arguments—bad arguments. I do not think any of them made those bad arguments in good faith: the failure of those in either group to acknowledge that they got a big one wrong and to engage in Bayeisan updating is interesting: that silence speaks volumes.

But Fama and the others who claimed a decade ago that, while private decision to spend more boosted employment and production, public decisions to spend more—fiscal stimulus—not only would not, but could not possibly ever boost employment and production... they had no argument at all.

What do I mean? This. This is why I am embarrassed and ashamed: Hoisted from Ten Years Ago: Fama's Fallacy, Take I: Eugene Fama Rederives the "Treasury View": A Guestpost from Montagu Norman, former Governor of the Bank of England:

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Weekend Reading: Paul Krugman (2011): Mr Keynes and the Moderns

Paul Krugman's distinction between Chapter 12er and Book 13 Keynesians is, I think, dead on:

John Maynard Keynes and George Bernard Shaw exiting the Fitzwilliam Museum, 1936

Paul Krugman (2011): Mr Keynes and the Moderns: "I’d divide Keynes readers into two types: Chapter 12ers and Book 1ers. Chapter 12 is, of course, the wonderful, brilliant chapter on long-term expectations, with its acute observations on investor psychology.... 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.... Chapter 12ers insist is that this is the real message of Keynes...

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The Great American Tax Heist Turns One: Live at Project Syndicate

Clowns (ICP)

Time has passed: a year's worth of water under the bridge. But I have not become less angry at and disappointed with how the Republican economists behaved in what my Project Syndicate editors call the Great American Tax Heist of last December:

Live at Project Syndicate: The Great American Tax Heist Turns One: Last December, Republicans relied on the support of conservative economists who predicted that the party's corporate tax cuts would boost productivity and investment in the United States substantially. The forecasts were wrong, and the silence of those who made them suggests that they knew it all along....

Critics of the “Tax Cuts and Jobs Act” described it as a cynical handout for wealthy shareholders. But a substantial number of economists came out in support of it.... One prominent group, most of whom served in previous Republican administrations, predicted in The Wall Street Journal that the tax cuts would boost long-run GDP by 3-4%, with an “associated increase” of about 0.4% “in the annual rate of GDP growth” over the next decade. And in an open letter to Congress, a coterie of over 100 economists asserted that “the macroeconomic feedback generated by the [tax cuts]” would be “more than enough to compensate for the static revenue loss,” implying that the bill would be deficit-neutral over time... Read MOAR at Project Syndicate

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Fall 2018 Econ 101b Exam: U.C. Berkeley

School of Athens

We expect that this will take you 90 minutes—but we will not kick you out after that time span... Open book, open devices, open internet—everything except conversing interactively with another Turing-Class entity... Do your work in your bluebook... Be calm: from your performance in the course so far, we are confident that you have (largely) got this...

Good luck!

Write your name, your section number, and your section leader on the front and at the top of the first page of your bluebook.

Make the first page of your bluebook an answer page for parts A and B so that we can quickly grade the exam—on that page write "A1:", "A2:", "A3:...", etc., and "B1:", "B2:", "B3:", etc., on successive rows of the page, and then write the answer you pick or the quantity you calculate next to each label...

 

Solow Growth Model

We have the Solow Growth Model (SGM) system of equations:

$ \frac{d\left(L_t\right)}{dt} = nL_t $ :: labor-force growth equation
$ \frac{d\left(E_t\right)}{dt} = gE_t $ :: efficiency-of-labor growth equation
$ \frac{d\left(K_t\right)}{dt} = sY_t - \delta{K_t} $ :: capital-stock growth equation
$ Y_t = \left(K_t\right)^{\alpha}\left(L_tE_t\right)^{1-\alpha} $ :: production function

 

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Matthew Yglesias: The Lies, The Lies of Andrew Sullivan: Hoisted from the Archives

Clowns (ICP)

Hoisted from the Archives: Matthew Yglesias: The Lies, The Lies: "Andrew Sullivan has been a pretty consistent proponent of the view that Paul Krugman is some sort of liar... [because of his] repeated insistences that George W. Bush's economic policy is founded on a tissue of lies. Krugman is, of course, entirely correct about this. The unnoted irony here is that in his May 14, 2001 column 'Downsize', Sullivan conceded Krugman's point: 'Ah, but the details. The Krugmans and the Chaits will shortly have a cow, if not a whole herd of them. The Times will weigh in again with yet another barrage of articles, editorials, and op-eds opposing any tax relief that would actually benefit those who pay most of the taxes. And, to be fair to these liberal critics, they're right...

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Two Differences Between a Clinton Administration and a Trump Administration...

Real Gross Private Domestic Investment FRED St Louis Fed

Here is one difference between a Clinton Administration and a Trump Administration. The Clinton administration of 1993-2001 sold its 1993 deficit-reduction reconciliation bill as a phased-in five-year plan to boost American economic growth and American incomes. By raising taxes and by cutting government spending relative to the then-projected baseline—half of the cuts coming from the military, half of the cuts coming from the social insurance programs—Clinton sought to redirect 1%-point of GDP's worth of funds each year for five consecutive years from funding the government debt to funding productive private investment.

Over the five years as the program was being phased in, this boost in investment was projected by the administration—i.e., by me and others—to be a supply-side economic stimulus raising the rate of growth of potential output and boosting the rate of economic growth and thus of American incomes by 0.2%-points per year. Thereafter, once it was fully phased in, the program was projected by the administration—i.e., by me and others—to boost investment relative to the baseline by 4%-points of national product and so boost the rate of potential output growth and thus of American incomes relative to bas3eline by 0.4%-points per year. The program was supposed to make the U.S. 1% richer after 5 years; 3% richer after 10 years; 5% richer after 15 years, and so on.

It worked. Investment grew. Growth accelerated. Income rose relative to the baseline.

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It is such a bad idea for a central bank to invert the yield curve. If central bankers can do only one thing, that is probably the thing they should know: Glenn D. Rudebusch and John C. Williams: Forecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve: "For over two decades, researchers have provided evidence that the yield curve... contains useful information for signaling future recessions.... Professional forecasters appear worse at predicting recessions a few quarters ahead than a simple real-time forecasting model that is based on the yield spread...

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"How an Economy Can Live Beyond Its Means on Its Wits...": Hoisted from the Archives

Preview of How an Economy Can Live Beyond Its Means on Its Wits Hoisted from the Archives

Hoisted from the Archives: How an Economy Can Live Beyond Its Means on Its Wits: P.J. Grigg attacking John Maynard Keynes:

I distrust utterly those economists who have with great but deplorable ingenuity taught that it is not only possible but praiseworthy for a whole country to live beyond its mens on its wits and who, in Mr. Shaw's description, teach that it is possible to make a community rich by calling a penny tuppence—in short who have sought to make economics a vade mecum for political spivs...

Confront economists' theories of depressions and what (if anything) the government should do about them and you find yourself immediately confronted with what look to be at least seven different theories:

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Monday Smackdown: Revisiting the Trump-McConnell-Ryan Tax Cut Debate

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

A year ago, during the Trump-McConnell-Ryan corporate tax cut debate, Greg Mankiw wrote that "a relevant exercise for my readers... [is assuming] the capital stock adjusts so that the after-tax marginal product of capital equals the exogenously given world interest rate r..." That was unprofessional. That is not a relevant model for a large country with a floating exchange rate. If you want an investment boom, cut the deficit—like Clinton-Mitchell-Gephardt did over 1993-1996.

Paul Krugman explains why: Paul Krugman: Why Was Trump’s Tax Cut a Fizzle?: "The blue wave means that Donald Trump will go into the 2020 election with only one major legislative achievement: a big tax cut for corporations and the wealthy. Still, that tax cut was supposed to accomplish big things. Republicans thought it would give them a big electoral boost, and they predicted dramatic economic gains. What they got instead, however, was a big fizzle...

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Why Doesn't Italy Have Better Options?

2018-12-08

We begin with Adam Tooze laying out the issues:

https://fred.stlouisfed.org/graph/?graph_id=525535&rn=85Adam Tooze: Italy: How Does the E.U. Think This Is Going to End?: "Over the past 10 years, Italy’s gross domestic product per capita has fallen... unique among large advanced economies...

...More than 32 percent of Italy’s young people are unemployed. The gloom, disappointment and frustration are undeniable. For the commission to declare that this is a time for austerity flies in the face of a reality that for many Italians is closer to a personal and national emergency....

The two parties that make up the current Italian government, the League and the Five Star Movement, were elected in March to address this crisis. The League is xenophobic; Five Star is erratic and zany. But the economic programs on which they campaigned are hardly outlandish.... The Italian government’s budget forecasts are optimistic. But others, including the Bank of Italy and the Peterson Institute of International Economics, warn that Italy is caught in a trap: Anxieties about debt sustainability mean that any stimulus has the perverse effect of driving up interest rates, squeezing bank lending and reducing growth...

 

What would have to be the case for a stimulus to have this perverse effect—to actually manage to not boost the economy but rather squeeze bank lending and reduce growth?

 

Our Filing System: The Basic IS Framework

Back in the late 1990s Paul Krugman concluded that workings of the macroeconomy had changed: that we had started to see The Return of Depression Economics https://books.google.com/books?isbn=039304839X. He was right. This meant that the economic analytical tools that had been forged in order to understand the Great Depression of the 1930s had become the right place to start any analysis of what was going on in the business cycle. And so it has proven to be for the past twenty years,

Therefore we start with John Hick's 1937 IS-Equation, from his article "Mr. Keynes and the 'Classics': A Suggested Interpretation" https://tinyurl.com/20181208a-delong. The variable we place on the left-hand side is aggregate demand AD. The variable we place on the right-hand side is the long-term risky real interest rate r. In between are a large host of parameters drawn from the macroeconomy's behavioral relationships and from salient features of the macroeconomic environment and macroeconomic policy. We identity aggregate demand AD with national income and product Y, arguing that the inventory-adjustment mechanism will make the two equal at the macroeconomy's short-run sticky-price Keynesian equilibrium within a few quarters of a year.

What Are Italy s Options 2018 12 08

Then we have not so much a model of the macroeconomy as a filing system for factors that we can and need to model, thus:

Jupyter Notebook Viewer

To simplify notation, we will typically use "$\Delta$" to stand for changes in economic quantities generated by shifts in the economic policy and in the economic environment, and we will drop terms that are zero.

 

Applying Our Filing System to Italy Today

For the problem of understanding Italy today, the pieces of this equation that matter are:

Jupyter Notebook Viewer

The change in national income and product ${\Delta}Y$ equals the change in aggregate demand ${\Delta}Y$ equals the sum of:

  • the multiplier $\mu$ times the change in government purchases ${\Delta}G$
  • the multiplier $\mu$ times the foreign propensity to purchase our exports $x_f$ times the change in exchange speculator optimism or pessimism about the long-run soundness of the currency ${\Delta}{\epsilon}_o$
  • the multiplier $\mu$ times the foreign propensity to purchase our exports $x_f$ times the sensitivity of the exchange rate to interest rates ${\epsilon}_r$ times the change in the interest rate in the rest of the eurozone ${\Delta}r^f$
  • the multiplier $\mu$ times the sum of the interest sensitivity of investment $I_r$ plus the product of the foreign propensity to purchase our exports $x_f$ and the sensitivity of the exchange rate to interest rates ${\epsilon}_r$ all times the change in the interest rate ${\Delta}r$

Now we need an extra equation: a country with a freely-floating exchange rate $\epsilon$:

Jupyter Notebook Viewer

the change in the exchange rate Δε is equal to the change in exchange speculator optimism or pessimism about the long-run soundness of the currency Δεo minus the sensitivity of the exchange rate to interest rates εr all times the change in the interest rate Δr. But Italy does not have a freely-floating exchange rate: Italy is in the eurozone. So

$ {\Delta}{\epsilon} = 0 $

therefore:

Jupyter Notebook Viewer

And the rewritten relevant parts of the IS equation are:

Jupyter Notebook Viewer

$ {\Delta}Y = \mu{\Delta}G - \frac{{\mu}I_r}{\epsilon_r}\Delta\epsilon_o -{\mu}I_r{\Delta}r^f $

Thus the change ${\Delta}Y$ in national income and product that follows a fiscal expansion with higher government purchases ${\Delta}G$ will be positive as long as:

$ {\Delta}G > \frac{I_r}{\epsilon_r}\Delta\epsilon_o + I_r{\Delta}r^f $

The shift to more expansionary fiscal policy will indeed boost demand, production, and employment unless this equation fails to hold.

 

Conclusion

What conclusions can we draw from this equation?

First, we conclude that taking on unsustainable debt—or rather debt perceived as unsustainable—could indeed fail to boost demand, production, and employment if the reaction Δεo to ΔG is too large. The natural thing, therefore, would be for the IMF and the European Union to step in with short-term support and guarantees to ensure that the market reaction Δεo coupled with a longer-term structural adjustment program to guarantee that debt repayment will in fact take place.

Second, that the European Union—which controls Δrf—could assist by switching to an easier money-tighter fiscal policy mix itself and so creating a negative value for Δrf.

Why would the European Union want to assist in these ways? Well, it wants a prosperous Italy, doesn't it? And it wants an Italy that stays in the eurozone, doesn't it? why would the IMF want to assist in these ways? Well, that is its job, isn't it?

If the past ten years ought to have taught the Great and Good of Europe anything, it is that ensuring prosperity, growth, and high employmennt is job #1. Figuring out how to dot the financial i's and cross the financial t's is distinctly secondary. But, as Adam Tooze writes, instead the Great and Good of Europe seem to wish to "hold the line on debt and deficits" without offering anything "positive in exchange, such as a common European investment and growth strategy or a more cooperative approach to the refugee question". He calls this, with great understatement, "a high-risk and negative strategy".

I cannot see how anyone can disagree.

 


#highlighted #globalization #eurozone #monetarypolicy

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It is a surprise to most economists to learn that the outbreak of inflation in the 1970s was not due to central bankers and governments trying to exploit the Phillips curve to run a high-pressure economy. The most important shocks were the oil shocks. The second most important shocks were those that caused the productivity growth slowdown. The third most important shocks were Johnson’s and Nixon‘s unwillingness to listen to their economic advisers, and Martin‘s and Burns’s unwillingness to pull a Volcker. Perhaps it is because it is such a surprise that so few have learned it, and how many forget it immediately after it is pointed out to the. And since the 1970s be strong belief that another 1970s is always and everywhere looking around the corner has been very damaging: and since the 1970s the strong believe that another 1970s is always been everywhere looking around the corner has been very damaging: Paul Krugman (2011): The Demand-Side Temptation: “[Nick] Rowe goes on to suggest that demand-side logic is dangerous... could lead to irresponsible policies. Well, there have been times and places.... But what I think Nick misses is the power of the contrary narrative, of the notion of the government as being like a family that must tighten its belt when the rest of us do, of the evils of printing money (hey, I can’t do that, why can Bernanke?)...

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Adam Tooze: Italy: How Does the E.U. Think This Is Going to End?: "Over the past 10 years, Italy’s gross domestic product per capita has fallen... unique among large advanced economies.... More than 32 percent of Italy’s young people are unemployed. The gloom, disappointment and frustration are undeniable. For the commission to declare that this is a time for austerity flies in the face of a reality that for many Italians is closer to a personal and national emergency...

Dtp5AvFW4AEiqUu jpg 1 200×691 pixels

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How Powell May Approach Regulation: Bloomberg Daybreak Asia 2017-12-01: Hoisted from the Archives

From a year ago. Not a transcript but much more what I wish I had said—that is, heavily edited and revised to increase clarity, decrease stupidity, and file a little bit of the ragged stream-of-consciousness rough edges off.

Nevertheless, holds up very nicely, no?

Needless to say, the backdrop here is not the view from the Berkeley Northgate TV studio:

How Powell May Approach Regulation If Named Fed Chair Bloomberg

but this is the view from the conference room in which I am holding pre-exam-week office hours:

View from Blum Center

Unfortunately, the view of the Golden Gate to the left of the frame is blocked by three tall pine trees that have no reason to live, and the peak of Mount Tamalpais is hidden by the salmon-and-white apartment building on the right.

People over the nexzt three months trying to decide between jobs at Berkeley and at universities with larger endowments take norte..

How Powell May Approach Regulation If Named Fed Chair: From 2017-11-01: Anchor: Do you think that's concerning or do you think it's refreshing that Powell comes from the private sector?

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Anna Snider: Just Released: Interactive R-star Charts: "With the arrival of Bank President John Williams... we’re now running—and sharing the output of—models he helped develop to obtain estimates of the natural rate of interest, or r-star, for the United States and other advanced economies... the real interest rate that allows an economy to expand in line with its underlying potential while keeping inflation stable.... We’re providing quarterly estimates of r-star and related variables on our public website in downloadable Excel files plus the replication code and documentation for both the Laubach-Williams ('LW') and Holston-Laubach-Williams ('HLW/) models...

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Hoisted from the Archives (December 20, 2010): Can't Anybody in Obama's Inner Circle Play This Game?

Clowns (ICP)

Hoisted from the Archives: Can't Anybody in Obama's Inner Circle Play This Game?: When people in the White House ask me whether I think Obama's SOTU address should be about tax reform or Social Security reform (i.e., 2/3 Social Security benefit cuts, 1/3 tax increases offered by the administration--and God alone knows what happens after that), I want to say: Why not make the SOTU address about jobs and economic recovery?...

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The Business-Cycle History of the Past Thirty Years Through the Lens of Aggregate Demand: Four Components of Multiplier-Driving Spending

As Paul Krugman says at every opportunity, if you knew nothing of macro after 1975—if you were just armed with sticky-price IS-LM—you would have done an excellent job at understanding the U.S. economy since 2008. I want to point out that this holds true for more than the past ten years: this holds true for the past thirty years as well:


Business Investment, Residential Construction, Government Purchases, Exports

All as Shares of Nominal Potential GDP

All as Percentage-Point Deviations from 2007QI Values...

Four Components of Autonomous Spending

 

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Monday Smackdown/Hoisted: John Cochrane's Claim in Late 2008 That a Recession Would Be a Good Thing Deserves Some Kind of Award...

The fact is that by the end of 2007 the construction sector had rebalanced: there was no excess of people pounding nails in Nevada...


To: @johnmlippert: If I may beg a small slice of your attention...

I am tracking down John Cochrane's claims that (i) in your December 23, 2008 article you were "only... on a hunt for embarrassing quotes", (ii) he had "spent about 10 hours patiently trying to explain some basics" to you, and (iii) you took him out of proper context when you wrote: "'We should have a recession', Cochrane said in November, speaking to students and said in November, speaking to students and investors in a conference room.... 'People who spend their lives pounding nails in Nevada need something else to do'."

Do you by chance remember the larger context of Cochrane's "pounding nails" comment, and do you have any idea why he now claims that you took him out of context? Or what he thinks the proper context would have been?

I would be grateful for any light you can shed on this.

Yours,

Brad DeLong brad.delong@gmail.com


John M. Lippert: "Hi Professor DeLong.

Thanks for your note. Professor Cochrane’s complaint is something of which I became aware several months after we published our story in 2008.... The bottom line is that Bloomberg did not respond to Cochrane’s comments. He never sent them to us, despite my request that he do so.

When we became aware of his complaint, we saw no reason to make a correction. Cochrane made the ‘pounding nails’ comment at a Chicago Booth forum at the Gleacher Center in downtown Chicago in November 2008. It was part of an ongoing lecture series, as I recall. It was kind of a big event, with a couple hundred people. So they may have a recording that you can access.

Good luck with your inquiries.

Tks,

John Lippert


Just FYI, if I were John Cochrane I would not characterize my 2008 CRSP Forum Keynote as something "I did not write...". And I would not characterize accurate quotations from it as:

an attribution, taken out of context, from a http://bloomberg.com article, written by a reporter [John Lippert] with whom I spent about 10 hours patiently trying to explain some basics, and who also turned out only to be on a hunt for embarrassing quotes...

John Cochrane: How Did Paul Krugman Get It So Wrong?: "As one little example, take my quotation about carpenters in Nevada...

...Krugman writes:

And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.” Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada?

I did not write this. It is an attribution, taken out of context, from a http://bloomberg.com article, written by a reporter [John Lippert] with whom I spent about 10 hours patiently trying to explain some basics, and who also turned out only to be on a hunt for embarrassing quotes.

Nevertheless, I was trying to explain how sectoral shifts contribute to unemployment. I never asserted that ‘it takes mass unemployment across the whole nation to get carpenters to move out of Nevada’. You cannot even dredge up an out-of-context quote for that monstrously made-up opinion. What is the point in conducting debate this way? I do not think that Krugman disagrees that sectoral shifts result in some unemployment, so the quote actually makes sense as economics. The only point is to make me, personally, seem heartless–a pure, personal, calumnious attack, which has nothing to do with economics...


Paul Krugman (2009): How Did Economists Get It So Wrong?: "Milton Friedman certainly never bought into the idea that mass unemployment represents a voluntary reduction in work effort or the idea that recessions are actually good for the economy. Yet the current generation of freshwater economists has been making both arguments...

...Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work... decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief.

And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.” Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada?

Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work?

But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.

Yet if the crisis has pushed freshwater economists into absurdity, it has also created a lot of soul-searching among saltwater economists. Their framework, unlike that of the Chicago School, both allows for the possibility of involuntary unemployment and considers it a bad thing. But the New Keynesian models that have come to dominate teaching and research assume that people are perfectly rational and financial markets are perfectly efficient. To get anything like the current slump into their models, New Keynesians are forced to introduce some kind of fudge factor that for reasons unspecified temporarily depresses private spending. (I’ve done exactly that in some of my own work.) And if the analysis of where we are now rests on this fudge factor, how much confidence can we have in the models’ predictions about where we are going?

The state of macro, in short, is not good. So where does the profession go from here?...


Contra Tim Duy, The Lack of Federal Reserve Maneuvering Room Is Very Worrisome...

Contra Tim Duy, The Lack of Federal Reserve Maneuvering Room Is Very Worrisome...

This, by the every sharp Tim Duy, strikes me as simply wrong: Contrary to what he says, the Fed has room to combat the next crisis only if the next crisis is not really a crisis, but only a small liquidity hiccup in the financial markets. Anything bigger, and the Federal Reserve will be helpless, and hapless.

Look at the track of the interest rate the Federal Reserve controls—the short safe nominal interest rate:

Month Treasury Bill Secondary Market Rate (FRED St Louis Fed)

In the past third of a century, by my count the Federal Reserve has decided six times that it needs to reduce interest rates in order to raise asset prices and try to lift contractionary pressure off of the economy—that is, once every five and a half years. Call these: 1985, 1987, 1991, 1998, 2000, and 2007.

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This is remarkably nihilistic from Bob Solow. The fact is that over my career academic macroeconomics, at least as it has been read why journalists and politicians, has been of little or no or negative help to fiscal authorities and central bankers trying to manage economic prosperity. The reception and influence of Friedman's "The Role o Monetary Policy" has been a big part of that process. In so doing, economics failed of its promise. Figuring out why is really important: not just something to muse about while toasting marshmallows: Robert Solow: A Theory Is a Sometime Thing: "One can speculate. Maybe a patchwork of ideas like eclectic American Keynesianism, held together partly by duct tape, is always at a disadvantage compared with a monolithic doctrine that has an answer for everything, and the same answer for every thing. Maybe that same monolithic doctrine reinforced and was reinforced by the general shift of political and social preferences to the right that was taking place at about the same time. Maybe this bit of intellectual history was mainly an accidental concatenation of events, personalities, and dispositions. And maybe this is the sort of question that is better discussed while toasting marshmallows around a dying campfire.

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Blame the Economists?: No Longer Fresh at Project Syndicate

Il Quarto Stato

A short version of my review of Adam Tooze's excellent Crashed: How a Decade of Financial Crises Changed the World: No Longer Fresh at Project Syndicate: Blame the Economists?: Ever since the 2008 financial crash and subsequent Great Recession, economists have been pilloried for failing to foresee the crisis, and for not convincing policymakers of what needed to be done to address it. But the upheavals of the past decade were more a product of historical contingency than technocratic failure: BERKELEY—Now that we are witnessing what looks like the historic decline of the West, it is worth asking what role economists might have played in the disasters of the past decade. From the end of World War II until 2007, Western political leaders at least acted as if they were interested in achieving full employment, price stability, an acceptably fair distribution of income and wealth, and an open international order in which all countries would benefit from trade and finance. True, these goals were always in tension, such that we sometimes put growth incentives before income equality, and openness before the interests of specific workers or industries. Nevertheless, the general thrust of policymaking was toward all four objectives. Then came 2008, when everything changed. The goal of full employment dropped off Western leaders’ radar... Read MOAR at Project Syndicate

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Economists' Models: Analysis Pumps or Filing Systems? And Do Countries with Reserve Currencies Need to Fear Solvency Crises?

School of Athens

I believe that there are four issues in this Summers-Krugman-Rogoff-Blanchard et al.-DeLong internet discussion of three years ago:

  1. As far as we economists are concerned, are our models analysis pumps, or are they merely filing systems to remind us of experiential wisdom? In other words: Are our models to be taken seriously when they lead us to a conclusion that the great and good believe is unserious?

  2. Do economies with exorbitant privilege in which the key leveraged financial institutions have little foreign-currency debt need to fear banking and government solvency crises?

  3. Can economies with exorbitant privilege in which the key leveraged financial institutions have little foreign-currency debt rely on their abilty to print their way to liquidity in an emergency and on market participants' recognition of that ability?

  4. Can economists build models and conduct analyses assuming that business expectations are reasonable things, and will not push the economy to a position that is not close to a self-consistent near rational expectations equilibrium?

As near as I can see:

  1. Larry Summers says: filing systems, yes, no, no.
  2. Paul Krugman says: analysis pumps, no, yes, yes.
  3. I say" both, no, yes, no.

I think I should, sometime over the past three years, have written a really good piece about these questions based on the ten items below. But I regret that I have not:

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Nick Rowe: Bicycle Disequilibrium Theory: "Suppose you need a bicycle to get to work. Suppose bicycles are a common property resource, because bike locks don't work. Every night the workers deposit their bicycles in the bike bank, and in the morning it's first come first served. And suppose that sometimes there aren't enough bicycles to go around. So sometimes the level of employment is determined by the number of bicycles, and not by all the usual stuff. Any individual can always get a bicycle in the morning, simply by getting up early enough. But in aggregate they can't. Fallacy of composition. A theory of when workers wake up might be interesting, and useful for microeconomists wanting to understand the distribution of employment, but it won't help us understand what determines the aggregate level of employment...

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Weekend Reading: John Maynard Keynes on the Baneful Consequences of Ricardo's Rhetorical Victory Over Malthus

John Maynard Keynes and George Bernard Shaw exiting the Fitzwilliam Museum, 1936

John Maynard Keynes: The General Theory of Employment, Interest, and Money: Chapter 3: "The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain...

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Hoisted from the Archives: Niall Ferguson Is Wrong to Say That He Is Doubly Stupid: Why Did Keynes Write "In the Long Run We Are All Dead"? Weblogging

Thinking how to talk about Schumpeter's "Ricardian Vice" and the extremely peculiar boosting by economists formerly of note and reputation of the Trump corporate tax cut, and so revisiting this https://www.bradford-delong.com/2013/05/niall-ferguson-is-wrong-to-say-that-he-is-doubly-stupid-why-did-keynes-write-in-the-long-run-we-are-all-dead-weblogging.html:


NewImage

Niall Ferguson:

An Open Letter to the Harvard Community: Last week I said something stupid about John Maynard Keynes.  Asked to comment on Keynes’ famous observation “In the long run we are all dead,” I suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay. This was doubly stupid. First, it is obvious that people who do not have children also care about future generations. Second, I had forgotten that Keynes’ wife Lydia miscarried.

Niall is wrong. His suggestion was not doubly stupid. There is more.

Niall speaks of Keynes's "In the long run we are all dead" as if it is a carpe diem argument--a "seize the day" argument, analogous to Marvell's "To His Coy Mistress" or Herrick's "To the Virgins"--and Ferguson sees his task as that of explaining why Keynes adopted this be-a-grasshopper-not-an-ant "party like we're gonna die young!" form of economics, or perhaps form of morality.

But that is not it at all.

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"In the Long Run We Are All Dead" in Context...

John Maynard Keynes (1923): A Tract on Monetary Reform", pp. 80-82: "[T]he [Quantity] Theory [of Money] has often been expounded on the further assumption that a mere change in the quantity of the currency cannot affect k, r, and k',—that is to say, in mathematical parlance, that n is an independent variable in relation to these quantities. It would follow from this that an arbitrary doubling of n, since this in itself is assumed not to affect k, r, and k', must have the effect of raising p to double what it would have been otherwise. The Quantity Theory is often stated in this, or a similar, form...

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Seminar: James Cloyne: Taxes and Growth: New Narrative Evidence from Interwar Britain: James Cloyne, Nicholas Dimsdale, and Natacha Postel-Vinay: Taxes and Growth: New Narrative Evidence from Interwar Britain: "The impact of fiscal policy on economic activity is still a matter of great debate. And, ever since Keynes first commented on it, interwar Britain, 1918-1939, has remained a particularly contentious case, not least because of its high debt environment and turbulent business cycle...

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Weekend Reading: Keynes Quoting Malthus

John Maynard Keynes: The General Theory of Employment, Interest and Money: "The doctrine did not reappear in respectable circles for another century, until in the later phase of Malthus the notion of the insufficiency of effective demand takes a definite place as a scientific explanation of unemployment. Since I have already dealt with this somewhat fully in my essay on Malthus, it will be sufficient if I repeat here one or two characteristic passages...

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Was the Great Recession More Damaging Than the Great Depression?: Over at the Milken Review

Was the Great Recession More Damaging Than the Great Depression Milken Institute Review

Was the Great Recession More Damaging Than the Great Depression?: ...Your parents’—more likely your grandparents’—Great Depression opened with the then-biggest-ever stock market crash, continued with the largest-ever sustained decline in GDP, and ended with a near-decade of subnormal production and employment. Yet 11 years after the 1929 crash, national income per worker was 10 percent above its 1929 level. The next year, 12 years after, it was 28 percent above its 1929 level. The economy had fully recovered. And then came the boom of World War II, followed by the “thirty glorious years” of post-World War II prosperity. The Great Depression was a nightmare. But the economy then woke up—and it was not haunted thereafter.

Our “Great Recession” opened in 2007 with what appeared to be a containable financial crisis. The economy subsequently danced on a knife-edge of instability for a year. Then came the crash — in stock market values, employment and GDP. The experience of the Great Depression, however, gave policymakers the knowledge and running room to keep our depression-in-the-making an order of magnitude less severe than the Great Depression. That’s all true. But it’s not the whole story. The Great Recession has cast a very large shadow on America’s future prosperity. We are still haunted by it... Read MOAR at Project Syndicate

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If you believe in the "plucking model", by which the economy when "plucked" into a state below normal employment by a negative shock then returns to normal, there is not strong reason to begin a recession watch until normal employment has resumed or has almost resumed. It has. So it is time to start a "what will cause the next recession?" watch. Tim Duy says: it will not be weakness in housing. I concur: the current weakness in housing is what the Federal Reserve wants to see, and is the intended effect of its raising interest rates—a little less employment in housing construction producing a little more room for higher employment in other sectors: Tim Duy: Decision Time: "Remember the recession calls in 2016 when manufacturing rolled over? The thinking was that every time industrial production falls by 2%, a recession followed, and this time would be no different. But it was different. Those calls did not play out because the shock was largely contained to that sector; recessions stems from shocks that hit the entire economy. And even if a recession could be boiled down to a single indicator, I would pick the yield curve over housing...

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Blame the Economists?: Fresh at Project Syndicate

Blame the Economists by J Bradford DeLong Project Syndicate

Fresh at Project Syndicate: Blame the Economists?: Ever since the 2008 financial crash and subsequent Great Recession, economists have been pilloried for failing to foresee the crisis, and for not convincing policymakers of what needed to be done to address it. But the upheavals of the past decade were more a product of historical contingency than technocratic failure: BERKELEY—Now that we are witnessing what looks like the historic decline of the West, it is worth asking what role economists might have played in the disasters of the past decade. From the end of World War II until 2007, Western political leaders at least acted as if they were interested in achieving full employment, price stability, an acceptably fair distribution of income and wealth, and an open international order in which all countries would benefit from trade and finance. True, these goals were always in tension, such that we sometimes put growth incentives before income equality, and openness before the interests of specific workers or industries. Nevertheless, the general thrust of policymaking was toward all four objectives. Then came 2008, when everything changed. The goal of full employment dropped off Western leaders’ radar... Read MOAR at Project Syndicate


#projectsyndicate #economicsgonewrong #economicsgoneright #monetarypolicy #finance #politicaleconomy

Weekend Reading: Robert Solow: A Theory Is a Sometime Thing

Robert Solow: A theory Is a Sometime Thing: "Milton Friedman... aims to undermine the eclectic American Keynesianism of the 1950s and 1960s... goes after two... lines of thought. His first claim is that the central bank, the Fed, cannot ‘peg’ the real interest rate... to undermine the standard LM curve.... The Fed can peg the nominal federal funds rate, but not the real rate...

..."These… effects will reverse the initial downward pressure on interest rates fairly promptly, say, in something less than a year. Together they will tend, after a somewhat longer interval, say, a year or two, to return interest rates to the level they would otherwise have had" (Friedman 1968, p. 6). Now we know what ‘peg’ means.... The goal, remember, is to contradict the eclectic American Keynesian... which did not, after all, require the Fed to control real interest rates forever. If the Fed can have meaningful influence only for less than a year or two, then it is surely playing a losing game, especially in view of those ‘long and variable lags.’ Is that really so?...

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