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...
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%.
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.
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…...
Hoisted from the Archives: Ricardo's Big Idea, and Its Vicissitudes https://www.bradford-delong.com/2017/10/ricardos-big-idea-and-its-vicissitudes-inet-edinburgh-comparative-advantage-panel.html:
INET Edinburgh Comparative Advantage Panel
Ricardo's Big Idea, and Its Vicissitudes
Income and Wealth Distribution, or, Watching Professional Republicans Sell Their Souls Back in 1992: Hoisted from the Archives
I have long wanted an undergraduate to write a senior thesis about this episode. I have never found one to advise to do so:
Hoisted from the Archives: The income distribution came on to the stage that is America's public sphere between February 14 and December 12, 1992. And the rhetoric of "X% of gains in per capita income over years Y-Z went to the top W%-iles of the income distribution" became a one in American political-economic discourse over that time period as well. Over those ten months then-New York Times economics reporter Sylvia Nasar wrote eight stories about income inequality in America. All of them were pitched at a high substantive and intellectual level—they would have fit into the New York Times's later Upshot (which has recently refocused at a less analytically-substantive level as concerned with "politics, policy, and everyday life"). This was, needless to say, very unusual for the New York Times.
Sylvia's first story addressed the peculiar fact that the "80's Boom", as Reagan Republicans and the New York Times called it, had seen the poverty rate not diminish but rise. Sylvia attributed that rise to union-busting, and a growing disparity between high- and low-wage jobs springing from a decline in relative manufacturing employment and possibly from boosted high-wage white-collar productivity from computerization. Her second story, on March 5, took a turn. Instead of continuing to investigate the causes of rising poverty and wage stagnation in a decade of supposed boom, it focused on "who had reaped the gains" from "the prosperity of the last decade and a half". It highlighted the "Krugman calculation". It began:
Populist politicians, economists and ordinary citizens have long suspected that the rich have been getting richer. What is making people sit up now is recent evidence that the richest 1 percent of American families appears to have reaped most of the gains from the prosperity of the last decade and a half. An outsized 60 percent of the growth in the average after-tax income of all American families between 1977 and 1989—and an even heftier three-fourths of the gain in average pretax income—went to the wealthiest 660,000 families, each of which had an annual income of at least $310,000 a year...
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
Hoisted from the Archives: Department of "Huh!?": Raghu Rajan Is a Member of the Pain Caucus, and I Don't Understand Why...
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...
John Cochrane Prostitutes Himself to Republican Politicians Department: Monday Smackdown/Hoisted from 2015
Noah Smith: John Cochrane Smackdown: "John writes: 'My surprise in reading Noah is that he provided no alternative numbers. If you don't think Free Market Nirvana will have 4% growth, at least for a decade as we remove all the level inefficiencies, how much do you think it will produce, and how solid is that evidence?...' I don't really feel I need to produce an alternative to a number that was made up as a political talking point. Why 4 percent? Why not 5? Why not 8? Why not 782 percent? Where do we get the number for how good we can expect Free Market Nirvana to be? Is it from the sum of point estimates from a bunch of different meta-analyses of research on various free-market policies? No. It was something Jeb Bush tossed out in a conference call because it was 'a nice round number', after James Glassman had suggested '3 or 3.5'. You want me to give you an alternative number, using the same rigorous methodology? Sure, how about 3.1. Wait, no. 3.3. There we go. 3.3 sounds good. Rolls off the tongue..."
I must say, Cochrane here reminds me of one of my most favorite quotes from tank economist Paul M. Sweezy:
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?
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.
Theories of Surplus-Value, Chapter 17: "When speaking of the destruction of capital through crises, one must distinguish between two factors...
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...
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:
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...
This, from this past April of all times, greatly puzzles me: WHAT IN THE HOLY NAME OF THE ONE WHO IS IS GOING ON HERE?!
Let us remember what really happened back in 2011 when the unemployment rate was 9%:
"Reinhart... explained that countries rarely pass the 90 percent debt-to-GDP tipping point precisely because it is dangerous.... Reinhart and Rogoff... 'current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP'..."
Yet there never was any "90 percent debt-to-GDP tipping point".
Reinhart and Rogoff thought there was because they did not do any robustness checks of their data-analysis binning procedures.
Perhaps an apology to the misled world should be a high priority? Perhaps it should be a higher priority than rants claiming that their critics like me—who were right—engaged in "years of mounting polemics against austerity policies, Keynesian dogma has become something close to a secular religion"?
Marking your beliefs to market makes your thoughts stronger and raises your credibility. Not doing so does the reverse:
Ken Rogoff: The Austerity Chronicles: "After years of mounting polemics against austerity policies, Keynesian dogma has become something close to a secular religion in popular economic-policy debates. But a new study of 16 advanced economies shows that, as with all dogmas, righteousness is no substitute for empirical facts...
Weekend Reading: Discussion of J. Bradford DeLong and Lawrence H. Summers: "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.
Hoisted from Six Years Ago: To Steal a Line from Leon Trotsky: "Every Man Has a Right to Be Stupid, but John Cochrane Abuses the Privilege..."
Hoisted from the Archives: Stupidity Is a Willed Choice Files: John Cochrane: Reading Paul Krugman calls to mind that I never reacted to John Cochrane's July 2012 failure to mark his beliefs to market and, instead, doubling down on his claim that the biggest risk the U.S. economy faces is that of becoming "Argentina" "quickly".
I must say that if I had been opining stridently about issues of public policy without doing my homework five years ago, and if between then and now events had developed in directions strongly contrary to my expectations, I would not double down on what I had thought then--I would rather try hard to do my homework and to mark my beliefs to market.
And if I were going to criticize people for not citing my work, I would not claim that a sentence they wrote which comes immediately after a four-paragraph quote from me as an example, and I would have read their explanation of why they think expansionary fiscal policy right now does not raise the risks of "fiscal dominance" rather than remain in ignorance of it.
But to each his own!
Hoisted from the Archives: John Cochrane's Claim in Late 2008 That a Recession Would Be a Good Thing Deserves Some Kind of Award...
Hoisted from the Archives: The fact is that by the end of 2007 the construction sector had rebalanced: there was no excess of people pounding nails in Nevada—even if you did believe the false theory that recessions have recessions do the "necessary work of rebalancing", there was no rebalancing work to be done after 2007. Even a quarter-competent Schumpeterian who kept even half an eye on the data should have been able to recognize that...
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.
Brad DeLong email@example.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.
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...
Anybody who has spent any time looking at the data knows that it is in the boom, not in the depression, that the work of sectoral readjustment is done. Indeed, that work cannot be done in the depression. In the depression nothing is profitable. So how could entrepreneurs possibly judge then what will be profitable when the depression is past? They must wait for the boom to see:
Robert Heilbroner (1996): The Embarrassment of Economics: Schumpeter arrived in his famous riding habit and great cloak, of which he divested himself in a grand gesture. He greeted us in a typically Schumpeterian way: "Gentlemen, a depression is for capitalism like a good, cold douche." The remark shocked us...
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:
The ε-Stigler and the Other Components of Stigler: On George Stigler's 1962 Denunciation of the "Insolence" of Demonstrating Negroes, and Other Topics
Twitter Thread: Daniel Kuehn wrote: "We say something intelligent and on-point about Buchanan or Friedman or Tullock or Stigler and then we try to extrapolate a history of conservatism from it. Generally we're not equipped to do that (I'm certainly not), and should be wary of it. Wary doesn’t mean don’t cross-pollinate. I think the interaction between the two communities is great. Just something to be aware of..."
Let's take the George Stigler vector and project it onto a complete intellectual basis made up of the unit vectors ε, σ, π, β, γ:
Over on the Twitter machine, Calvin TerBeek has eaten his wheaties this morning, and presents us with George Stigler in 1962 writing for New Guard, the publication of the conservatives Young Americans for Freedom. Stigler denounces the "Negro leaders" and the "political, intellectual, and religious leaders of the nation" for protesting and approving of protests: the "stream of demonstrations, growing in size and in insolence". Stigler writes: "How much easier to march on the mayor than to teach industry to a boy: how much simpler to keep the children home to coerce the school board than to instill in them a love of art and literature and science". He also slags decolonization, and approves of American Jews in "the rapid process of losing their identity".
"Attempts to Make Sense Out of Right Wing Austrian Economics Can Never Amount to Anything"—rootless_e: Hoisted From the Archives
rootless_e is correct: Ludwig von Miese is not: Hoisted from the Archives: Quote of the Day: November 12, 2011: "Attempts to carry out economic reforms from the monetary side can never amount to anything but an artificial stimulation of economic activity by an expansion of the circulation, and this, as must constantly be emphasized, must necessarily lead to crisis and depression. Recurring economic crises are nothing but the consequence of attempts, despite all the teachings of experience and all the warnings of the economists, to stimulate economic activity by means of additional credit"—Ludwig von Mises, The Theory of Money and Credit...
"Attempts to make sense out of right wing Austrian economics can never amount to anything."—rootless_e...
"Fictitious" Wealth and Ludwig von Mises: Nevertheless, like a moth to a flame—or like a dog to vomit, or like a dog to something worse—I find myself under a mysterious but inexorable and irresistible compulsion to waste what would otherwise be productive work time trying to make some kind of sense of it—to at least understand wherein lies the error, and how somebody trying very hard to understand the economy (never mind that he is a big fan of the political leadership of Benito Mussolini) can go so pathetically wrong. It is, of course, not the case that every expansion of the circulation is an "artificial" (and unnatural) "stimulation of economic activity" that must "necessarily lead to crisis and depression". So why does Ludwig von Mises think that it must? Here is my current guess as to where von Mises is coming from:
Writing Bulls--- for the WSJ Op-Ed Page as a Career Strategy: The Nine Unprofessional Republican Economists
The extra quarter's worth of data from the new BEA NIPA release raises this, once again, to the top of the pile: Note the contrast between the path of investment, on the one hand, implicit in the growth forecast of the effects of the Trump-Ryan-McConnell tax cut that Robert J. Barro, Michael J. Boskin, John Cogan, Douglas Holtz-Eakin, Glenn Hubbard, Lawrence B. Lindsey, Harvey S. Rosen, George P. Shultz and John. B. Taylor, and, on the other hand, reality:
If you are even 10% in the explain-the-world business—if you are even 1% in the explain-the-world business—such a sharp disjunction between what you had predicted and the outcome calls forth curiosity, interest, and explanations of why you think you went wrong and what your future research projects will be to figure it out.
Only if you are 100% in the I-am-engaging-in-vice-signalling-by-writing-bulls----to-please-my-political-masters business are you left doing <crickets> in response to such a very sharp disjunction between your predictions and reality.
Yet as I listen to each and very one of the Nine Unprofessional Republican Economists, all that I hear is: <crickets>...
- Economics as a Professional Vocation: Bulls--- Detection as a Student Learning Goal
- The Nine Unprofessional Republican Economists Have Become Even More Unprofessional
Come to think of it, none of the nine has dared to see that Steve Moore is unqualified to serve on the Federal Reserve, either—and two of the nine, Taylor and Lindsey, are, I am assured, in his corner...
So Far, Only Three Professional Republicans Are Willing to Say that Stephen Moore Is Not Qualified to Be a Fed Governor
So far, only three professional Republicans are willing to say that Stephen Moore is not qualified to be a fed governor. A lot are saying it in private. But only three are saying it in public. They are:
- Greg Mankiw
- Ross Douthat
- Steve Moore
Yes, Of Course Larry Kudlow Is For QE Now and Was Against It When Obama Was President. Why Would You Think Otherwise?
A question: Benedict Trump: @ProtectronArmy: "I wonder if Kudlow was pro or con QE when Obama was President...
I answer: He was against QE when Obama was President. Why would you think otherwise?:
Brad DeLong: @delong: Kudlow was against QE under Obama: The zero-interest-rate target will unfortunately remain in place much longer—until unemployment goes to 6.5 percent or less. Given rising tax and regulatory threats from Washington, and the job-stopping Obamacare regulations and mandates, unemployment may be sticky on the downside. But the big news is that the Fed may stop growing its balance sheet sooner than most market people expect. As someone who is totally uncomfortable with the Fed’s $4 trillion balance sheet and reserve-creation process, I welcome
Larry Kudlow (2013): https://t.co/U85MOHlB73: The zero-interest-rate target will unfortunately remain in place much longer—until unemployment goes to 6.5 percent or less. Given rising tax and regulatory threats from Washington, and the job-stopping Obamacare regulations and mandates, unemployment may be sticky on the downside. But the big news is that the Fed may stop growing its balance sheet sooner than most market people expect. As someone who is totally uncomfortable with the Fed’s $4 trillion balance sheet and reserve-creation process, I welcome the news. The central bank is listening to its critics, both inside and out...
They have no morals and no shame.
Larry Lindsey and John Taylor: "PLEASE APPOINT US TO SOMETHING!! WE ARE LOYAL!!!! WE ARE NPOSTLTE PEOPLE!!!!!! PLEASE!!!!!!!!"
At some level, this is hilarious: HA HA HA!!!
Greg Mankiw has said the obvious: that Stephen Moore is not qualified to be a Fed Governor. Kevin Hassett—Kevin Hassett!—appears to are frantically trying to organize internal opposition to the nomination of a grotesquely-unqualified governor who admits he is grotesquely-unqualified. Kevin:
As the process moves forward, if Steve ends up being the nominee, he'll have good explanations for his positions. You're right that he's gone through his career being a pundit and having really interesting things to a whole range of topics, but as a nominee you have to be more careful about every little word that he says. I'm sure that he's going to be pulling back his op-eds and preparing for confirmation, should that [nomination in fact] arise..."
And so John Taylor and Larry Lindsey decide that now is the time for them to demonstrate that they are NO PLATE OF SHIT TOO LARGE TO EAT people, as far as a Republican White House is concerned. note that they do this even though they may well in so doing alienate Banking-Committee Republican senators with likely long future tenures who this it kinda important that the Fed be, you know, a functional institution. Or are all the Repubilcan senators on the Banking Committee NPOSTLTE people too?
David Patten: Trump Fed Nominee Stephen Moore Targeted by Liberal Resistance: "Moore's roster of big-name advocates include... Bush economic adviser Larry Lindsey... two-time runner-up to serve as Fed Chairman John Taylor...
James Montier will soon have an answer to his question why people hate MMT. MMT is about to hate James Montier too: James Montier: Why Does Everyone Hate MMT?: "Many of the negative articles I’ve read about MMT use the tried and tested method of setting up a straw man purely for the purposes of knocking him down. So, to avoid confusion, I will lay out a simple and straightforward description of what MMT is.... (4) Functional finance, not sound finance. Fiscal policy is much more potent than monetary policy. Fiscal policy should be aimed at generating full employment while maintaining low inflation...
Among the professional Republicans, Ross Douthat joins Greg Mankiw in opposition to Steve Moore. So far, they are the only two I have seen—and Greg Mankiw is the only economist:
Ross Douthat: Why are people up in arms over Steve Moore for the Fed?: "The consensus in conservative academic think tank land is that Moore is an enormous hack, and this was true long before his Trump boosterism. Trump wants to nominate him because he's against Fed tightening, which is probably correct policy, but Moore pretty clearly is only taking that view because it's Trump's view and he likes Trump...
I have here a transcript from a week or so ago of Kevin Hassett on Fox Business telling transparent lies. Seriously: why does he bother? What does he gain? Is it really the case that AEI will have him back after things like this? WILL banks like JPM Chase will pay him to speak to conferences?
If so, they have really really really really bad judgment:
7:38:49 BARTIROMO: The Atlanta Federal Reserve on Friday issued its GDP forecast for the first quarter, it’s three-tenths of a percent. What was your reaction to this? I know that this changes a lot, by the way...
7:38:59 HASSETT: Sure it does, yeah...
7:39:00 BARTIROMO: You’ll probably revise it umpteen times, but 0.3%, obviously not great for the first quarter...
7:39:05 HASSETT: Right, well there are two things going on. The first is that we started the quarter out with a 300,000 jobs number, north of 300,000. And most of the time when you do that, you end up with a 3% quarter. And so we’re gonna get jobs again this week, and if we get another really big number, and I think we’ll have a lot of confidence that something as low as three-tenths isn’t gonna happen. But there is this weird pattern in the data all the way back to 2010, that the first quarter tends to be about 1% below the average for the year. So if we think as we do at the White House that we’re gonna have about a 3% year, then right now, if you wanted me to put a number on the table, I’d say it’s probably gonna be about a 2% first quarter.
7:39:38 BARTIROMO: Okay, so is that largely because of the shutdown, or what happened in the first quarter...
7:39:41 HASSETT: No, it’s because of the seasonality thing, they don’t seasonally adjust the data correctly in Q1, it’s a weird technical thing. And you know, we could go to the blackboard, I know you’d love it, but your viewers would probably never get me invited back again...
These are lies.
That the Bernanke Fed responded to hitting the zero lower bound by lowering its inflation target always struck me as not sane. Yet that is what it did. It went from a 2.5%-per-year core PCE chain inflation target to an asymmetric 2%-or-less-per-year core PCE chain inflation target:
Paul Krugman back in 1999 demonstrated that a flexible-price economy in which Say's Law holds reacts to hitting the zero lower bound on interest rates with an immediate and discontinuous drop in the price level in order to generate the inflation it needs for the zero nominal interest rate to generate the right neutral real interest rate so that full employment can be maintained. A central bank has one major job: to make Say's Law true in practice even though it is false in theory by pushing the real interest rate to the neutral rate.
Thus there are two not-wrong ways to deal with the zero lower bound problem:
- Keep your inflation target high enough that you do not hit the zero lower bound.
- If you do hit the zero lower bound, immediately do everything you can to push the inflation rate up until the zero nominal interest rate you have generates the neutral rate interest rate you need.
The Federal Reserve did not do either of the two not-wrong things in the early 2010s. The Federal Reserve's forthcoming "fundamental rethink" will not include an acknowledgement that the Bernanke Fed did a wrong thing in the early 2010s. And according to Gavyn Davies it has already taken the possibility of adopting a policy of doing the right thing—doing either of the right things—off the table. This is not good:
Gavyn Davies: Federal Reserve’s Fundamental Rethink About Inflation: "One idea for avoiding the Japanese deflationary trap is simply to raise the existing inflation target... Clarida has specifically ruled this out.... When prices fall below the long-run 2 per cent target during a recession, the Fed would credibly commit to compensating for this error during the subsequent recovery... the short run inflation rate may exceed 2 per cent while the catch-up to the long-term path occurs...
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 the public sphere of the Global North has been in a fit of high madness with respect to its excessive fear of government debts and deficits. But this affliction may be breaking. In the past two weeks I have noted two straws in the wind.
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
Short-Run Economic Forecast: The Economic Forecast: Commonwealth Club Non-Public Event Opening Statement
General Talking Points: Commonwealth Club Talking Points (January 25, 2019): Forecasting and Steve Moore Edition
Yes, There Are Individual Economists Worth Paying Respect to. But Is Economics Worth Paying Respect to?
Blush. To be one of fifteen good economists name-checked by Larry Summers genuinely makes my day—nay, makes my week.
But this gets into a topic I have been worrying at for a long time now. And so let me try once again to say what needs to be said, for I do have to admit that, contrary to what Larry maintains, Fareed Zakaria does have a point when he says that "events have hammered... nails into the coffin of traditional economics" and that, while the question mark at the end is important, it is time to speak of "the end of economics?". Yes, there are very many good economists worth listening to. But does economics as a whole have any claim to authority, or is it better for outsiders' first reaction to be to dismiss its claims as some combination of ideology on the one hand and obsequious toadying to political masters on the other?
Open right now on my virtual desktop, as has been true about 5% of the time over the past fourteen months, is an article forecasting the economic effects of the 2017 Trump-McConnell-Ryan tax cut by nine academic economists: Robert J. Barro, Michael J. Boskin, John Cogan, Douglas Holtz-Eakin, Glenn Hubbard, Lawrence B. Lindsey, Harvey S. Rosen, George P. Shultz and John. B. Taylor: How Tax Reform Will Lift the Economy: We believe the Republican bills could boost GDP 3% to 4% long term by reducing the cost of capital. It is, bluntly, unprofessional.
Larry Summers: Has economics failed us? Hardly: "My friend Fareed Zakaria... writing... “The End of Economics?,” doubting the relevance and utility of economics and economists. Because Fareed is so thoughtful and echoes arguments that are frequently made, he deserves a considered response. Fareed ignores large bodies of economic thought, fails to recognize that economists have been the sources of most critiques of previous economic thinking, tilts at straw men and offers little alternative to economic approaches to public policy...
Brad DeLong (2007): On Robert Barro's (2005) "Rare Events and the Equity Premium" and T.A. Rietz's (1988) "The Equity Risk Premium: A Solution": Our habit of using the Lucas-tree model of Lucas (1978), "Asset Prices in an Exchange Economy" as a workhorse has turned out to be a trap. The Lucas-tree model has neither production nor accumulation. This makes it easy to solve. But this makes its responses perverse. There are no scarce resources to be allocated among alternative uses. There are only asset prices which must move so as to make agents unwilling to try to reallocate resources. It is, I think, not surprising that an economic model in which resource allocation plays no role is a dangerous tool to use in trying to understand the world...
The remarkable thing about Robert Barro—and all the other Lucases and Famas and Boldrins and Cochranes who, back in 2008-2012, said it was logically impossible for expansionary fiscal policy to work—and his question "Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people?" is that the answer had been well-known and on the table since at least 1829. The answer was given by John Stuart Mill The market failure is that the economy is out-of-equiilibrium, in a "general glut", with an excess demand for money and an excess supply of pretty much every currently-produced good and services.
Normally the existence of excess supplies and excess demands in an economy is a good thing: The entrepreneurial profits imbalances create set in motion the migration of resources to higher-value uses. But private-sector entities cannot migrate labor and capital into the business of creating money, for money is liquid trust and can only be created by institutions that are trusted to be, well, good for the money. So the solution is not to move resources out of creating currently-produced goods and services but to move demand into buying currently-produced goods and services. And—as long as it is good for the money—the government's borrowing-and-spending or printing-and-dropping works just fine:
Comment of the Day: JEC: Keynesian Economics vs. Regular Economics: "'Unlike the trade-off in regular economics, that extra $1 billion is the ultimate free lunch. How can it be right? Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people?' The funny thing here is that Barro imagines this to be a killer rhetorical question, when it is in fact a crucial and open research question (and one that Keynesian macroeconomists have done far too little to answer, in my opinion). What makes it a research question rather than a damning rhetorical one is the empirical fact that, under certain circumstances, multipliers greater than one are well-documented. (In fairness, better documented today than in 2011)...
Monday Smackdown: Apropos of David Brooks's ill-sourced imaginings that "cultural Marxism... is now the lingua franca in the elite academy..." and his use of Alexander Zubatov and Russell Blackford to back him up...
I am not sure whether Brooks is simply confident that people will not check Zubatov's references or did not check them himself—he does have to write a full 1200 words a week in his job. But I have long thought that betting nobody will check the references is an intellectual style much more common on the right than on the center or the left. For example:
On Niall Ferguson: Why Did Keynes Write "In the Long Run We Are All Dead"?: In [Keynes's] extended discussion of how to use the quantity theory of money, the sentence 'In the long run we are all dead' performs an important rhetorical role. It wakes up the reader. It gets him or her to reset an attention that may well be flagging.
But it has nothing to do with attitudes toward the future, or with rates of time discount, or with a heedless pursuit of present pleasure.
So why do people think it does? Note that we are speaking not just of Ferguson here, but of Mankiw and Hayek and Schumpeter and Himmelfarb and Peter Drucker and McCraw and even Heilbroner—along with many others.
The most remarkable thing about this piece from 2011 is that Robert Barro does not seem to feel under any pressure at all to provide an account of why it was that real GDP per capita was 52,049 dollars in the fourth quarter of 2007 and yet only 49,318 dollars in the second quarter of 2009—and did not surpass its 2007Q4 level again until 2013Q3.
Other adherents than Barro to what Barro calls "normal economics" have put forward three theories:
- that there was a huge sudden change in American workers' utility functions that made them much less eager to work,
- that there was a huge sudden forgetting of a great deal of knowledge about how to manipulate nature and organize production, and
- that there was a great and well-founded fear that Obama was about to impose taxes to turn America into a Venezuela or that Bernanke was about to follow a monetary policy that would turn the U.S. into a Zimbabwe.
They were laughed at.
So Barro prefers to have no explanation at all for why production per capita was lower than it had been in 2007Q4, and yet maintains unshaken confidence that he has a deep and correct understanding of what determines the level of production. You can't do that—hold that you have the correct theory, and yet not explain how it applies to the world in which you live: Robert Barro (2011): Keynesian Economics vs. Regular Economics: "The overall prediction from regular economics is that an expansion of transfers, such as food stamps, decreases employment and, hence, gross domestic product (GDP). In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working. In addition, the financing of a transfer program requires more taxes—today or in the future in the case of deficit financing. These added levies likely further reduce work effort—in this instance by taxpayers expected to finance the transfer—and also lower investment because the return after taxes is diminished...
0, 179, 465, 654—what's the next number in this series? Stephen Moore claims it is obvious, and gestures at it with an "and so on". Two numbers give you a line, three (that don't fall on a line) give you a parabola, and four (that don't fall along a line or a parabola) give you a cubic. We have four: What are the next numbers iin the cubic? 542, and -75, and -1401. Add up the first ten terms of this "and so on" series and we get not +6000 billion but rather -39820 billion. Economists know how to do and use math. Stephen Moore just doesn't: Stephen Moore: The Corporate Tax Cut Is Paying for Itself: "Kevin Hassett... caused a brouhaha by claiming... that the corporate tax cut... has 'about paid for itself.'... He is almost entirely right.... Even if we assume a reversion to the pre-Trump 1.9% growth path, the ratchet up in GDP this year translates into 179 billion in unexpected output this year, 465 billion next year, 654 billion in 2020, and so on. This magic of compounding yields more than $6 trillion additional GDP over the decade thanks to the faster growth already achieved...
Danny Blanchflower: "Hey Stephen Moore you need to withdraw this lie NOW: ‘Pay gains in real terms this year are now estimated at 3 percent—one of the biggest increases in two decades’. Real hrly earnings rose 0.8% real weekly 0.5%...
Brad DeLong: Gee, I Have Argued Myself From Half-Agreeing With @EconMarshall To 90% Agreeing With Him, Haven’t I?_:
Suresh Naidu: Sorry that came out wrong, deleted. Straightforward: a substantial amount of economic power and inefficiency is not eliminated by deconcentration/free entry. Not clear, lots of problems are made worse by free entry/competition. Low margins mean harder to unionize. Innovation is done by big firms. On simple efficiency grounds things can get worse in market with advantageous selection (eg loans) or with any negative ext. It depends!
Mike Konczal: If we are worried about margins being too low, boy do I have exciting news for you:
Sure, but between that, Tobin's Q, "profit share", consistent rate of return under declining real rates, and the break of investment and profitability, something is broken. One can contest any of the individual methods, but together they paint a clear picture.
Suresh Naidu: The " always more competition" fix implies we want to expand output but it is not clear we do in every market (eg airline monopoly might be 10th best emissions regulation).
(((E. Glen Weyl))): 10th best reasoning is fine for policy technocrats, but I think a pretty poor basis for thinking about imaginaries for broad social change and democratic movement building. Imaginaries that move us beyond monopolistic corporate forms, but using market mechanisms, seem promising. I am talking about building coalitions and democratic discourse rather than just being technocratic experts.
Note to Self: WTF?!?! At a ten-percent pre-tax social return to investment, that would require a 1 trillion—a 5%-point of national income—permanent upward jump in the annual flow of investment into America. Given that it looks like Trump is raising the annual deficit by 400 billion, that would require a 1.4 trillion—a 75-point of national income—permanent upward jump in the sum of annual private savings plus the annual trade deficit. On what planet and on what definition of "reasonable" is it "reasonable" to argue that Trump's tax cuts are going produce such a thing? Greg Mankiw: The Bad Economics Behind Trump's Policies: "One might reasonably argue that Trump’s tax cuts will increase growth over the next decade by as much as half a percentage point per year...
The so brilliant as to be goddess-like Chye-Ching Huang gets this one, I think, wrong: In response to: Jared Bernstein: "For the [Trump-McConnell-Ryan tax] cuts to have more than near-term growth impacts, they’d have to boost biz investment a lot more than we’ve seen so far, though these are early days. Both WSJ and Slate show “muted” investment results..." She writes: Chye-Ching Huang: "My concern is the frame that "growth' is what we should be focused on. If what we care about is how workers are doing—and GOP lawmakers claimed the 2017 tax law would help workers—we should focus on the metric that directly shows how they're doing! If the claimed point of tax cuts for corporations was to raise wages, we should first and foremost look at real wage rates to assess the results...
But those economists shilling for Trump-McConnell-Ryan committed not just to wage increases, but to a particular mechanism for wage increases: (1) U.S. a small open economy -> (2) tax cuts produce a huge jump in investment -> (3) faster growth -> (4) factor shares revert -> (5) higher wages.
To see whether this argument makes sense we can—and should—look at this causal mechanism at every one of its five steps.