#economicsgonewrong Feed

Lying Liar Kevin Hassett Lies Again...


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.

2019 03 08 First Quarter GDP Seasonals numbers

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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:

Personal Consumption Expenditures Chain type Price Index FRED St Louis Fed

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:

  1. Keep your inflation target high enough that you do not hit the zero lower bound.
  2. 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...

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Debt-Derangement Syndrome: No Longer Fresh at Project Syndicate—Long Version

Debt Derangement Syndrome by J Bradford DeLong 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 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.

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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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Commonwealth Club: Annual Economic Forecast Event (January 25, 2019): Relevant Files


Commonwealth Club: Annual Economic Forecast

Short-Run Economic Forecast: The Economic Forecast: Commonwealth Club Non-Public Event Opening Statement

Talking Points and Snippets from Commonwealth Club January 25, 2019 Forecast Event

General Talking Points: Commonwealth Club Talking Points (January 25, 2019): Forecasting and Steve Moore Edition

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Yes, There Are Individual Economists Worth Paying Respect to. But Is Economics Worth Paying Respect to?

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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.

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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...

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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...

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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)...

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Betting That Nobody Will Check the References as an Intellectual Style: Monday Smackdown

Juggalos Google Search

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.

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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...

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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...

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A Lazy New Year's Eve Morn on Twitter...

School of Athens

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.

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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...

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

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Not Only No Wage But Minimal Investment Boosts from Trump-McConnell-Ryan...

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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.

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