Grasping Reality on TypePad, by Brad DeLong

Over at Equitable Growth: The highly-estimable Jared Bernstein has a very nice piece today. It attempts to sum up a great deal about the state of the economy in a very short space with five super-short equations;

• One is about our current likely-to-be-chronic inequality problems.
• Two are about our demand-management and maintaining-employment problems.
• Two more strongly suggest that the solutions to our problems are extraordinarily simple. They say that in our current dithering and paralysis we are frozen out of fear of dangers that simply do not exist. Thus we are leaving very large and very gourmet free lunches on the table.

So, first, let us listen to Jared:

Jared Bernstein: Five Simple Formulas: "Here are five useful, simple... inequalities... READ MOAR

Over at Huffington World Post: Future Economists Will Probably Call This Decade the 'Longest Depression': Posted: 01/08/2016 9:28 am EST Updated: 49 minutes ago: Economist Joe Stiglitz warned back in 2010 that the world risked sliding into a 'Great Malaise.' This week, he followed up on that grim prediction, saying, 'We didn't do what was needed, and we have ended up precisely where I feared we would.'

More on the very-sharp Ryan Cooper's gotten one mostly wrong...

The two questions are (a) how much higher could expansionary fiscal and cooperative monetary policy permanently push annual GDP up above its current trend without triggering massive inflation, and (b) how large would the expansionary policies have to be to push the economy up that far? My guesses are 5% to (a)--that we could permanently raise annual GDP $800 billion relative to our current trajectory without triggering an upward spiral in inflation--and that we would need $300 billion more of annual government purchases. to get us there to (b).

Must-Read: I have only one critique of Justin Wolfers's series of tweets here. He says that they are simple math errors. It is true that they are conceptually simple. But getting all this right is not easy--I have seen Alan Blinder get it wrong (in the context of a $12B surge in inventories in a single quarter, and its effect on real GDP growth rates) at a blackboard in his OEOB office during the Clinton administration[1].

This does explain a puzzle. As somebody-or-other said in the conversation, if you believe with Gerry Friedman that all of the shortfall in real spending growth since 2007 can be easily recaptured via demand channels alone, then Sanders's proposals are at most one-third the size that they should be--and that is the critique that Friedman should be making of Sanders given Friedman's beliefs about aggregate supply. (Since I do not share those beliefs, I think Sanders's fiscal stimulus proposals are about right-sized):

Justin Wolfers: On Twitter: "Romer and Romer find what look like...

The estimable Mike Konczal writes:

Mike Konczal: Dissecting the CEA Letter and Sanders's Other Proposals: "I would have done Gerald Friedman’s paper backwards...

...He gives a giant headline number and then you have to work into the text and the footnotes to gather all the details. But a core assumption within the paper is that we are capable of getting back to the 2007 trend GDP through demand. We can get the recovery we should have gotten in 2009...

He is wrong.

I missed this six months ago:

Julie Verhage: The Two Big Economic Policy Failures That John Maynard Keynes Would Be Disappointed by Today: "The famous economist isn't around for us to ask him...

...but here is probably the next best thing. Robert Skidelsky... said... Keynes would have found two things upsetting. First, he would be frustrated with the lack of  precautions taken to prevent a huge financial crash like the one we saw in 2008. Secondly, Lord Skidelsky believes Keynes... would have wanted a more 'buoyant response,' he said.  Specifically, he doesn't think Keynes would have liked the Federal Reserve's quantitative easing....

Over at Huffington World Post: Future Economists Will Probably Call This Decade the 'Longest Depression': Posted: 01/08/2016 9:28 am EST Updated: 49 minutes ago: Economist Joe Stiglitz warned back in 2010 that the world risked sliding into a 'Great Malaise.' This week, he followed up on that grim prediction, saying, 'We didn't do what was needed, and we have ended up precisely where I feared we would.' READ MOAR

Sokrates: You remember how I used to say that only active dialogue--questions-and-answers, objections-and-replies--could convey true knowledge? That a flat wax tablet covered by written words could only convey an inadequate and pale simulacrum of education?

Aristoteles: Yes. And you remember how I showed you that you were wrong? That conversation is ephemeral, and very quickly becomes too confused to be a proper educational tool? That only something like an organized and coherent lecture can teach? And only something like the textbooks compiled by my lecture notes can make that teaching durable?

Aristokles: But, my Aristoteles, you never mastered my "dialogue" form. My "dialogue" form has all the advantages of permanence and organization of your textbooks, and all the advantages of real dialectic of Sokrates's conversation.

Over at Equitable Growth: I am, once again, struck by just how much smarter the economics profession as a whole would have been over the past sixteen years if only people had taken as their lodestone this paper: Paul Krugman (1999): Thinking about the liquidity trap

Wherever I look at the post-2007 discussion in macroeconomics, I see enormous literatures and subliteratures, all of them containing a great deal of verbose and confused argument, all of them eventually leading to conclusions that were... laid out with diamond-like clarity in single paragraphs in Krugman (1999): READ MOAR

Over at Equitable Growth: Olivier Blanchard, at least, has said that the secular decline in global real interest rates and increased macro instability means that the 2%/year inflation target was greatly ill-advised and needs to be raised to 4%/year. But, among the great and good who staff the finance ministries, central banks, and international organizations these days, he is nearly alone. And the other pieces of the policy puzzle that might get us out of our zero-lower-bound-secular-stagnation pickle--aggressive redistribution via taxes and transfers, higher debt levels for reserve currency-issuing sovereigns with exorbitant privilege to boost the supply of safe assets, reducing risk premia by governments' assumption of the role of entrepreneurial risk-bearer of last resort, international organizations that emerging markets regard as friends rather than enemies--are nowheresville. READ MOAR