Grasping Reality on TypePad, by Brad DeLong

Atrios: What A Weird Man: "I know talk of Trump's mental decline has faded a bit...

Over at Equitable Growth: Nouriel Roubini writes:

Nouriel Roubini: "Worries about a hard landing in China... China is more likely to have a bumpy landing than a hard one...

...[but] investors’ concerns have yet to be laid to rest.... Emerging markets are in serious trouble.... The Fed probably erred in exiting its zero-interest-rate policy in December...

And it is not clear how the Federal Reserve can correct what is now widely-recognized as a probable error. READ MOAR

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

From the "Meeting Report" section of the Fall 2015 Brookings Papers on Economic Activity:

”Fredric Mishkin elaborated on the issues that discussant Adam Posen had raised...

...regarding how demoralizing the outcomes from Japanese monetary policy have been. He had felt more strongly than Posen that expectations were very important and that managing expectations is a key element in good monetary policy. He and his colleagues expected much stronger effects in Japan from the expansion of its monetary policy. Japan’s outcome might demonstrate that raising inflation expectations is much more difficult than lowering them, and moreover this might be true globally.

Why is it called: "helicopter money"? Why isn't it called: "expansionary fiscal policy with monetary support to neutralize any potential crowding-out of private-sector spending"?

Why did Milton Friedman set it forth in his writings as one of the paradigmatic cases of expansionary monetary policy? Why did Ben Bernanke refer to it and so gain his unwanted nickname of "Helicopter Ben"?

In Milton Friedman's case, I believe that it was a conviction that the LM curve was steep enough and the IS curve flat enough that the fiscal side was fundamentally unimportant--that about the same effects were achieved whether the extra money was introduced into the economy via being dropped from helicopters or via open-market operations. To focus on how open-market operations worked would thus confuse listeners who would then have to think through asset market-equilibrium to no substantive gain in understanding. In Friedman's view, the entire Tobin analytical tradition, not to mention Wicksell, was largely a distracting waste of time. So why go there?

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.'

Let me promote this to "highlighted" status, and flag it: it is time I once again tried to think hard about just what the "macro" weeks of introductory economics are for:

Time to Start Teaching the Undergraduates About Business Cycles: How to begin? What is the vision I went them to take away and remember?

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....

I really, truly am obsessing about this to excess, am I not?

But it's overwhelmingly weird: conclusions that seem to me obvious and inescapable, nailed-down and air-tight, ironclad and titanium do not seem to have any force with the deciding members of the FOMC:

Notes for My Comment at the URPE-AEA Session: Causes of the Great Recession and the Prospects for Recovery

• Presiding: Fred Moseley
• David M. Kotz and Deepankar Basu: Stagnation and Institutional Structures
• Robert McKee [Michael Roberts]: Recessions, Depressions, and the Rate of Profit
• Mario Seccareccia and Marc Lavoie: Understanding the Great Recession: Keynesian and Post-Keynesian Insights
• Discussants: Robert J. Gordon, Brad DeLong, David Colander

Must-Read: Jared Bernstein: 2015 Was Solid Year for Job Growth: "Payrolls were up 292,000 in December and the unemployment rate held steady at a low rate of 5%...

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

Hoisted from 2012/Live from Zachary's: Is the U.S. at Immediate Risk of Rapidly Becoming "Argentina" as a Result of Expansionary Counter-Cyclical Policies?: The Bet with Noah Smith: Noah Bravely Takes the Cochrane-Argentina Side…: The bet:

If, at any time between 7/28/2012 and 7/28/2015, core consumer prices, as recorded in the FRED database series CPILFESL, are up more than 5% in the preceding 12 months, and if over the same 1-year period monthly U3 unemployment (as recorded in FRED database series UNRATE) has not averaged below 6%, then Brad DeLong agrees to buy Noah Smith one dinner at Zachary's Pizza and to pay Noah 99 times the cost--including tax but excluding tip--of Noah's meal at Zachary's in Federal Reserve notes, or in alternative means of payment accepted by Zachary's should Zachary's Pizza no longer be accepting Federal Reserve notes at the date of the dinner. This cost will be assessed as the total cost of the dinner to all, divided by the number of people present, regardless of how much pizza is consumed by or how much alcohol is drunk by specific individuals.

When and why does the Confidence Fairy appear? The very sharp-witted Karl Smith has long had a genuinely-different way of looking at the national income identity. I think his approach can shed much light on this question. And it can also shed light on the closely related question of when and whether governments seeking full employment should greatly concern themselves with "confidence".

An interview with Jan Hatzius I did last fall:

Brad DeLong is a professor of economics at UC Berkeley, where his research focuses on financial crises and 20th century macroeconomics, as well as the political economy of monetary and fiscal policy. He has taught at Harvard University and served as Deputy Assistant Secretary of the Treasury for Economic Policy under the Clinton Administration. Below, he and Goldman Sachs Chief Economist Jan Hatzius discuss risks around liftoff and the structural downshift in rates.

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.

Paul Krugman's Respectable Radicalism politely points out (at least) one dimension along which I am a moron.

Let me back up: Here in the United States, the current framework for macroeconomic policy holds that the economy is nearly normalized, that further extraordinary expansionary and fiscal policy moves carry "risks", and that as a result the right policy is stay-the-course. I was arguing that the Economist Left Opposition demand--for substantially more expansionary monetary and fiscal policies right now until we see the whites of the eyes of rising inflatio--was soundly-based in orthodox lowbrow Hicks-Patinkin-Tobin macro theory. That is the macro theory that economists like Ben Bernanke, Janet Yellen, and Stan Fischer taught their entire academic careers.

Paul Krugman points out—politely—that I am wrong.

Larry Summers attributes the Federal Reserve's decision to tighten policy, in what appears to him and to me to be a weakly-growing and high-slack economy, to four mistakes, which are themselves driven by a fifth, overarching mistake. The four mistakes are:

Over at Equitable Growth: So as I finish my Pre-Federal Reserve Interest-Rate Liftoff Lollapalooza, I am left with three conclusions:

1. Paul Krugman and Larry Summers are such amazing f#@$*%$ geniuses...
2. If I simply wiped my brain, and reprogrammed the left half with Paul and the right half with Larry, I would be so much smarter than I am...
3. Their influence on low-theory, analysis, and policy is immense, yet somehow... not big enough...

I confess that back when I somehow found myself taking point on the internet for the Larry-Summers-for-Fed-Chair movement, I thought that the choice between Janet and Larry had the potential to be a big deal if we wound up in the tails--that Larry might break the committee so that it could not act when it needed to, and Janet might fail to act in the absence of consensus when it need to act. But I did not think it would be a big deal anywhere near the center of the distribution.

Yet here we are in the center of the distribution, and somehow the difference the choice has made feels... substantial. Larry the Dove...

Here's the whole lollapalooza: READ MOAR

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: Larry Summers: What Should the Fed Do and Have Done?: "The Federal Reserve... has strongly signaled that it will raise rates...

...Given the strength of the signals that have been sent it would be credibility-destroying not to carry through with the rate increase, so there is no interesting discussion to be had about what should be done on Wednesday...

This seems to me to be wrong: credibility that one will stubbornly pursue bad policies is not worth gaining, or preserving. 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