- Evening Must-Read: Robert Shiller: "[Eugene Fama] Is a Careful Researcher... | Washington Center for Equitable Growth
- Morning Must-Read: Lars Svensson: Leaning Against the Wind the Wrong Monetary Policy for Sweden | Washington Center for Equitable Growth
- Bad Google! (Brad DeLong's Grasping Reality...)
- Weekend Reading: Janet Yellen and Christine LaGarde (Brad DeLong's Grasping Reality...)
- Liveblogging World War I: July 5, 1914: Germany's "Faithful Support" (Brad DeLong's Grasping Reality...)
The Inflation Bear Case:
- .@TheStalwart asked me to make the #inflationbear case. I do so in the next 17 tweets...
- (1/17) .@TheStalwart In the 27 years that Greenspan and Bernanke he were chairs of the Federal #inflationbear
- (2/17) .@TheStalwart Reserve annual real GDP growth stopped cold or actually #inflationbear
- (3/17) .@TheStalwart once every nine years or so. These recessions took place without the Federal Reserve wishing for a #inflationbear
- (4/17) .@TheStalwart recession to curb inflation. These recessions took place even though the Federal #inflationbear
- (5/17) .@TheStalwart thought it was following appropriate, stabilizing monetary policy. #inflationbear
- (6/17) .@TheStalwart A decade ago I would have said that the American economy had strong equilibrium restoring forces: #inflationbear
- (7/17) .@TheStalwart that the chances of another recession before full recovery to normal had taken place were very #inflationbear
- (8/17) .@TheStalwart small. I cannot say that today. The chances of another recession now look more or less normal: #inflationbear
- (9/17) .@TheStalwart 50-50 or so in the next five years. And should such a recession come, the Federal Reserve will not be #inflationbear
- (10/17) .@TheStalwart able to lower interest rates to fight it. And should such a recession come, the Federal Reserve has #inflationbear
- (11/17) .@TheStalwart shown it has no taste for the extraordinary balance-sheet expansions needed to effectively fight it. #inflationbear
- (12/17) .@TheStalwart And should such a recession come, the broken politics of Washington prevent fiscal expansion to #inflationbear
- (13/17) .@TheStalwart stabilize aggregate demand. And should such a recession come, Tim Geithner by failing to take #inflationbear
- (14/17) .@TheStalwart the equity of the too-bit-to-fail-banks burned up the political will for finance-sector anti-recession #inflationbear
- (15/17) .@TheStalwart policies. A Federal Reserve where a large chunk of the FOMC takes 2%/year as an inflation ceiling. #inflationbear
- (16/17) .@TheStalwart A government that is out of ammunition should there be another adverse shock. The lower tail in #inflationbear
- (17/17) .@TheStalwart which PCE inflation over the next decade significantly undershoots 10%/year is thick. #inflationbear
- The past 17 tweets have been the #inflationbear case. I do not stand behind them as a forecast: they are a scenario only
Noah Smith: John Cochrane's thoughts on the recession and recovery: "A 'demand-side' recession should see a drop in inflation, and a 'supply-side' recession should see a rise in inflation.... It's unlikely that the economy is as simple.... But the intuition is still there. Consider Cochrane's proposed alternative reasons for the slow recovery: 1) policy uncertainty, 2) regulation and taxes, and 3) redistribution. All of these things are basically impediments to the production process--i.e., they make it more costly to produce things.... Higher costs should get at least partially passed on to the consumer in the form of higher prices.... Now, it's possible to write down a macro model in which anticipation of higher costs tomorrow actually causes prices to go down today. In fact, for any X, it's probably possible to write down a modern macro model in which X happens. But this idea goes strongly against basic economic intuition. The Cochrane/Taylor/Mulligan/Prescott/Baker/Bloom/Davis thesis isn't obviously wrong, but it's obviously counterintuitive.... But there is also the issue of parsimony. Cochrane writes: 'These [policy] problems did not cause the recession. But they are worse now, and they can impede recovery and retard growth.' I think people naturally see the recession and the recovery as one single phenomenon, and tend to prefer explanations in which there is only one cause for both. If you have two completely separate explanations--one for the recession and one for the slow recovery--you're adding a lot of free parameters... [and] model complexity should be penalized, as with some sort of information criterion..."
Adam Ozimek: Why You Don't Need To Be A Paternalist To Embrace Welfare Paternalism: "Incentivizing work is consistent with... non-paternalis[m] when you remember that the government on net disincentivizes work and employment... the status quo is that many people are probably working an inefficiently low amount. On the margin, incentives that lean towards work and against leisure probably increase efficiency.... If giving someone money means they choose less work and more leisure that is fine, and they are better off. However welfare recipients choose to spend their money, they are better off.... No, the instinctive support for working that many feel has a completely non-paternalistic basis: given the world we live in, on many margins working more has positive spillovers, and is economically efficient..."
Should Be Aware of:
- Stephanie Aaronson et al. (2006): Lars Svensson: The Recent Decline in the Labor Force Participation Rate and Its Implications for Potential Labor Supply
- Virginia Heffernan and Gemma Correll: "Death of an Unpublished Tweet: A flowchart helps you decide which of your bright ideas to post, and which to compost..."
- William G. Gale and Peter R. Orszag (2002): A New Round of Tax Cuts?
- Timothy B. Lee: Larry Lessig raised $5 million to reform campaign finance. Now he needs GOP support
Evan Soltas/Kindea Labs: America's Real Racism Problem -- Visualized:
Jaume Ventura and Alberto Martin: Managing Credit Bubbles: "Changes in investor sentiment or market expectations can give rise to credit bubbles, that is, expansions in credit that are backed not by expectations of future profits (i.e. fundamental collateral), but instead by expectations of future credit (i.e. bubbly collateral). During a credit bubble, there is more credit available for entrepreneurs: this is the crowding-in effect. But entrepreneurs must also use some of this credit to cancel past credit: this is the crowding-out effect. There is an 'optimal' bubble size that trades off these two effects and maximizes long-run output and consumption. The 'equilibrium' bubble size depends on investor sentiment, however.... This provides a new rationale for macroprudential policy. A lender of last resort can replicate the 'optimal' bubble by taxing credit when the 'equilibrium' bubble is too high.... The same conditions that make this policy desirable guarantee that a lender of last resort has the resources to implement it...."
Robert Sanders: Extinct human cousin gave Tibetans advantage at high elevation: "Tibetans were able to adapt to high altitudes thanks to a gene picked up when their ancestors mated with a species of human they helped push to extinction, according to a new report by University of California, Berkeley, scientists.... An unusual variant of a gene involved in regulating the body’s production of hemoglobin... became widespread in Tibetans after they moved onto the high-altitude plateau several thousand years ago. This variant allowed them to survive despite low oxygen levels at elevations of 15,000 feet or more, whereas most people develop thick blood at high altitudes, leading to cardiovascular problems. 'We have very clear evidence that this version of the gene came from Denisovans',” mysterious human relative that went extinct 40,000-50,000 years ago, around the same time as the more well-known Neanderthals, under pressure from modern humans, said principal author Rasmus Nielsen, UC Berkeley professor of integrative biology. 'This shows very clearly and directly that humans evolved and adapted to new environments by getting their genes from another species.' Nielsen and his colleagues at BGI-Shenzhen in China, the world’s largest genome sequencing center, will report their findings online on July 2 in advance of publication in the journal Nature..."
Lars Syll: Krugman on the relevance of the history of economic thought: "Being myself the author of seven books on the history of economic thought I can’t but applaud Krugman’s plaidoyer.... The financial crisis of 2007-08 and its aftermath definitely shows that something has gone terribly wrong with our macroeconomic models, since they obviously did not foresee the collapse or even make it conceivable.... Modern mainstream macroeconomics obviously did not anticipate the enormity of the problems that unregulated 'efficient' financial markets created. Why? Because it builds on the myth of us knowing the 'data-generating process'.... Mainstream macroeconomists... want to be able to use their hammer. They decide to pretend that the world looks like a nail and that uncertainty can be reduced to risk. So they construct their mathematical models on that assumption--and the ensuing results are financial crises and economic havoc..."
Robert Shiller: "[Eugene Fama] Is a Careful Researcher, an inspired researcher. I don't know if Fama ever states his theory really clearly, if he did it might sound a little odd.... I shouldn't try to psychoanalyse Eugene Fama but I know that he is committed... to a libertarian philosophy, teaching at the University of Chicago where Milton Friedman once lived. It must affect your thinking somehow that they really believe in markets. I think that maybe he has a cognitive dissonance. His research shows that markets are not efficient. So what do you do if you are living in the University of Chicago? It's like being a Catholic priest and then discovering that God doesn't exist or something, you can't deal with that, you've got to somehow rationalise it.... Some people who seem crazy turn out to be smart after all. Apparently that is what Fama thinks. I think they are just crazy," Shiller said, conceding his remarks "may be insulting" to his fellow laureate.... [He has a] fundamentally different view of the world. That's the world we live in, when it comes to economics people have emotions, it's not like chemistry or physics..."
Lars Svensson: Why leaning against the wind is the wrong monetary policy for Sweden: "Sweden has pursued a tighter monetary policy than is necessary to achieve the inflation target in order to reduce risks associated with household indebtedness.... According to the Riksbank’s own recently published calculations, the benefit of this policy – in the form of lower risks from household debt – is completely insignificant compared to the cost in terms of higher unemployment and lower inflation. Since inflation has fallen much below the inflation target and households’ inflation expectations, the policy has instead actually increased households’ real debt burden and, if anything, increased any risks from the debt. Thereby it has made more difficult the work of the Finansinspektionen (FI, the Swedish FSA) to reduce any such risks..."