Brad DeLong

Brad DeLong Commenting on Myself: Price of Haut Brion Monday Hoisted from Comments Weblogging

Brad DeLong : Selections from Samuel Pepys Diary for April 1663: Thursday History Weblogging: John Locke reports that he could get Haut Brion at the vineyard gate in barrels for about 2 shillings a bottle. 2 shillings would get you an unfurnished room in central London for 2 weeks (with fireplace), or about 10 one-pound loaves of bread…

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A day's unskilled work would buy perhaps 5 one-pound loaves of bread...

Today you can get a loaf of bread for, say, $1. And a day's unskilled work will buy you 80 of them. And a bottle of Haut Brion will run you $1000 for a good year (admittedly, not at vineyard gate).

So back then you could get a bottle of Haut Brion with one day's unskilled work. Today it would take 12.5 days…

Nick Crafts: George Osborne Badly Needs to Study the Macroeconomic Leadership Secrets of Neville Chamberlain…

Nick Crafts:

Escaping liquidity traps: Lessons from the UK’s 1930s escape: The UK escaped a liquidity trap in the 1930s and enjoyed a strong economic recovery. This column argues that what drove this recovery was ‘unconventional’ monetary policy implemented not by the Bank of England but by the Treasury. Thus, Neville Chamberlain was an early proponent of ‘Abenomics’. This raises the question: is inflation targeting by an independent central bank appropriate at a time of very low nominal-interest rates?

I Say We Start a Kickstarter to "Persuade" David Glasner to Write 38 Posts--One for Each Chapter--on Keynes's "Treatise on Money"

Niall Ferguson Is Wrong to Say That He Is Doubly Stupid: Why Did Keynes Write "In the Long Run We Are All Dead"? Weblogging

Niall Ferguson:

An Open Letter to the Harvard Community: Last week I said something stupid about John Maynard Keynes.  Asked to comment on Keynes’ famous observation “In the long run we are all dead,” I suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay. This was doubly stupid. First, it is obvious that people who do not have children also care about future generations. Second, I had forgotten that Keynes’ wife Lydia miscarried.

Niall is wrong. His suggestion was not doubly stupid. There is more.

Niall speaks of Keynes's "In the long run we are all dead" as if it is a carpe diem argument--a "seize the day" argument, analogous to Marvell's "To His Coy Mistress" or Herrick's "To the Virgins"--and Ferguson sees his task as that of explaining why Keynes adopted this be-a-grasshopper-not-an-ant "party like we're gonna die young!" form of economics, or perhaps form of morality.

But that is not it at all.

Eric Rauchway: Adam Smithian "Sympathy" and the Sources of Keynes’s Critique of the 1919 Treaty of Versailles: Niall Ferguson Carl-Melchior-Was-Really-Hot Smackdown Watch

Eric Rauchway:

Apropos nothing at all I thought I might address the suggestion, sometimes raised, that John Maynard Keynes’s “love” for Carl Melchior, German representative at Versailles, might substantively have influenced Keynes’s position on what reparations the Germans ought to pay. Keynes made early calculations for what Germany should pay in reparations in October, 1918. In “Notes on an Indemnity,” he presented two sets of figures – one “without crushing Germany” and one “with crushing Germany”.

Brad DeLong (1997): The Corporation as a Command Economy: Wednesday Hoisted from The Archives from 17 Years Ago Weblogging

Introduction:

Most of us spend more than one-third of our waking lives working for large, modern corporations: organizations where we do not know personally either those at the top or the bulk of those at the bottom of the organization's administrative hierarchy. This is a striking change from two centuries ago, when a productive organization of more than thirty was unusual, and one of more than three hundred an extreme oddity.

Why do so many of us work for large modern corporations? And what impact does working for large modern corporations have on our lives? The second is much too broad a question, and is moreover a question that I--a narrow-minded professional economist--feel unqualified to address. So I am going to focus on the economic side of the modern corporation. I am not going discuss the political or sociological or ethical implications of large modern corporations. I am not going to discuss their historical development, or the contrasts between different countries' styles of corporate life.

"This Is a Nightmare"

John Maynard Keynes:

The Great Slump of 1930: This is a nightmare, which will pass away with the morning. For the resources of nature and men's devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life… and will soon learn to afford a standard higher still. We were not previously deceived.

But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time…

John Maynard Keynes (1923), "A Tract on Monetary Reform", pp. 80-82

Keynes (1923):

[T]he [Quantity] Theory [of Money] has often been expounded on the further assumption that a mere change in the quantity of the currency cannot affect k, r, and k',--that is to say, in mathematical parlance, that n is an independent variable in relation to these quantities. It would follow from this that an arbitrary doubling of n, since this in itself is assumed not to affect k, r, and k', must have the effect of raising p to double what it would have been otherwise. The Quantity Theory is often stated in this, or a similar, form.

Now "in the long run" this is probably true. If, after the American Civil War, that American dollar had been stabilized and defined by law at 10 per cent below its present value, it would be safe to assume that n and p would now be just 10 per cent greater than they actually are and that the present values of k, r, and k' would be entirely unaffected. But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean will be flat again.

Somebody Has to Be the Pontifex Who Decides What "Keynesian Economics" Is: And I Elect Mark Thoma to Be That Bridge-Builder

Mark Thoma:

Seven Myths about Keynesian Economics: The claim that Keynesians are indifferent to the long-run is one of many myths about Keynesian economics…. This has it backwards. Conservatives who oppose Keynesian economics are not concerned enough about short-run economic problems, particularly unemployment, and failing to address our short-run problems can bring long-run harm…. Keynesians care very much about the long run, but they do not go along with the idea that neglecting short-run issues is the best way to solve our long-run problems.

Keynesian Economics: The Gay Science?

Niall Ferguson certainly thought so in 1995. Donald Markwell, author of Donald Markwell (2006), "John Maynard Keynes and International Relations: Economic Paths to War and Peace", emails me a copy of Niall Ferguson's 1995 Spectator article, with its claim that Keynes's belief in "the ideas contained in The Economic Consequences of the Peace" "owed as much to his homosexuality as to his Germanophilia…" for "there is no question that the attraction Keynes felt for [Carl Melchior] strongly influenced his judgment…"

But that is not what he says today:

My disagreements with Keynes’s economic philosophy have never had anything to do with his sexual orientation. It is simply false to suggest, as I did, that his approach to economic policy was inspired by any aspect of his personal life.

Guenter Grass DeLong Smackdown Watch: Monday Hoisted from Comments Weblogging

Brad DeLong : Thursday Dozen Hoisted from the Archives: Keepers from May 2005: Grebmörts said...

I see that you rethought part of your criticism of Guenter Grass shortly after posting it. The events that have happened since 2005 should make you rethink the rest. He complained that the "growing gap between rich and poor" had brought about "the impotence of politics", a political system that responds only to the interests of the elites. Democracy is being destroyed.

That sounds a lot like the situation in the US today. Washington is unable to end this depression because gridlock serves the interests of the overclass.

Grass was right. You owe him an apology.

Martha L. Olney and Aaron Pacitti: The Service Sector and the Business Cycle

Martha L. Olney and Aaron Pacitti:

More services means longer recoveries: Recovery from recessions takes longer than it has in the past. The current crisis aside, this change has not happened because recessions themselves are longer. Nor has it occurred because recessions are deeper than in the past. Instead this change is the result of slower economic growth following the end of a recession. And slower growth means longer recoveries. As shown below, the four longest recoveries in recent history, as measured by the number of months it took until the economy recovered all of the jobs lost during the recession, also have been the four most recent recoveries—those that followed the recessions of 1981, 1990, 2001, and 2007.

Demography: Twentieth Century Economic History Weblogging

Tyrannies throughout the world—dictators, sane or insane—for whom prosperity was not a concern or was even seen as a threat, were the principal cause of rising relative inequality around the globe. But the second cause were the demographic burdens placed on poor countries by the population explosion. These burdens are now, fortunately, ebbing as the demographic transition to low fertility and extended lifespan finish their spread across the globe.

Understanding Karl Marx: Hoisted from the Archives from Four Years Ago May Day Weblogging

In the beginning was Karl Marx, with his vision of how the Industrial Revolution would transform everything and be followed by a Great Communist Social Revolution—greater than the political French Revolution—that would wash us up on the shores of Utopia.

The mature Marx saw the economy as the key to history: every forecast and historical interpretation must be based on the economy's logic of development. This project as carried forward by others ran dry. Sometimes--as in, say, Eric Hobsbawm's books on the history of the nineteenth century--this works relatively well. But sometimes it led nowhere. The writing of western European history as the rise, fall, and succession of ancient, feudal, and bourgeois modes of production is a fascinating project. But the only person to try it seriously soon throws the Marxist apparatus over the side, where it splashes and sinks to the bottom of the sea. Perry Anderson's Passages from Antiquity to Feudalism and Lineages of the Absolutist State are great and fascinating books, but they are not "Marxist". They are Weberian. The key processes in Anderson's books concern not “modes of production” but rather “modes of domination.”

Stanford Talk: Understanding Karl Marx.pdf

Global Inequality: Saturday Twentieth Century Economic History Weblogging

Those economies relatively rich at the start of the twentieth century have by and large seen their material wealth and prosperity explode. Those nations and economies that were relatively poor have grown richer, but for the most part slowly. The relative gulf between rich and poor economies has grown steadily over the past century. Today it is larger than at any time in humanity’s previous experience, or at least larger than at any time since only some tribes knew how to use fire. The gulf across which the world’s rich and poor regarded each other exists in every dimension: how much people consume, whether they can read, what tools they use, and how they make their living.

Carmen Reinhart and Ken Rogoff: Debt, Growth and the Austerity Debate

Carmen Reinhart and Ken Rogoff:

Debt, Growth and the Austerity Debate - NYTimes.com: IN May 2010, we published an academic paper, “Growth in a Time of Debt.” Its main finding, drawing on data from 44 countries over 200 years, was that in both rich and developing countries, high levels of government debt — specifically, gross public debt equaling 90 percent or more of the nation’s annual economic output — was associated with notably lower rates of growth.

Given debates occurring across the industrialized world, from Washington to London to Brussels to Tokyo, about the best way to recover from the Great Recession, that paper, along with other research we have published, has frequently been cited — and, often, exaggerated or misrepresented — by politicians, commentators and activists across the political spectrum.

Abba Lerner (1943): "Functional Finance"

Abba Lerner (1943): "Functional Finance":

The first financial responsibility of the government (since nobody else can undertake that responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes….

Mike Konczal: Reinhart-Rogoff a Week Later: Why Does This Matter?

Mike Konczal:

Reinhart-Rogoff a Week Later: Why Does This Matter?: Well this is progress. We are seeing distancing by conservative writers on the Reinhart/Rogoff thesis. In Feburary, Douglas Holtz-Eakin wrote:

The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth. Granted, the research is not yet robust enough to say exactly when and how a crisis will engulf the US, but there is no reason to believe that America is somehow immune. (h/t QZ.)

What Economists to Listen to? And Why?

I really wish that Jonathan Portes had written this before I had to give my talk on economists as public intellectuals yesterday…

Jonathan Portes:

Not the Treasury view...: Which (macro)-economists are worth listening to?: [W]hen economists argue about the correct stance of policy, who should we (policymakers, commentators, and the general public) listen to?… I [had] pointed out that not only was the government's decision in 2010 to cut the deficit too quickly doing considerable economic damage, but that this was both predictable and predicted by economists such as Paul Krugman and Martin Wolf. Their response was essentially "how were we to know which economists to listen to? Others were saying the opposite". 

Review of Robert Skidelsky (2000), "John Maynard Keynes: Fighting for Britain": Hoisted from the Archives from Twelve Years Ago

Review of Robert Skidelsky (2000), "John Maynard Keynes: Fighting for Britain" (London: Macmillan: 0333604563), pp. xxiii, 580.

J. Bradford DeLong

July 2001

Each of the first two volumes of Robert Skidelsky's biography of John Maynard Keynes--Hopes Betrayed, and The Economist as Saviour--was an astonishing intellectual achievement. Now that it is complete, it is clear that as a whole the three-volume biography is the finest biography of an economist that I have ever read, or that I ever expect to read. However, this third volume--Fighting for Britain--does not quite measure up to its predecessors. Nevertheless, it is still a superb book. It falls short only because its predecessors have raised the bar so very high indeed.

Notre Dame Public Intellectualism Conference: Comment on Ahmad Moussalli: Islam and the Public Intellectual

Last year my former student Eric Chaney wrote a paper "Democratic Change in the Arab World: Past and Present". In it he saw a striking difference between not the Arab lands but rather the lands of the original first two centuries of Arab conquest on the one hand, and the lands of subsequent expansion on the other. In the 28 countries that are lands of the original Arab conquest, there is a substantial "democratic deficit". In the 15 countries that are lands of subsequent post-Ummayad expansion, democracy is doing about as well as one would expect.

From this pattern Chaney concludes that there is little special about Islam, little special about oil, little special about desert terrain, little special about Arab culture, but that there is something special about the long-run historical heritage--about the political modes of domination established after the Rashidun, under the Ummayad and especially the Abbasid ruling dynasties. They led to a millennium-long withdrawal of religious and other intermediary forms of social organization from the task of criticizing the doings of the state to following the doctrine that the state is to be supported.

Now I at least do not think that a theocracy controlled by those of the Party of Ali who claim to speak in the name of the Occulted One is a step forward. And similar currents of theocracy among those following Traditional Practices seem similarly unwise.

But is there a middle way, a creative tension, something like the medieval European intellectual contest between the Emperor's University of Naples and the Pope's University of Bologna both arguing for the rule of law and the curbing of arbitrary power, a way--without a theocratic turn--for the ulema to take on a more active and prophetic critical role vis-a-vis the governments? Not Jerusalem speaking to Athens, but Mecca speaking to Baghdad?

Economic Policy: Saturday Twentieth Century Economic History Weblogging

Note well: the economy will not manage itself, at least not in a good way.

As John Maynard Keynes shrilly stated back in 1926:

Let us clear… the ground…. It is not true that individuals possess a prescriptive 'natural liberty' in their economic activities. There is no 'compact' conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened… individuals… promot[ing] their own ends are too ignorant or too weak to attain even these. Experience does not show that… social unit[s] are always less clear-sighted than [individuals] act[ing] separately. We [must] therefore settle… on its merits… "determin[ing] what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion".

The management of economies by governments in the twentieth century was at best inept. And, as we have seen since 2007, little if anything has been durably learned about how to regulate the un-self-regulating market in order to maintain prosperity, or ensure opportunity, or produce substantial equality.

Reinhart-Rogoff Weblogging: No, Their Argument for Austerity Now Out of Fear of Debt Didn't Seem to Me to Make That Much Sense

Let me highlight a passage from the "Understanding Our Adversaries" evolution-of-economists'-views talk that I started giving three months ago, a passage based on work by Owen Zidar summarized by the graph above:

The argument [for fiscal contraction and against fiscal expansion in the short run] is now: never mind why, the costs of debt accumulation are very high. This is the argument made by Reinhart, Reinhart, and Rogoff: when your debt to annual GDP ratio rises above 90%, your growth tends to be slow.

This is the most live argument today. So let me nibble away at it. And let me start by presenting the RRR case in the form of Owen Zidar's graph.

First: note well: no cliff at 90%.

Second, RRR present a correlation--not a causal mechanism, and not a properly-instrumented regression. There argument is a claim that high debt-to-GDP and slow subsequent growth go together, without answering the question of which way causation runs. Let us answer that question.

The third thing to note is how small the correlation is. Suppose that we consider two cases: a multiplier of 1.5 and a multiplier of 2.5, both with a marginal tax share of 1/3. Suppose the growth-depressing effect lasts for 10 years. Suppose that all of the correlation is causation running from high debt to slower future growth. And suppose that we boost government spending by 2% of GDP this year in the first case. Output this year then goes up by 3% of GDP. Debt goes up by 1% of GDP taking account of higher tax collections. This higher debt then reduces growth by... wait for it... 0.006% points per year. After 10 years GDP is lower than it would otherwise have been by 0.06%. 3% higher GDP this year and slower growth that leads to GDP lower by 0.06% in a decade. And this is supposed to be an argument against expansionary fiscal policy right now?

The 2.5 multiplier case is more so. Spend 2% of GDP over each of the next three years. Collect 15% of a year's extra output in the short run. Taking account of higher tax revenues, debt goes up by 1% of GDP and we have the same ten-year depressing effect of 0.06% of GDP. 15% now. -0.06% in a decade. The first would be temporary, the second is permanent, but even so the costs are much less than the benefits as long as the economy is still at the zero lower bound.

And this isn’t the graph that you were looking for. You want the causal graph. That, worldwide, growth is slow for other reasons when debt is high for other reasons or where debt is high for other reasons is in this graph, and should not be. Control for country and era effects and Owen reports that the -0.06% becomes -0.03%. As Larry Summers never tires of pointing out, (a) debt-to-annual-GDP ratio has a numerator and a denominator, and (b) sometimes high-debt comes with high interest rates and we expect that to slow growth but that is not relevant to the North Atlantic right now. If the ratio is high because of the denominator, causation is already running the other way. We want to focus on cases of high debt and low interest rates. Do those two things and we are down to a -0.01% coefficient.

We are supposed to be scared of a government-spending program of between 2% and 6% of a year's GDP because we see a causal mechanism at work that would also lower GDP in a decade by 0.01% of GDP? That does not seem to me to compute.

Now tonight I have been nibbling the RRR result down. Presumably they are trying to see if it can legitimately be pushed up. This will be interesting to watch over the next several years, because RRR is the heart of the pro-austerity case right now.

Europe Fails to Learn the Lessons of History: Notes on Political Union for Barry Eichengreen's "Future of the Euro" Conference, as Delivered

What is the best place to start?

The problem is I really have four starting points, or perhaps I have five starting points--fear, surprise, ruthless efficiency, etc….

First, I would have to be even more rash than Charles le Temeraire, last duke of sovereign Burgundy, to opine about classical Dutch history with Jan de Vries in the room, but let me do so to point out that this session's topic, "political union", is a vague and sketchy concept. The political union of the strongest power in 17th century Europe, the seven United Provinces of the Netherlands, was made up of the components. First, there was a talk shop in the Hague--which had rather less power than is currently assembled in Brussels and Strasbourg. Second, the same guy, the Prince of Orange, was nearly always the stadthouder, the chief executive, of all seven provinces. Third, one of the provinces, Holland, was 60% of the total, and so if consensus was not reached could threaten to go it alone and do what was necessary--but when it did so take down names and have a long memory of who had played ball and who had not.

Lernerism in a Hicksian Straightjacket

Whenever I read Abba Lerner (1943) or his latter-day disciples, I find myself puzzled by their near-certainty: they know that fiscal expansion and contraction can keep employment high and inflation equal to expectations, and that monetary expansion can keep interest rates so low that there is no government budget financing constraint that binds.

As with so much else, a remarkably large measure of clarity can be achieved quickly by casting their argument in Hicksian (1937) IS-LM terms.

Is the U.S. Treasury a Cost or a Profit Center for the Federal Government?

When the average interest rate r on U.S. Treasury debt is and is expected to remain lower than the economy's trend growth rate g, the U.S. Treasury is not a cost center--debt amortization is not an expenditure category--but rather a profit center--analogous to the medieval Medici Bank, which Florentines and others paid handsomely to safeguard their money…

"Austerity" in the Context of the Global Economic Downturn: Wednesday Hoisted from Archives from Two Years Ago Weblogging

Brad DeLong: Friday February 18, 2011: Let me speak as a card-carrying neoliberal, as a bipartisan technocrat, as a mainstream neoclassical macroeconomist--a student of Larry Summers and Peter Temin and Charlie Kindleberger and Barry Eichengreen and Olivier Blanchard and many others.

We put to one side issues of long-run economic growth and of income and wealth distribution, and narrow our focus to the business cycle--to these grand mal seizures of high unemployment that industrial market economies have been suffering from since at least 1825. Such episodes are bad for everybody--bad for workers who lose their jobs, bad for entrepreneurs and equity holders who lose their profits, bad for governments that lose their tax revenue, and bad for bondholders who see debts owed them go unpaid as a result of bankruptcy. Such episodes are best avoided.

From my perspective, the technocratic economists by 1829 had figured out why these semi-periodic grand mal seizures happened. In 1829 Jean-Baptiste Say published his Cours Complet d'Economie Politique… in which he implicitly admitted that Thomas Robert Malthus had been at least partly right in his assertions that an economy could suffer from at least a temporary and disequliibrium "general glut" of commodities. In 1829 John Stuart Mill wrote that one of what was to appear as his Essays on Unsettled Questions in Political Economy in which he put his finger on the mechanism of depression.

Owen Zidar on Reinhart, Reinhart, and Rogoff

Owen Zidar on Reinhart, Reinhart, and Rogoff: http://owenzidar.wordpress.com/2013/04/16/debt-to-gdp-future-economic-growth/:

There has been a lot of discussion today on Reinhart and Rogoff’s work on Debt to GDP & future economic growth (see Mike Konczal, Krugman, CEPR, Brad Plumer, and the original critique from Herden, Ash, Pollin), so I wanted to highlight some work on this issue that I put together when helping Brad Delong and Laura Tyson on an IMF presentation on fiscal policy after the crisis.

The Future of the Euro: Lessons from History: U.C. Berkeley: Men's Faculty Club: Heyns Room: April 16, 2013

http://eurofuture2013.wordpress.com

Download 20130416 Brad DeLong "Future of the Euro" Eichengreen Conference Talk

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DRAFT: The 1919-1939 interwar period taught us four lessons:

1. In order for the world economy to be prosperous, adjustment to macroeconomic disequilibrium needs to be undertaken by both "surplus" and "deficit" economies--not by "deficit" economies alone.

2. If the world economy is to have any chance of avoiding or limiting crises, an integrated banking system requires an integrated bank regulator and supervisor.

3. In order for crises to be successfully managed, the lender of last resort must truly be a lender of last resort: it must create whatever asset the market thinks is the safest in the economy, and must be able to do so in whatever quantity the market demands.

4. In order for any monetary union or fixed exchange rate system larger than an optimum currency area to survive, it must be willing to undertake large-scale fiscal transfers to compensate for the exchange rate movements to rapidly shift inter-regional terms of trade that it prohibits.

I, at least, thought that everybody--or everybody who mattered in governing the world economy--had learned these four lessons that 1919-1939 had so cruelly taught us. Now it turns out that the dukes and duchesses of Eurovia had, in fact, learned none of them. History taught the lesson. But while history was teaching the lesson, the princes and princesses of Eurovia and their advisors were looking out the window and gossiping on Facebook.

Macroeconomic Overview Talk for UMKC MBA Students (April 1, 2013)

20130401 Macro Outlook.pdf | 20130401 Macro Outlook.ppt | 8500 words

This year I am on sabbatical--which means I do not teach. And I do miss it. Thus, from my perspective at least, this next hour is going to be an hour of pure fun.

I hope it will be an hour of pure fun for you all as well.

As Bob Strom said, right now in this MBA class you are transitioning from studying micro to studying macroeconomics. You are moving away from studying that part of economics where you talk about how the market system works well: how supply balances demand to make the maximum possible amount and value of win-win deals, and how people respond to the incentives they’re given to change their behavior. To the extent that things go wrong in microeconomics--to the extent that when you step back and look at the situation you say "Geewillickers! I really wish this had not happened!"--it is because you wish that you or the market system had not given people the incentives that it in fact did.

It's the Seventieth Anniversary of Abba Lerner's "Functional Finance"…

I (or somebody) should run a history of economic thought conference to celebrate the seventieth anniversary of Abba Lerner's "Functional Finance" in the fall…

Milton Friedman on Abba Lerner:

Milton Friedman and Rose Friedman, Two Lucky People: We were affected very differently by the Keynesian revolution—Lerner becoming an enthusiastic convert and one of the most effective expositors and interpreters of Keynes, I remaining largely unaffected and if anything somewhat hostile….

Lerner was trained at the London School of Economics, where the dominant view was that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by “easy money” policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.

Productivity: Saturday Twentieth Century Economic History Weblogging

The twentieth century saw the material wealth of humankind explode beyond all previous imagining: we—at least those of us who belong to the upper middle class and live in the industrial core of the world economy—are now far richer than the writers of previous centuries’ utopias could imagine. The eighteenth and nineteenth centuries saw, for the first time, productive capability outran population growth and natural resource scarcity. By the last quarter of the nineteenth century, the average inhabitant of a leading economies—a Briton, a Belgian, a Dutchman, an American, a Canadian, or an Australian—had perhaps twice the material wealth and standard of living of the typical inhabitant of a pre-industrial economy. The standards of living of the bulk of the population underwent a substantial, sustained, and unreversed rise in the eighteenth and nineteenth centuries for perhaps the first time in a thousand, if not in seven thousand years.

Seven Themes: Saturday Twentieth Century Economic History Weblogging

Survey history courses in 2500—if they even have universities—will have at most one single week to spend on the twentieth century. In that one single week, teachers will focus on economic, and technological, and secondarily political and social history as they try to hastily and cursorily make seven points:

(1) Twentieth-centiury history was overwhelmingly economic history: the economy was the dominant arena of events and change, and economic changes were the driving force behind other changes in a way rarely—if ever—seen before.

I Believe Tyler Cowen Is Simply Wrong

Tyler Cowen:

Is this grandma’s liquidity trap?: I say no and David Andolfatto agrees: 'In grandma’s liquidity trap, the real interest rate is too high because of the zero lower bound. Steve [Williamson] argues that in our current liquidity trap, the real interest rate is too low, reflecting the huge world appetite for relatively safe assets like U.S. treasuries. If this latter view is correct, then “corrective” measures like expanding G or increasing the inflation target are not addressing the fundamental economic problem: low real interest rates as the byproduct of real economic/political/financial factors.' I remain surprised at how many policy discussions fail to draw this basic distinction."

The large demand for relatively safe assets like U.S. Treasury securities means that the interest rate consistent with full employment--the "natural" interest rate, in Wicksell's terms--is lower than normal, and the natural rate is in fact less than zero. Since the market interest rate is bounded below by the zero lower bound, the market rate is too high.

Once you distinguish--as Knut Wicksell does: this is cutting-edge economics as of 1890 after all--all of the following things are true:

• The current natural interest rate is much lower than it is normally--the natural rate is too low--and that is a problem.
• The current market interest rate is higher than the natural rate--the market rate is too high--and that is a problem.
• Increasing G--printing more Treasury bonds, selling them, and buying goods and services--(a) increases the supply of safe assets, (b) lowers the proper value of safe assets via supply and demand, thus (c ) raises the "natural" rate of interest, and (d) could fix our problems if the policy raises the natural rate of interest so much that it is no longer lower than the market rate of interest.

In general, when the market rate of interest is higher than the natural rate of interest--when ex ante saving at full employment is greater than ex ante investment--you can fix the problem and restore full employment by (i) reducing the market rate of interest via expansionary monetary policy, (ii) raising the natural rate of interest via expansionary fiscal policy, (iii) raising the natural rate of interest via summoning the Confidence Fairy, or (iv) raising the natural rate of interest via summoning the Inflation Expectations Imp. At the ZLB, (i) is out of the question, so you must have resort to one or more of (ii), (iii), and (iv)...

This is not rocket science. This is basic Geldzins und Guterpreis...

Bill Janeway: The Two Innovation Economies

Followers and leaders, known knowns and unknown unknowns:

The Two Innovation Economies by William Janeway: For 250 years, technological innovation has driven economic development. But the economics of innovation are very different for those at the frontier versus those who are followers striving to catch up. At the frontier, the innovation economy begins with discovery and culminates in speculation… progress has been achieved through trial and error. The strategic technologies that have repeatedly transformed the market economy – from railroads to the Internet – required the construction of networks whose value in use could not be known when they were first deployed.

What is the source of the tradition that Solomon married a daughter of Hiram, King of Tyre?

The Hoover Administration Was "Liquidationist"; Hoover Himself Was Merely Anti-Keynesian

It is very important to note that Herbert Hoover in his Memoirs is an unreliable narrator, magnifying his differences with those upon whom he seeks to cast blame--not only their fair share of blame but his share as well--for the disaster of the Great Depression.

LK:

Social Democracy for the 21st Century: A Post Keynesian Perspective: Herbert Hoover Rejected Keynesianism: And he tells us explicitly that he did so in a speech in October 1936, when describing his time as president, recently cited by Daniel Kuehn in a really excellent post here. I cite the full quotation below:

During my four years powerful groups thundered at the White House with these same ideas [i.e., the ideas of Roosevelt’s New Deal – LK]. Some were honest, some promising votes, most of them threatening reprisals, and all of them yelling ‘reactionary’ at us.

The Use and Abuse of Monetary History

Barry Eichengreen at Project Syndicate:

The Use and Abuse of Monetary History: Imagine two central banks. One is hyperactive, responding aggressively to events. While it certainly cannot be accused of ignoring current developments, its policies are widely criticized as storing up problems for the future. The other central bank is unflappable. It remains calm in the face of events, seeking at all cost to avoid doing anything that might be construed as encouraging excessive risk-taking or creating even a whiff of inflation…. It is, in fact, a capsule depiction of the United States Federal Reserve and the European Central Bank.

Tyrannies: Saturday Twentieth Century Economic History Weblogging

The twentieth century’s tyrannies were more brutal and more barbaric than those of any previous age. And—astonishingly—they had their origins in economic discontents and economic ideologies. People killed each other in large numbers over questions of how the economy should be organized, which had not been a major source of massacre in previous centuries.

Twentieth-Century governments and their soldiers have killed perhaps forty million people in war: either soldiers (most of them unlucky enough to have been drafted into the mass armies of the twentieth century) or civilians killed in the course of what could be called military operations.

Ryan Avent: Decoupling: One Expensive Euro

Ryan Avent:

Decoupling: One expensive euro: [L]essons learned from the [Great] Depression… a nasty feedback loop…. [H]eavily indebted economies… faced pressure to begin running large current account surpluses in order to pay back loans. The gold standard prevented devaluation, however, and instead forced countries into import-crushing downturns to generate the needed surplus. Other economies, unwilling to allow their current accounts to swing to large deficits lest they suffer gold outflows, tightened monetary policy in response…. At the same time, economic downturns squeezed banks, leading to waves of bank failures…. Capital outflows placed pressure on central banks to raise interest rates (to hang on to gold reserves), which increased the odds of bank failure, which accelerated the pace of outflows. The result was economic collapse and catastrophe, broken only by the end of the gold standard and which even then left political chaos in its wake….

[T]oday's policymakers do know more about how not to fight crises than their 1930s counterparts. That difference in knowledge is the reason the euro area is falling hundreds of billions short of an achievable output path rather then several trillion. And so I think there might be a different and more effective way to describe what's happening in Europe.

The Future of the Euro: Lessons from History

Program | Future of the Euro: Lessons from History: A Conference at UC Berkeley | April 15-16, 2013:

April 15, 2013: 5 p.m. Keynote and Reception

• Welcome: Anton Fink, Partner and Managing Director, Dale Investment Advisors and Trustee, Marshall Plan Memorial Foundation

• How to Correct the Design Failures of the Euro Area: Helene Schuberth, Senior Advisor, Austrian National Bank

April 16, 2013: 8:30 a.m. Welcome

• Introduction: Barry Eichengreen, George C. Pardee and Helen N. Pardee Professor of Economics and Professor of Political Science, UC Berkeley

9:00 a.m. Political Union

• Chair: Dieter Stiefel, Professor Emeritus for Social and Economic History, University of Vienna

• Benjamin Jerry Cohen, Louis G. Lancaster Professor of International Political Economy, UC Santa Barbara

• Harold James, Professor of History and International Affairs, Princeton University, and Professor of History, European University Institute Florence

• J. Bradford DeLong, Professor of Economics and Chair of the Political Economy of Industrial Societies major, UC Berkeley

10:45 a.m. Coffee and Refreshments

Olivier Blanchard: Five Lessons for Economists From the Financial Crisis

David Wessel:

Olivier Blanchard’s Five Lessons for Economists From the Financial Crisis: Here are Mr. Blanchard¹s five lessons in his own words, lightly edited by The Wall Street Journal’s David Wessel:

1.Humility is in order: The Great Moderation [the economically tranquil period from 1987 to 2007] convinced too many of us that the large-economy crisis -­ a financial crisis, a banking crisis ­- was a thing of the past. It wasn’t going to happen again, except maybe in emerging markets. History was marching on. My generation, which was born after World War II, lived with the notion that the world was getting to be a better and better place. We knew how to do things better, not only in economics but in other fields as well. What we have learned is that¹s not true. History repeats itself. We should have known.

David Graeber April Fools' Day Post: Cheaply Manufacturing Extended Trollage via Sub-Turing Evocations: Threat or Menace? Weblogging

David Graeber wrote, about his book Debt:

[S]cholars of Greece, Mesopotamia, and Islam, Medievalists, Africanists, historians of Buddhism, and a wide variety of economists... none have noticed any glaring errors... it’s remarkable that someone who is not an area specialist actually more or less gets it right (remember, these are scholars often loathe to admit even their own colleagues in the field get it more or less right.)... meticulously researched and has stood up to scholarly review...

I protested that David Graeber's chapter 12, at least, got quite a large number of things wrong.

For one thing, Graeber thinks that the participants in the meetings of the Federal Reserve's decision-making body--the Federal Open Market Committee--are eighteen private bankers and one person, the Chair, appointed by the President. In actual fact the participants in FOMC meetings consist of (a) the seven Governors of the Federal Reserve (of whom one is Chair) all of whom are appointed by the President with the advice and consent of the Senate, and (b) the twelve heads of the regional Federal Reserve Banks, all of whom must be approved by a majority vote of the Governors and who are not private bankers seeking profits but rather heads of government-sponsored enterprises that do not view maximizing their bottom lines as their goals. Rather than one out of nineteen, all nineteen FOMC participants are either chosen by the President (with the advice and consent of the Senate) or by the President's appointees. Graeber does not get it right. If you want to understand today's economy, it is important to know whether one of nineteen or all of its top decision makers serve because the President and his appointees want them to. It is important to know whether eighteen of them or zero of them are private bankers. It is important to know whether the Federal Reserve is very akin to the American Petroleum Institute or the Federal Trade Commission.

This is a big deal. This stuff matters. It is a glaring error, along the lines of claiming that adolescent females in Samoa speak to no males save their fathers, uncles, and brothers. It is a glaring error, along the lines of claiming that high-status adult males among the Yanomamo behave like the seventeenth-century Quaker followers of William Penn rather than like Akhilleus son of Peleus. (And, yes, I have a very large bone to pick with Napoleon Chagnon for translating the Yanomamo self-description as "fierce" rather than "noble" or "manly"--as in Sigifrith the Atheling, or Arjuna of the Arya, or Horatius Cocles virtus holding the bridge against Lars Porsenna. But that is for another time and place.)

My protest was received with hoots:

Philip Pilkington:

Seriously?... petty stuff…. We can all pick over tiny details in books and engage in hermeneutic readings…. It’s not hard.…. [W]hat’s going to be remembered, David’s book with its intellectually revolutionary message, one that has inspired so many young economists that I meet or DeLong’s pedantic complaints about ambiguous meanings and contentious issues.… Who wins in the contest for etiquette? I don’t know. But who wins the intellectual argument? Again, let history decide. But I’m thinking Graeber.

And David Graeber:

[F]or all [DeLong's] blustering about how my chapter 12 was full of factual errors, he had never managed to identify more than one--a minor point about the number of reserve board governors who are Presidential appointees (the main point, about the Fed not being part of the government and not operating under Presidential oversight DeLong does not contest)…

But it wasn't one error, David.

It seemed that I had a discourse-situation problem. (I) Graeber's default seemed to be to claim that his book Debt was error-free. (II) If challenged on any point, his mode of operation appeared to be to retreat--admit error--and then counterattack claiming that this error is minor--no matter how glaring it was--and that the fact that people are attacking that error shows how totally right the rest of the book was.

So how to stake out a marker that there are dozens of errors, without wasting a lot of time doing so?

And there are dozens of errors: the Federal Reserve is not a council of eighteen private bankers plus a presidential appointee as their chair; Korean-American shopkeepers do not long to treat everybody else in Brooklyn the way Saul and Samuel treated the people of Amalek; Apple Computer--this was a hilarious one--Apple was not founded by ex-IBM engineers who formed little democratic circles of twenty to forty people with their laptops in each other's garages--there were neither laptops nor garages big enough to hold 20 in Silicon Valley in 1978, nor was Apple either Democratic or made up of any ex-IBM employees--the fact that people are as happy to hold the debt of the Swiss government than the debt of the U.S. government shows that it is not fear of being bombed by the US Air Force that makes countries seek to buy U.S. Treasury bonds; the Federal Reserve is perfectly constitutional, as is the FDA, the FCC, the EPA, the FTC, etc.; Nixon did not close the gold window because of the mounting costs of the Vietnam War; there is nothing that makes Iraq more likely than any other corner of the world to be the source of the next forward leap in human society; the Federal Reserve does not lend private banks money at the prime rate--you really don't know whether to laugh or cry at passages like: "For those who don't know how the Fed works: technically, there are a series of stages. Generally the Treasury puts out bonds to the public, and the Fed buys them back. The Fed then loans the money thus created to other banks at a special low rate of interest ('the prime rate')". Et cetera.

It was a puzzle that I could not solve.

At the end January I noticed David Graeber was on Twitter tweeting things like:

David Graeber ‏@davidgraeber: considering the misery & devastation DeLong's NAFTA inflicted on Mexico, it's hardly surprising

David Graeber ‏@davidgraeber: @delong author of economic catastrophes arrogantly inflicted only on others (NAFTA), lashes out at such as tried to warn him at the time


David Graeber ‏@davidgraeber: they feel history passing them by. Even the IMF seems to take me more seriously than DeLong these days

And a light bulb went on in my head.

The North Atlantic Macroeconomy: Let it Bleed?: We Are Live at Project Syndicate

http://www.project-syndicate.org/commentary/the-great-depression-redux-by-j--bradford-delong

BERKELEY – In the 12 years of the Great Depression – between the stock-market crash of 1929 and America’s mobilization for World War II – production in the United States averaged roughly 15% below the pre-depression trend, implying a total output shortfall equal to 1.8 years of GDP. Today, even if US production returns to its stable-inflation output potential by 2017 – a huge “if” – the US will have incurred an output shortfall equivalent to 60% of a year’s GDP.

In fact, the losses from what I have been calling the “Lesser Depression” will almost certainly not be over in 2017. There is no moral equivalent of war on the horizon to pull the US into a mighty boom and erase the shadow cast by the downturn; and when I take present values and project the US economy’s lower-trend growth into the future, I cannot reckon the present value of the additional loss at less than a further 100% of a year’s output today – for a total cost of 1.6 years of GDP. The damage is thus almost equal to that of the Great Depression – and equally painful, even though America’s real GDP today is 12 times higher than it was in 1929.

The Astonishing Increase in Holdings of U.S. Treasury Debt: Yet More "Yes, Sir John Hicks Told Me So" Weblogging

Brad DeLong (2011) 2013: The Interest Rate That Did Not Bark in the Night: The Surge in U.S. Treasury Debt and the Non-Reaction of Rates: A U.S. government that had been paying back $240 billion a year at the start of the 2000s and issuing a net of $300 billion a year in the mid-2000s was suddenly issuing $1.1 trillion a year of bonds.

Back in the third quarter of 2008 I wondered: "Who is going to buy all of these things?" There were nearly $4.3 trillion of Treasuries held by the real public in mid-2008. But we were about to start adding to that at a pace of $1.1 trillion a year: $5.4 trillion by mid-2009, $6.5 trillion by mid-2010 $7.6 trillion by mid-2011--doubling U.S. Treasury debt held by the public in four short years.--and we are on track to have $10.7 trillion early 2014, an increase to a factor of 2.5 in less than five years.

Who I wondered back in 2008 would buy these things?

And at what prices would they buy and hold them?

Brad DeLong (2011): The Interest Rate That Did Not Bark in the Night: The Surge in U.S. Treasury Debt and the Non-Reaction of Rates: Tuesday Hoisted from Archives Weblogging

http://delong.typepad.com/sdj/2011/06/hoisted-from-the-archives-if-you-are-looking-for-a-monument-to-john-hicks-look-around-you.html

At the very start of the 2000s in the years of the Clinton budget surpluses--remember those?--the U.S. government was repaying its debt at the rate of $60 billion a quarter: each quarter saw $60 billion less of U.S. Treasury debt out there in the private market for savers to hold.

George W. Bush--with assistance from Alan Greenspan and the entire rest of the Republican Party--quickly fixed that: from 2002 to 2007 the average quarter saw net Treasury issues of some $70 billion. Each quarter saw the U.S. Treasury having to find extra buyers for another $70 billion of bonds.

A bunch of us (definitely including me) feared that this shift from prudent to feckless fiscal policy would put substantial upward pressure on interest rates. We were wrong. A weak economy lowered private issues of bonds to fund investment. The desire of China and other emerging economies to keep their currency values low made them eager to soak up every dollar earned by their businesses' exports that they could find and invest it in U.S. Treasury debt. Add to that the emerging private rich abroad for whom U.S. Treasuries became more and more desirable as a hedge, and late-2007 saw the 10-year U.S. Treasury rate exactly where it was when the Clinton surpluses had come to an end at the end of 2001. The market took six years of this swing in bond issues and ate it, without a burp.

Then came the recession. Revenues collapsed. Spending on unemployment insurance and other social insurance expenditures rose. The Recovery Act added an extra $600 billion of debt on top of that. And Treasury interventions in financial markets required debt issues as well. A U.S. government that had been paying back $60 billion a quarter at the start of the 2000s and issuing a net of $70 billion a quarter in the mid-2000s was suddenly issuing $380 billion a quarter of bonds.

The Grand Narrative: Saturday Twentieth Century Economic History Weblogging

Every history tells a story of what happened: one damned thing after another. But which story do you tell?

If you are telling a story of the history of five hundred years ago, you most-likely focus on Martin Luther and Jean Calvin’s Protestant Reformation, on the Spanish conquest of the Americas, on the rise of the Shāhān-e Gūrkānī—the Moghul Empire—in the Indian subcontinent, and maybe a couple more. Those are the axes of the history of the 1500s: religion, expansion, and conquest. If you are telling a story of a thousand years ago, you most-likely focus on the rise of the Song Dynasty in China, on the waning of the golden age that was Abbasid Baghdad-centered Islamic civilization, and on, perhaps, the establishment of feudal “civilization” in western Europe. Those are the axes of the history of the 1000s: politics and culture. Other stories of other centuries would most-likely focus on the Christianization of the Roman Empire, the shift of China’s population center of gravity to the rice-growing south and and so forth. The rise, diffusion, and fall of dynasties, empires, religions, and cultures are the axes of history, with perhaps some reference to what the cultures of material subsistence in the background were and how they slowly changed.

Yes, Restricting Access to Contraception Is Immoral. Why Do You Ask?

The Future of the Euro: Lessons from History

The 1919-1939 interwar period taught us four lessons:

1. In order for the world economy to be prosperous, adjustment to macroeconomic disequilibrium needs to be undertaken by both "surplus" and "deficit" economies--not by "deficit" economies alone.

2. If the world economy is to have any chance of avoiding or limiting crises, an integrated banking system requires an integrated bank regulator and supervisor.

3. In order for crises to be successfully managed, the lender of last resort must truly be a lender of last resort: it must create whatever asset the market thinks is the safest in the economy, and must be able to do so in whatever quantity the market demands.

4. In order for any monetary union or fixed exchange rate system larger than an optimum currency area to survive, it must be willing to undertake large-scale fiscal transfers to compensate for the exchange rate movements to rapidly shift inter-regional terms of trade that it prohibits.

I, at least, thought that everybody--or everybody who mattered in governing the world economy--had learned these four lessons that 1919-1939 had so cruelly taught us. Now it turns out that the dukes and duchesses of Eurovia had, in fact, learned none of them. History taught the lesson. But while history was teaching the lesson, the princes and princesses of Eurovia and their advisors were looking out the window and gossiping on Facebook.

J. Bradford Delong for Democracy Journal: Shrugging off Atlas

J. Bradford Delong for Democracy Journal: Shrugging off Atlas: Issue #28: Exactly how did once-respectable conservative economists get swept up in “moocher class” mania?

Review of Nicholas Eberstadt (2012), A Nation of Takers: America’s Entitlement Epidemic (Templeton Press) http://www.amazon.com/Nation-Takers-Americas-Entitlement-Epidemic/dp/1599474352.

If there was a single moment when Mitt Romney lost the 2012 presidential election, it was in May when he stood in front of the $50,000-a-plate audience at Sun Capital honcho Marc Leder’s home in Boca Raton and spoke his soon-to-be-infamous words:

There are 47 percent of the people who will vote for the President no matter what…. There are 47 percent who are with him, who are dependent upon government…who believe that government has a responsibility to care for them, who believe that they’re entitled to health care, to food, to housing, you name it…. These are people who pay no income tax…. My job is not to worry about those people—I’ll never convince them that they should take personal responsibility and care for their lives…

This is what Mark Schmitt of the Roosevelt Institute calls “the theory of the moocher class.” And Romney is all in with it. In July, after a poorly received speech at the NAACP convention, he boasted:

When I mentioned I am going to get rid of Obamacare, they weren’t happy…. But I hope people understand this… if they want more stuff from government tell them to go vote for the other guy—more free stuff.

Those of us who know the numbers, or who simply live in America and look around, know that the 47 percent who aren’t paying federal income taxes this year are by and large not “moochers.” About a fifth are elderly retired. About two-thirds are in households with incomes of less than $20,000 a year—definitely not living high. And nearly one-third owe no income taxes because of the earned-income and child tax credits, which both became law with bipartisan support.

As a group, the 47 percent who pay no income taxes do not lack work ethic. They do take personal responsibility for their lives. They may not pay federal income taxes this year, but they pay plenty of sales, property, and payroll taxes. For the most part, they do not constitute the Democratic base. More than half of the 47 percent are the elderly white and Southern white voters who voted for Romney by substantial margins.

So how does someone like Romney, along with his peers and all their staffs and everyone else in that Boca Raton room, become convinced that 47 percent of Americans are the moochers, the takers, dependent on “free gifts” from the government, lacking work ethic, lacking personal responsibility?

Enter Nicholas Eberstadt of the American Enterprise Institute (AEI), with his contribution to the think tank’s “New Threats to Freedom” series. We need venture no further into A Nation of Takers than the bottom of the second page…