...and thank you all for joining us here today. This is a special day for us at the Federal Reserve Bank of Minneapolis, especially at the Helena Branch. Dave Solberg, a member of the Branch’s board of directors, will complete his service at the end of this year. I would like to extend my personal thanks to Dave for his service to the Helena Branch and, more broadly, to the Federal Reserve. The time that our directors, and members of our advisory councils, devote to their work is truly valuable. Dave and his colleagues bring important insights about the economy from people on Main Street and on farms and ranches across the region. As I have said many times, we have no end of data at the Federal Reserve, but data are backward-looking, and we need all the information we can get to make judgments about the future course of the economy. So thanks again to Dave and to his colleagues on the board, as well as anyone else in the room who has served on a Federal Reserve board or council. We appreciate your service.
...is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity.... To the extent that opportunity itself is enhanced by access to economic resources, inequality of outcomes can exacerbate inequality of opportunity, thereby perpetuating a trend of increasing inequality.... Society faces difficult questions of how best to fairly and justly promote equal opportunity. My purpose today is not to provide answers to these contentious questions, but rather to provide a factual basis for further discussion.... I will review trends... then identify and discuss four sources of economic opportunity in America.... The first two are widely recognized as important sources of opportunity: resources available for children and affordable higher education. The second two may come as more of a surprise: business ownership and inheritances.... In focusing on these four building blocks, I do not mean to suggest that they account for all economic opportunity, but I do believe they are all significant sources of opportunity for individuals and their families to improve their economic circumstances...
Over at Equitable Growth: Jonathan Chait has an interesting piece on the thought on healthcare policy of the likely future senator from Iowa, Joni Ernst:
...have failed. And yet conservative opposition... has not diminished. If you want to know why this is, listen to... Joni Ernst....
We’re looking at Obamacare right now. Once we start with those benefits in January, how are we going to get people off of those? READ MOAR
Over at Equitable Growth: I am very happy to be here this morning to introduce the Oregon Economic Forum's Keynote Speaker, Doug Elliott of the Brookings Institution, and to set the stage for his talk.
To do that, let me ask all of you to cast yourselves back to 2006, to the end of Alan Greenspan's long tenure as Chair of the Federal Reserve, and to the days of what was then called the "Great Moderation". During Greenspan's term starting in 1987 the unemployment rate had never gone above 7.8% and it had gotten as low as 3.8%. The attainment of low unemployment under Greenspan did not signal any forthcoming inflationary spiral: The peak 12-mo PCE price index core inflation rate during Greenspan's tenure was 4.7%. The peak inflation rate that followed that 3.8% unemployment rate was 2.4%. Inflation had not been above 2.5% since December 1993. READ MOAR
Over at Equitable Growth: God! We were (and are) so smart!
J. Bradford DeLong and Lawrence H. Summers (1992): Macroeconomic Policy and Long-Run Growth:
On almost any theory of why inflation is costly, reducing inflation from 10%/year to 5%/year is likely to be much more beneficial than reducing it from 5%/year to 0%/year. So austerity encounters diminishing returns. And there are potentially important benefits of a policy of low positive inflation. It makes room for real interest rates to be negative at times, and for relative wages to adjust without the need for nominal wage declines....
These arguments gain further weight when one considers the recent context of monetary policy in the United States. A large easing of monetary policy, as measured by interest rates, moderated but did not fully counteract the forces generating the recession that began in 1990. The relaxation of monetary policy seen over the past three years in the United States would have been arithmetically impossible had inflation and nominal interest rates both been 3%-points lower in 1989. Thus a more vigorous policy of reducing inflation to 0%/year in the mid-1980s might have led to a recent recession much more severe than we have in fact seen...
If the past 24 hours... the past six months... the past six years... are not convincing evidence that a 2%/year inflation target is too low, what would be convincing evidence to that effect?
Plus Bonus Hoisted from the Archives:
A 2%/Year Inflation Target Is too Low: First, the live question is not whether the Federal Reserve should raise its target inflation rate above 2% per year.
The live question is whether the Federal Reserve should raise its target inflation rate to 2% per year.
On Wednesday afternoon, Federal Reserve Chair Bernanke stated that he was unwilling to undertake more stimulative policies because "it is not clear we can get substantial improvements in payrolls without some additional inflation risks." But the PCE deflator ex-food and energy has not seen a 2% per year growth rate since late 2008: over the past four quarters it has only grown at 0.9%. At a 3.5% real GDP growth rate, unemployment is still likely to be at 8.4% at the end of 2011 and 8.0% at the end of 2012--neither of them levels of unemployment that would put any upward pressure at all on wage inflation. It thus looks like 1% is the new 2%: on current Federal Reserve policy, we are looking forward to a likely 1% core inflation rate for at least another year, and more likely three. A Federal Reserve that was now targeting a 2% per year inflation rate would be aggressively upping the ante on its stimulative policies right now. That is not what the Federal Reserve is doing. Would that we had a 2% per year inflation target.
But if we were targeting a 2% inflation rate--which we are not--should we be targeting a higher rate? I believe that the answer is yes.
To explain why, let me take a detour back to the early nineteenth century and to the first generations of economists--people like John Stuart Mill who were the very first to study in the industrial business cycle in the context of the 1825 crash of the British canal boom and the subsequent recession. John Stuart Mill noted the cause of slack capacity, excess inventories, and high unemployment: in the aftermath of the crash, households and businesses wished to materially increase their holdings of safe and liquid financial assets. The flip side of their plans to do so--their excess demand for safe and liquid financial assets--was a shortage of demand for currently-produced goods and services. And the consequence was high unemployment, excess capacity, and recession,.
Once the root problem is pointed out, the cure is easy. The market is short of safe and liquid financial assets? A lack of confidence and trust means that private sector entities cannot themselves create safe and liquid financial assets for businesses and households to hold? Then the government ought to stabilize the economy by supplying the financial assets the market wants and that the private sector cannot create. A properly-neutral monetary policy thus requires that the government buy bonds to inject safe and liquid financial assets--what we call "money"--into the economy.
All this is Monetarism 101. Or perhaps it is just Monetarism 1. We reach Advanced Macroeconomics when the short-term nominal interest rate hits zero. When it does, the government cannot inject extra safe and liquid money into the economy through standard open-market operations: a three-month Treasury bond and cash are both zero-yield government liabilities, and buying one for the other has no effect on the economy-wide stock of safety and liquidity. When the short-term nominal interest rate hits zero, the government has done all it can through conventional monetary policy to fix the cause of the recession. The economy is then in a "liquidity trap."
Now this is not to say that the government is powerless. It can buy risky and long-term loans for cash, it can guarantee private-sector liabilities. But doing so takes risk onto the government's books that does not properly belong there. Fiscal policy, too, has possibilities but also dangers.
My great uncle Phil from Marblehead Massachusetts used to talk about a question on a sailing safety examination he once took: "What should you do if you are caught on a lee shore in a hurricane?" The correct answer was: "You never get caught on a lee shore in a hurricane!" The answer to the question of what you should do when conventional monetary policy is tapped out and you are at the zero interest rate nominal bound is that you should never get in such a situation in the first place.
How can you minimize the chances that an economy gets caught at the zero nominal bound where short-term Treasury bonds and cash are perfect substitutes and conventional open-market operations have no effects? The obvious answer is to have a little bit of inflation in the system: not enough to derange the price mechanism, but enough to elevate nominal interest rates in normal times, so that monetary policy has plenty of elbow room to take the steps it needs to take to create macroeconomic stability when recession threatens. We want "creeping inflation."
How much creeping inflation do we want? We used to think that about 2% per year was enough. But in the past generation major economies have twice gotten themselves stranded on the rocks of the zero nominal bound while pursuing 2% per year inflation targets. First Japan in the 1990s, and now the United States today, have found themselves on the lee shore in the hurricane.
That strongly suggests to me that a 2% per year inflation target is too low. Two macroeconomic disasters in two decades is too many.
If Cliff Asness was going to write the passage below, has there ever been a worse week for him to write it?
I mean "it's not over! The enormous pent-up inflation from the Fed's QE programs is out there bubbling under the surface!! Short Treasuries massively now!!!" has not been a winning rhetorical strategy for quite a while, and to double down on it this week does make you look like quite an idiot...
Paul Krugman lived up to his lifelong motto of 'stay classy'... lesser lights of the Keynesian firmament have also jumped in (collectivists, of course, excel at sharing a meme). Responding to Krugman is as productive as smacking a skunk with a tennis racket.... Paul's screeds.... I'll put our collective record up against Krugman's (and the Krug-Tone back-up dancers) any day of the week and twice on days he publishes... chicanery (silly Paul, you are no Rabbit)... never-uncertain-but-usually-wrong like Paul... malpractice... honest Paul Krugman (we will use this term again below but this is something called a "counter-factual")... former economists turned partisan pundits....
Much like when the Germans bombed Pearl Harbor, nothing is over yet. The Fed has not undone its extraordinary loose monetary policy and is just now stopping its direct QE purchases...
It was perfectly normal--well, not strikingly abnormal--for Cliff Asness to have taken a look at the speed at which the monetary base was increasing in 2009 and thinking that such policies, unless reversed, were likely to lead to a burst of inflation. Wrong, but not strikingly abnormal.
It was perfectly normal--well, not strikingly abnormal--for Cliff Asness to have taken a look at the speed at which the national debt was increasing in 2009 and thinking that such policies, unless reversed, were likely to lead to high Treasury real interest rates. Wrong, but not strikingly abnormal.
In order to avoid such predictions you had to:
For large increases in the monetary base not to make the likely future one of high inflation, and for large increases in the national debt not to make the likely future one of high Treasury real interest rates--well, something weird had to be going on.
But, as Krugman, Woodford, Eggertssen, Hicks, Keynes, etc. had noted, were warning, and were correct in warning back in 2009-2010, something weird was going on.
Because of how the economy had gotten itself wedged, the risk that extraordinary monetary easing would lead to an inflationary spiral was extremely low. Because of how the economy had gotten itself wedged, the risk that large government debt issuance would lead to exploding real interest rtes on government debt was extremely low. Only people who really did not understand what was going on would think that 2010 was a time to stress, highlight, obsess over, and freak out about INFLATION! DEBT! when the real risks to freak out about were DEPRESSION!! UNEMPLOYMENT!!!
But when something weird is going on, to get things badly wrong is normal--well, not that abnormal.
What is not normal--what is really abnormal--is to be a dead-ender.
What is not normal is to claim that your analysis back in 2010 that quantitative easing was generating major risks of inflation was dead-on.
What is not normal is to adopt the mental pose that your version of classical austerian economics cannot fail--that it can only be failed by an uncooperative and misbehaving world.
What is not normal is, after 4 1/2 years, in a week, a month, a six-month period in which market expectations of long-run future inflation continue on a downward trajectory, to refuse to mark your beliefs to market and demand that the market mark its beliefs to you. To still refuse to bring your mind into agreement with reality and demand that reality bring itself into agreement with your mind. To still refuse to say: "my intellectual adversaries back in 2010 had a definite point" and to say only: "IT'S NOT OVER YET!!!!"
Let's quote Thomas Piketty:
...in the United States. The increase was largely the result of an unprecedented increase in wage inequality and in particular the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large firms...
...They’re intrigued, but not convinced. Perhaps Mr. Piketty has isolated the forces that will drive wealth inequality in the future, but for now, they’re not convinced the forces he focuses on are central to understanding the recent rise in wealth inequality. At least that’s my reading of the latest survey run by the University of Chicago’s Initiative on Global Markets. I’ve written before about their Economic Experts panel, which is intended to be broadly representative of opinion among elite academic economists.... The expert economists were asked whether
the most powerful force pushing toward greater wealth inequality in the U.S. since the 1970s is the gap between the after-tax return on capital and the economic growth rate.
To translate, does the T-shirt slogan “r>g” explain why wealth has become more unequally distributed?... 18 percent... uncertain. The clear majority either disagreed (59 percent) or strongly disagreed (21 percent)....
But what was the point of this? We saw from the Piketty quote up at the top that Piketty does not think that "r>g" has been driving the rise in American inequality. Why is it an interesting question to ask?
Justin, in my view, buries the lead, for he does indeed point out later on in his article:
If surveyed, it is likely that he would have joined the majority view in disagreeing with the claim the survey asked about. In Mr. Piketty’s telling, rising incomes among the super-rich are responsible for the recent rise in wealth inequality...
Shouldn't the IGM Forum at the Booth Business School of the University of Chicago have found somebody who had actually read Piketty's Capital in the Twenty-First Century to decide on what questions to ask?
I am sure that it was always such--that intellectual standards in the academy were always not that high, and that a great many of the people making arguments always were people who hadn't done their homework. But I do seem to be reminded of it more and more these days, especially since the beginning of the financial crisis back in 2007...
...with an unprecedented level of loose monetary policy... created a risk of serious inflation....Paul Krugman lived up to his lifelong motto of "stay classy" with a piece on the subject entitled Knaves, Fools, and Quantitative Easing. Some lesser lights of the Keynesian firmament have also jumped in.... Responding to Krugman is as productive as smacking a skunk with a tennis racket. But, sometimes, like many unpleasant tasks, it's necessary....
We did not make a prediction.... We warned of a risk....
UPDATE: Cliff Asness states that I misinterpreted his column: that he did not intend for his:
I'm amazed that a Paul Krugman can look at 15+ years of the earth not warming and feel his beliefs [on global warming] need no modification...
to be a right-wingnut dog-whistle claim that global warming from human activity had stopped and was unlikely to resume.
@delong: .@Cimmerian999 Suggest you replace “the earth not warming” with “surface atmosphere temperatures not exceeding extraordinary spike of 1998”
.@Cimmerian999: .@delong Yes, in a paragraph meant to be funny (lost on you and Jesse obviously) that would work much better.
...can look at 15+ years of the earth not warming and feel his beliefs need no modification or explanation...
What next, Cliff? ShadowStats? Queen Elizabeth a secret lizard-person? Moon landing faked?
Conor Dougherty: Two Cities With Blazing Internet Speed Search for a Killer App: "Google Fiber in Kansas City Residents in the Missouri city are finding out that Google’s super high-speed Internet is so fast...
...it’s sometimes hard to know what to do with it. A team of computer programmers here set out to learn how many cute kitten photos can be downloaded in one second on their Internet network, one of the fastest in the country. The answer: 612.... When your city has Internet capacity to spare and is not exactly a hotbed for tech start-ups, figuring out what you are supposed to do with all that speed is a challenge.... fter a few million in waived permit fees and granting Google free access to public land, the area is finding out that Google Fiber is so fast, it’s hard to know what to do with it. There aren’t really any applications that fully take advantage of Fiber’s speed, at least not for ordinary people....
Ideas have ranged from installing Fiber-connected cameras in high-crime areas to building a model home where entrepreneurs could test new kinds of Internet-connected appliances. The Kansas City Public Library is experimenting with a software-lending service that will let residents use high-speed Internet to “check out” expensive and data-heavy programs like video editing software. One company tinkered with a service that would allow families to lease data storage in their homes.... The average connection speed in the United States is about 10 megabits per second, good for 14th in the world....
Economically speaking, the biggest benefit may end up being the way fiber has energized the local start-ups.... Programmers have made a sport out of trying to slow Google Fiber down by using online video games and other data-heavy applications to perform the digital equivalent of turning on every faucet in the house at once: Hence, the “Too Many Kittens for Broadband” experiment, part of a hack-a-thon sponsored last year by the KC Digital Drive...
Over at Equitable Growth: I note the publication of the IMF World Economic Outlook and its chapter 3 calling for North Atlantic economies to borrow more and spend it on infrastructure because, right, now in today's exceptional circumstances, it is--as Larry Summers and I pointed out in 2012--a policy that is self-financing does not increase but rather reduces the relative burden of the national debt.
It is thus time for Larry and me--and everyone else who has been doing the arithmetic--to take a big victory lap.
We have had no effect on policy in the North Atlantic in the past 2 1/2 years. But we were (and are) right. And it is important to register that--both so that our intellectual adversaries rethink their models and thus their positions, and so that the North Atlantic economic policymakers can do better next time. And next time is, come to think of it, right now: interest rates on the debts of reserve currency-issuing sovereigns are no higher, infrastructure gaps are larger, and output gaps are at least as large as they were 2 1/2 years ago. It's not too late to do the right thing, people!
...for countries with infrastructure needs, the combination of low interest rates and mediocre growth mean that it’s time for an investment push. What’s at stake: For countries with infrastructure needs, the combination of low interest rates and mediocre growth mean that it’s time for an investment push. While Brad DeLong and Lawrence Summers already laid out the theoretical case in a 2012 Brookings paper, the empirical case was laid out this week in Chapter 3 of the latest IMF World Economic Outlook.
Lawrence Summers writes that in a time of economic shortfall and inadequate public investment, there is for once a free lunch – a way for governments to strengthen both the economy and their own financial positions. Greg Mankiw writes that the free-lunch view is certainly theoretically possible (just like self-financing tax cuts), but we should be skeptical about whether it can occur in practice (just like self-financing tax cuts).
Abiad and al. write on the IMF blog that the evolution of the stock of public capital suggests rising inadequacies in infrastructure provision. Public capital has declined significantly as a share of output over the past three decades in both advanced and developing countries. In advanced economies, public investment was scaled back from about 4 percent of GDP in the 1980s to 3 percent of GDP at present (maintenance spending has also fallen, especially since the financial crisis).
This makes a very strong case for sharply increasing public investment in a depressed economy
Paul Krugman writes that this is disinvestment madness. Real interest rates are extremely low, indicating that the private sector sees very little opportunity cost in using funds for public investment. There has been a lot of slack in the labor market, so that many of the workers one would employ in public investment would otherwise have been idle--so very little opportunity cost there either. This makes a very strong case for sharply increasing public investment in a depressed economy; a case that doesn’t rely on claims that there is a large multiplier, although there’s every reason to believe that this is also true.
The authors of the WEO’s chapter 3 write that in contrast to the large body of literature that has focused on estimating the long term elasticity of output to public and infrastructure capital using a production function approach, the IMF analysis adopts a novel empirical strategy that allows estimation of both the short- and medium-term effects of public investment on a range of macroeconomic variables. Specifically, it isolates shocks to public investment that can plausibly be deemed exogenous by following the approach of smooth transition VARs of Auerbach and Gorodnichenko (2012, 2013), where the shocks are identified as the difference between forecast and actual investment. In the WEO chapter, the forecasts of investment spending are those reported in the fall issue of the OECD’s Economic Outlook for the same year.
The positive effects of increased public infrastructure investment are particularly strong when public investment is undertaken during periods of economic slack and monetary policy accommodation
The authors of the WEO’s chapter 3 write that a problem in the identification of public investment shocks is that they may be endogenous to output growth surprises. But the public investment innovations identified are only weakly correlated (about –0.11) with output growth surprises. Another possible problem in identifying public investment shocks is a potential systematic bias in the forecasts concerning economic variables other than public investment, with the result that the forecast errors for public investment are correlated with those for other macroeconomic variables. To address this concern, the measure of public investment shocks has been regressed on the forecast errors of other components of government spending, private investment, and private consumption.
Abiad and al. write on the IMF blog that the benefits depend on a number of factors. The authors find that the positive effects of increased public infrastructure investment are particularly strong when public investment is undertaken during periods of economic slack and monetary policy accommodation, where additional public investment spending is not wasted and is allocated to projects with high rates of return and when it is financed by issuing debt has larger output effects than when it is financed by raising taxes or cutting other spending.
Mario Monti writes that while a simplistic stability pact may have been the right choice when the euro was in its infancy, Europe can no longer afford to stick with such a rudimentary instrument. By failing to recognize the proper role of public investment, it has pushed governments to stop building infrastructure just when they should have built more. What is needed is not the flexibility to deviate from the rules, but rules that are economically and morally rigorous. The new Commission should announce a proposal for updating the rules on fiscal discipline, to reflect the role of productive public investment. The commission would then enforce the existing stability pact while allowing for the favorable treatment of public investment within the limits set out in 2013.
Europe needs mechanisms for carrying out self-financing infrastructure projects outside existing budget caps
Lawrence Summers writes that Europe needs mechanisms for carrying out self-financing infrastructure projects outside existing budget caps. This may be possible through the expansion of the European Investment Bank or more use of capital budget concepts in implementing fiscal reviews.
...That is, an IMF study suggests that the expansionary effects are sufficiently large that debt-financed infrastructure spending could reduce the debt-GDP ratio over time. Certainly this outcome is theoretically possible (just like self-financing tax cuts), but you can count me as skeptical about how often it will occur in practice (just like self-financing tax cuts). The human tendency for wishful thinking and the desire to avoid hard tradeoffs are so common that it is dangerous for a prominent institution like the IMF to encourage free-lunch thinking."
The Laffer Curve proposition holds true--tax-rate cuts are self-financing--if, defining α to be the elasticity of production with respect to the net-of-tax rate:
τ > 1/(1+α)
τ = 1/(1+α)
then tax revenue is at its maximum. If:
τ < 1/(1+α)
then the Laffer Curve proposition fails, and tax-rate cuts are not self-financing.
Arguments that the Laffer Curve proposition fails--that tax-rate cuts reduce revenue--are invariably arguments, with various bells and whistles added on, that the economy's parameter α is in the range from 0.25 to 1, depending, and thus that the critical tax rate τ at which the Laffer Curve proposition becomes true is between 50% and 80%, and thus above the current tax rate t.
Arguments that infrastructure investment is not self-financing should, similarly, invariably be arguments, with bells and whistles, that the net revenue raised ρt--the product of ρ, the comprehensive net rate of return on and thus the income produced by a dollar of infrastructure investment, multiplied by the current tax rate t--is less than the real rate of interest r at which the government must borrow to finance its infrastructure investment:
ρt < r
In a world where the real rate at which the U.S. Treasury can borrow for ten years is 0.3%/year and in which the tax rate t is about 30%, infrastructure investment fails to be self-financing only when the comprehensive rate of return is less than 1%/year.
Now you can make that argument that properly-understood the comprehensive rate of return is less than 1%/year. Indeed, Ludger Schuknecht made such arguments last Saturday. He did so eloquently and thoughtfully in the deep windowless basements of the Marriott Marquis Hotel in Washington DC at a panel I was on.
But Mankiw doesn't make that argument.
And because he doesn't, he doesn't let his readers see that there is a huge and asymmetric difference between:
my argument that tax-rate cuts are not (usually) self financing, which at a tax rate t=30% requires only that α < 2.33; and:
his argument that infrastructure investment is not self-financing, which at a tax rate t=30% requires that ρ < 1%/year.
To argue that α < 2.33 is very easy. To argue that ρ < 1%/year is very hard. So how does Mankiw pretend to his readers that the two arguments are equivalent? By offering his readers no numbers at all.
The data of economics comes in quantities. We can count things. We should count things. Please step up the level at which you play this game, guys...
Robert Waldmann saves me from having to read further in David Graeber's Debt: The First Five-Thousand Mistakes this Monday morning:
On unemployment-rate mean-reversion:
...Your analysis is notably different from Paul Krugman's analysis of private sector employment.
This is not odd--notoriousl,y unemployment has returned to normal partly through a decline in labor force participation. But wait, he says this recovery is a lot like the last recovery.
The difference is that you impose the assumption that everything before 2008 was the same. In contrast, Krugman argues (and argued in 2008) that financial crisis recessions are different from inflation fighting recessions. Spring 91 through (at least) Spring 93 saw the "jobless recovery". In 1993 you were attempting to understand why things were different pre- and post-1991. The 2001 mini-recession was followed by recovery with declining employment--the "job-loss recovery". At the time, you wrote something was going very wrong with the US labor market. Now there is a desperate need for jobs and you don't see a pattern in jobless, job loss, and job lust.
"Secular stagnation" is a misleading phrase. It was coined by Alvin Hanson in the 1930s to describe a fear that an exhaustion of technological opportunities in a world monetary system that still possessed a nominal anchor to gold would generate a sub-zero full-employment Wicksellian natural rate of interest. But we don't have an exhaustion of technological opportunities. We don't have a monetary system with a nominal anchor to gold.
What we do have are rates of inflation in the DMs that expose us to severe downside macroeconomic risks, and a lack of risk tolerance and risk-bearing capacity in the United States that keep even the lowest of attainable safe interest rates from producing high enough equity and capital valuations to make it profitable to boost investment enough to push DM economies to anything like full employment.
There have not yet been any convincing stories of how a trend growth drop would have emerged in the absence of the investment shortfall, the labor skills atrophy, and the other channels of "hysteresis" that have been in operation since 2008.
The only major supply shock in the past decade has been a positive one: the unexpected emergence of new hydrocarbon-extraction technologies like tracking. We could have a large adverse hydrocarbon-supply shock from political turmoil at the borders of Muscovy. But we have not yet.
What to expect from interest rates? They will, of course, fluctuate. The modal scenario I see in the United States is one in which the Federal Reserve begins raising interest rates too early--a la Sweden at the start of this decade--and then has to return to the ZLB in a year or two as the economy weakens. The optimistic scenario is that that of the smooth glide-path to the normalized, Goldilocks economy. The pessimistic scenario is another adverse shock hits demand while the Federal Reserve is still too close to the ZLB to effectively respond, and political gridlock gives the United States another lost decade.
What to expect from interest rates? They will, of course, fluctuate. The modal scenario I see in the Eurozone is one of continued waves of crisis as Eurozone breakup fears cause spikes in interest rates in the European periphery, as the ECB then does enough to calm markets but not enough to generate recovery, that Germany makes covert fiscal transfers to keep the pain low enough to keep the Eurozone together--and winds up spending much much more than if it had bit the bullet back in 2000. In that scenario German growth over the medium term remains at best adequate as the chronic Eurozone crisis both diminishes confidence and keeps German exports competitive.
The pessimistic scenario is one of Eurozone breakup--with German interest rates even lower than they are, and peripheral European interest rates high with redoubled risk premium. The optimistic scenario is that somehow, some way, the Confidence Fairy appears and the Eurozone has a smooth glide-path to a normalized, Goldilocks economy.
The source of the chronic crisis is a shortage of aggregate demand coupled with deep structural woes that originated in the decision by German banks to loan massive amounts to the Eurozone periphery. Those loans pushed costs in the Eurozone periphery up to levels that are in strong disequilibrium in the absence of continued capital outflows from Germany.
Since the chronic crisis had a German origin--in the lending decisions of German banks--it is only appropriate that it have a German solution--adjustment via German fiscal expansion and via the implicit real debt writedowns generated by moderate German inflation should be part of the solution.
Back in 1829, the young British economist John Stuart Mill was the first to argue that while in a market monetary economy there would usually be enough spending to employ everyone who could be profitably employed at the wages they demanded, this was not always the case. If and when the economy lacked enough cash and cash-like assets to make households, businesses, and savers as a group happy with their holdings of means of payment and potential collateral, then there would be a "general glut"--an excess demand of cash and collateral--and an excess supply of labor and currently-produced goods and services: what we call a depression.
The provision of those cash and cash-like assets has to be the business of the national or currency-area government--if not of a super-continental monetary and financial hegemon--because no private entity has the power to make its liabilities legal tender and thus the ability to guarantee their acceptance in transactions and as collateral.
The ECB is tasked with this Millian objective of providing the eurozone economy with the means of payment and stores of value--cash and potential collateral--that the economy needs. The ECB is failing.
Fourth quarter-to-fourth quarter real GDP growth in the eurozone in 2013 was 0.5%. Fourth quarter-to-fourth quarter real GDP growth in the eurozone in 2013 looks to be 0.4%. December-to-December inflation in the eurozone in 2013 was 0.9%. December-to-December inflation in the eurozone in 2014 looks to be 0.0%. The ECB's annual inflation target is 1.75%. Given the potential for catchup in the European periphery to higher productivity standards, that can only be attained via nominal eurozone GDP growth of 4%-5%/year. The 1.4% nominal GDP growth we saw in 2013 and the 0.4% nominal GDP growth it appears we will see in 2014 tell us that the ECB has fallen further behind the curve than it was at the end of 2012: 7.2%-points further behind the curve than it was then.
One possibility is that the ECB is failing because it cannot do so, for every time it creates a reserve deposit it does so by withdrawing A high-quality liquid asset from the private market place, and so to first-order leaves the stock of cash plus potential collateral unchanged. Perhaps the ECB cannot carry out its million objective without engaging in what would be regarded as fiscal policy.
Another possibility is the ECB is failing because financial Germany believes that the ECB's target must be not a 1.75%/year inflation target for the eurozone, but a 1.5%/year or less inflation target for Germany--and that Mario Draghi is not powerful enough to overrule financial Germany in the corridors of power in the ECB and hence cannot do whatever it takes.
In this context, I am reminded of Ludger Schuknecht's exchange with Martin Wolf back in 2012, in which Schuknecht said, among others things: "Mr Wolf’s solution... is risk transfer via eurobonds... and demand stimulation via cheaper money and less fiscal consolidation in Germany. But the public and markets have been led to believe in short-term measures for far too long...." "expansionary policies and weak fiscal positions... created the current problems..." "fiscal consolidation and structural reforms... have invariably succeeded wherever they have been implemented..." "any decision to disregard the rules or introduce ill-suited tools such as eurobonds could undermine... confidence..." "Germany must not undermine its role as an anchor of stability via inappropriate and ineffective fiscal stimuli..." "German and European interests are indeed very much aligned and they are reflected in the jointly agreed strategy...": the policies that the eurozone has undertaken over the past 2.5 years were, to his eyes back in 2012, already dangerously radical and already pushing the utmost of the envelope that Germany could allow. Yet now we clearly need more...
Daniel Davies: The World Is Squared--Episode 3: The Greek Calends--A Disquisition on the Nature of Debt: "What is debt?...
...It’s a promise to pay back a specific amount of money at a specific time. Why is it so popular--why do people always seem to end up getting into it? Why, for example, don’t people make more equity investments, buying a share of someone else’s profits and sharing their risks in the way in which Islamic banking is meant to operate?
Over at Equitable Growth: As I continue to try to worry--without great success--the question of just where the increases in financial instability produced by the prolonged period of past and expected future extremely low interest rates and by quantitative easing comes from...
Two sources of risk:
To recap my thinking before now:
Over at Equitable Growth: Nick Bunker picks up the slack left when Reuters pulled the plug on its noble and very useful Counterparties:
Nick Bunker: Where is the wage growth?: "The lack of wage growth is on everyone’s mind...
...Catherine Rampell at The Washington Post considers a variety of reasons for this slow wage growth... but finds one more convincing... a considerable amount of slack in the labor market.... Justin Wolfers presents a related puzzle... at the historical relationship between the unemployment rate and average wage growth.... Jared Bernstein looks at the relationship between wage growth and... [a] labor market slack [measure] developed by... Andrew Levin... [and] finds that the... relationship between slack and wage growth has weakened.... Tim Duy... thinks that Wolfers’s puzzle... isn’t all that puzzling.... The meager wage growth of recent years is just a continuation of a long-term trend highlighted by The New York Times’ David Leonhardt...
Over at Equitable Growth: J. Bradford DeLong: Talking Points for IIF: Modern Capitalism: Growth and Inequality”: 4:00-4:50 pm, Friday October 10, 2014, Ronald Reagan Building
I am going to talk mostly about the U.S. and somewhat less about the North Atlantic, and say only one thing about the world as a whole.
The one thing about the world as a whole: After the Qingming Festival of 1976, the rulers of China recognized that they had lost whatever legitimacy they had ever possessed, that Hua Guofeng and his allies could not manage the situation, and that they needed to adopt the successful-mouse-catchers development strategy, the world has become a more equal place because China and secondarily India have done well. But a continuation is not guaranteed for the next two generations. It may not even be ore likely than not.
The United States primarily and the rest of the North Atlantic to a lesser degree are losing the race between technology and education. We do not need to slow technology; we do need to accelerate education if we are to ever reduce the gap between those at the 20th and 80th income percentiles to a magnitude that does not shame us.
We may not be able to do so with our current educational technologies: we know how to get 1/3 of our populations reaching adulthood a useful college education--but the same educational strategies may well be much less effective for those outside our luckiest 1/3.
A good deal of the rise in inequality outside of the 80-20 education-and-technology factor is also due to our technologies' creation of winner-take-all contests within our economy. It is not clear to me why the economy of 1900 and the economy of 2000 did this, while the economy of 1960 did not.
The rest of the rise is due to a feedback loop by which the rich use their wealth to acquire more political influence to secure the rents that make them even richer so that they can use their wealth to an even greater extent to acquire still more political influence to secure even more rents. We do stand in great danger of building a latifundista society, which will in due course bring with it our Perons, our Pinochets...
Martin Wolf, J. Bradford DeLong, Mohamed El-Erian,
Jason Furman Lawrene Summers.
Over at Equitable Growth: Back before 2008, we neoclassical new Keynesian-new monetarist types were highly confident that the U.S. macroeconomy as then constituted had very powerful stabilizing forces built into it: if the unemployment rate rose above the so-called natural rate of unemployment, the NAIRU, it would within a very few years return to normal. READ MOAR
Over at Equitable Growth: Larry Elliott: IMF warns period of ultra-low interest rates poses fresh financial crisis threat: "The Washington-based IMF said...
...that... the risks to stability... c[o]me from the... shadow banking system... hedge funds, money market funds and investment banks that do not take deposits from the public. José Viñals, the IMF’s financial counsellor, said:
Policymakers are facing a new global imbalance: not enough economic risk-taking in support of growth, but increasing excesses in financial risk-taking posing stability challenges.... Risks are shifting to the shadow banking system in the form of rising market and liquidity risks. If left unaddressed, these risks could compromise global financial stability.
The stability report said low interest rates were “critical” in supporting the economy because they encouraged consumers to spend, and businesses to hire and invest. But it noted that loose monetary policies also prompted investment in high-yield but risky assets and for investors to take bigger bets. One concern is that much of the high-risk investment has taken place in emerging markets, leaving them vulnerable to rising US interest rates.... The IMF said there was a trade-off between the upside economic benefits of low interest rates and the money creation process known as quantitative easing and the downside financial stability risks... developments in high-yielding corporate bonds were “worrisome”, that share prices in some western countries were high by historical norms, and that there were pockets of real estate over-valuation...
I have come to the conclusion that those who say that quantitative easing has increased systemic financial-market risks have simply not thought hard enough about what quantitative easing is. In quantitative easing the central bank takes duration risk off of the private sector's balance sheet and onto the governments, that is, the taxpayers'. The ratio of risk to be borne to private-sector risk-bearing capacity falls. The presumption is that this makes financial markets less, not more, vulnerable to systemic risk. You could tell some kind of complex contrarian story with demand and supply curves that slope in non-obvious ways. But none of those who say that quantitative easing increases systemic risk make such arguments--and if they understood quantitative easing properly, they would understand that they need to and feel impelled to do so.
The argument that ultra-low interest rates and the anticipated continuation of ultra-low interest rates for a considerable time period raises systemic financial risks is less mired in the, well, mire. But it, too, is not obvious. An economy sinks into depression when households, savers, and businesses in aggregate believe that they are short of the assets they need to hold to ensure liquidity--that after subtracting off assets they are holding as savings vehicles they do not have enough cash and enough safe nominal assets that could be pledged to immediately raise cash. As a result, the aggregate of households, savers, and businesses try to cut their spending below their income in order to build up their liquid cash and safe collateral balances; but since my income is nothing more than your spending, they fail and so production, income, and spending fall until the private sector finds itself so poor that it no longer seeks to build up its liquid cash and safe collateral balances.
In such a situation the government, by trading its cash and its safe collateral liabilities for risky financial assets and four currently-produced goods and services both:
creates more of what the private sector wants to hold, and so reduces or eliminates the gap between current and desired holdings of liquid cash and safe collateral.
lowers interest rates and so increases the value of the future relative to the present, providing a direct financial incentive both to spend now on the creation of long-duration real assets and to spend now out of what are now more valuable anticipations of future income.
On the one hand, higher asset valuations and higher levels of production and income greatly reduce the risks associated with financial assets backed by real wealth of one form or another. On the other hand, the tilting of the intertemporal relative price structure greatly increases the incentive to create long-duration financial assets--which will inherently be speculative, and some of which will partake to some degree of the unhedged out-of-the-money put or even the Ponzi nature. Which of these effects will be larger? For small reductions in interest rates, the first-order effect on the value of existing collateral assets in making finance safer will outweigh the second-order creation of new long-duration assets in making finance riskier. To the extent that prudential regulation is effective--or even exists--the range over which reductions in interest rates will improve stability is larger. To the extent that the economy is already flush with long-duration financial assets--which it is--the range over which reductions in interest rates will improve stability is larger.
The first-class study of this I know finds no evidence of the IMF's contention that policies of ultra-low interest rates have laid the foundations for increased risks of systemic financial instability in the United States. Outside the United States? Yes, times of low interest rates in the core are times of opportunity--cheap financing is available to finance economic development--but also times of danger--are their financial markets robust enough to control and manage the hot-money fluctuations?--in the periphery. But how much weight does the argument that prudential policy in the periphery may go wrong have in militating against policies that--correctly--aim at appropriate internal balance in the core?
I am now more inclined to view worries that ultra-low interest rate and quantitative easing policies raise risks of future financial instability as the last-gasp argument of the austerians--as one more attempt to find an argument, any argument, to justify universal bankruptcy and the war on the Keynesian Mammon of Unrighteousness.
Yael Abouhalkahthe: Brownback’s tax cuts aren’t killing jobs on Missouri side of state line: "When he visited Johnson County in August 2012...
...Kansas Gov. Sam Brownback boldly claimed his aggressive tax-cut law would bring wonderful economic dividends to that part of the Kansas City area. “That’s a shot of adrenaline to the heart of this economy,” Brownback said at a forum of small business leaders at Johnson County Community College, pointing out that their profits would be exempt from state income taxes starting Jan. 1, 2013.... Perhaps the single biggest speculation by Brownback’s supporters was that small businesses in Kansas City would hop the state line into Johnson and Wyandotte counties. This would be the final nudge needed, it was said, to escape paying the city’s 1 percent earnings tax, too.... So far, however, all these pumped-up promises by the Brownback camp and all the stoked-up fears of Republican Missouri lawmakers have not come true.... From January 2013 through August 2014, the Kansas side of this area added 5,600 jobs for a growth rate of 1.2 percent. The Missouri side of the region gained 6,900 jobs on a slightly larger employment base, a growth rate of 1.2 percent — the exact same rate as in Kansas....
This debate would be simply something fun to watch except for the many negative effects of Brownback’s self-professed “real live experiment” with the state economy. The tax cuts have led to deeper losses in state revenue than predicted. They have not created a significant growth in jobs that could begin to replace money lost from the tax reductions. The state’s bond rating has been reduced.... But Brownback soldiers on... claim[ing] that job growth has been three times as high on the Kansas side than it has been for the Missouri side of this area... [from] June 2011 through June 2014....
Wait: Why start counting in June 2011 even though Brownback took office five months earlier? A quick look shows why the data cherry-picking occurred....
So far, the tax-cut experiment has sliced state revenues, not been a great boon to Johnson and Wyandotte counties, and not really hurt Missouri-side counties.
Over at Equitable Growth: I think Mohamed El-Erian makes two analytical errors:
He argues that a faster American recovery requires that the private sector "decouple even more from Washington" and undertake "longer-term investments... [to] unleash underused resources and expand longer-term potential... [at the] scale and scope... need[ed] to validate the current level of excessive risk-taking by financial markets lest that, in itself, becomes a consequential headwind to economic growth and stability..." This morning's earnings yield is 5.1%. This morning's 5-year TIPS yield is 0.1%. That five percentage-point spread does not suggest a financial market in which demand for risky assets has outrun supply and pushed risky-asset valuations to levels that are inviting a crash and subsequent financial crisis triggered by the potential bankruptcy of institutions with normal equity cushions. And are there an unusually large number of institutions right now with normal or subnormal equity cushions whose business model is to sell unhedged out-of-the-money puts on a large scale, pocket their winnings until the strategy goes bust, and then declare bankruptcy and walk away? I'm watching. I don't see any concentration of such institutions...
El-Erian assumes that Washington can do nothing. That is not true. Washington may do nothing--it probably well do nothing. But it could do a lot. FHFA head Mel Watt has the power to offer every homeowner in America a refi at conforming-loan rates with an equity-option kicker attached to mortgages that do not have the 20% equity cushion or exceed appropriate conforming-loan limits. Federal Reserve head Janet Yellen has the power to do a Paul Volcker and undertake a regime change to the Federal Reserve's operating procedures and so alter the expected and actual future path of nominal GDP. Either or both of those could powerfully jumpstart the economy over the next two years. The FHFA and Federal Reserve regime change options should be on the table. El-Erian should not overlook them...
Mohamed El-Erian: US midterm elections offer limited prospect for economic change: "The main question is not whether the midterms will change the gridlock in Washington...
...that undermines economic growth, accentuates inequalities, and holds back prosperity; it is whether companies and individuals can decouple even more forcefully from yet another 'do-little' Congress.... There is little chance of change in the polarisation and dysfunction paralysing Congress.... The fiscal stance would not be altered to provide for higher and better balanced aggregate demand; supply responsiveness would not be enhanced by stepped-up investments in infrastructure, education, labour market strengthening and other areas that improve productivity; medium-term operational uncertainty would not be reduced by greater clarity on corporate tax reform; and damaging debt overhangs would not be lifted.... For stock markets to continue to prosper, the private sector would have to decouple even more from Washington.... It would require much bigger emphasis on longer-term investments in areas that, notwithstanding the continued shortfalls in Congress, unleash underused resources and expand longer-term potential. And the scale and scope would need to validate the current level of excessive risk-taking by financial markets lest that, in itself, becomes a consequential headwind to economic growth and stability...
Was it Larry Summers who said that proofs that high-quality central banking couldn't push average unemployment below (and low quality central banking above) the NAIRU should be classified the same way as proofs that it was not possible to either consistently win or lose at poker?
Robert Waldmann: Phillips curves with Anchored Expectations: "I will assume that unemployment is a function of actual inflation...
...minus expected inflation. I will also assume that people are smart enough that no policy will cause them to make forecast errors of the same sign period after period after period.... I will assume that perfect inflation forecasting causes unemployment to be 5%... [and] unemployment is linear in the inflation expectations error.... Under bounded rationality with hypothesis testing.... Forecasting rules are ordered from a first rule to a second, etc. When agents use rule n they also test the null that rule n gives optimal forecasts against the alternative that rule n+1 gives better forecasts. They switch to rule n+1 if the null is rejected at the 5% level.... I will assume that rules are also ordered so if rule n gives persistent underestimates of future inflation, rule n+1 gives higher forecasts.... Learning about the Fed Open Market Committee restarts each time a new Fed chairman is appointed.... The data used to test the current rule against the next one are only those accumulated with the current chairman... [who] are replaced at known fixed intervals...
Now that's more like it, internet!
You all are going to have to wait at least a week more for my to continue my death-march close reading of chapter 11 of David Graeber's Debt: The First 5000 Mistakes--a chapter which I think whose bankruptcy goes well beyond chapter 11 into chapter 7.
For today we have Paul Krugman:
Paul Krugman: Bill Grosses, Idealized and Actually Existing: "Brad DeLong tries at some length to rationalize Bill Gross’s insistence in 2011 that interest rates were about to spike...
...But while it’s nice to be charitable, to attempt to put the best face on someone else’s arguments, it’s also important to look at the argument someone was actually making. And the reasoning of Gross and others was much cruder and a lot more foolish than Brad acknowledges.... Gross wasn’t arguing that rates would rise sharply once people understood that the economy would normalize.... He was arguing that rates were being suppressed right now by the Fed’s purchases of Treasuries, and would spike as soon as those purchases ended.... Not only did it ignore the fundamental reasons rates tended to stay low in a deleveraging world, not only did it overestimate the impact of QE, but it also assumed that the rate of Fed purchases--the flow of QE--was what mattered, when sensible people argued that the stock of assets the Fed held mattered. I wrote all about this at the time. If you find it hard to believe that such a smart guy could make such a poor argument, well, that’s the world we’re living in.
Over at Equitable Growth: I look at the track of the past twelve months' core PCE chain-index inflation:
And I look at the annualized month-to-month changes:
And this is what I see: Over the past 50 months, only 11 have seen core inflation above 2%/year. Of the past 25 months, only 5 have seen core inflation above 2%/year. Of the past 12 months, only 2 have seen core inflation above 2%/year. Any reasonable time-series smoothing-and-forecasting algorithm tells us that PCE core inflation right now is about 1.4%/year. READ MOAR
Needless to say, he has good reason:
Paul Krugman Plays Ming the Merciless: Gross Gone: "I don’t know anything about what’s been going on internally at Pimco...
I just read the same stories as everyone else. I have, however, written a lot about Pimco’s macroeconomic analysis (which drove its bond-investment decisions). The interesting thing is the Pimco was initially a bond bull, based on the correct understanding that deficits don’t crowd out lending when the economy is in a liquidity trap; but it then went off the rails, with Bill Gross insisting that rates would spike when the Fed ended QE2. I tried to explain why this was wrong, and got a lot of flak from people insisting that the great Gross knew more than any ivory-tower academic. But I knew what I was talking about!
I was talking to my neighbor across the street yesterday. He said:
I'm 74. I have to get my knees rebuilt now. I have to get my knees rebuilt before I can't do it anymore. I heard it on the radio. There's going to be no more medical procedures for you after 75. It's because of ObamaCare. It was designed by the mayor of Chicago, Rahm Emmanuel. And he says--he put it into the bill--that nobody should get any medical care after they are 75.
Ya think maybe Rahm Emmanuel's brother Zeke Emmanuel's musing in public right now that he doesn't want any treatment after he is 75 because he doesn't want people in the future to remember him as anything less than sharp as a tack might not have been the smartest thing for him to do if he wants to increase the American public's understanding of our health-care dilemmas?
"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 at 1853 Solano Ave. in Berkeley CA, and to pay Noah 49 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. If however, the above condition is not satisfied, Noah agrees to buy Brad one dinner at Zachary's.
Miles Kimball will be the judge in charge of refereeing the bet. The decisions of the judge will be final and unappealable.
Furthermore, Noah's brave and gracious willingness to take the John Cochrane-Argentina side of this bet at odds of only 50-1 will not be construed as a statement of his confidence in or of his support for any economist or position of economic analysis that judges expansionary fiscal policy at the zero lower nominal interest rate bound to be "insane", or that judges "1932" to currently be a less dire risk for the U.S. than "Argentina".
In retrospect, given Bernanke's unwillingness to split the FOMC over policy, it was grossly unfair of me to give Noah only 50-1 odds:
We now have only ten more data points to see before the bet expires, and the last two data points are now in the average that must be over 5.0%/year for Noah to win. Annualized, the two data points we have are: July: 1.2%/year; August: 0.9%/year. The ten remaining data points must thus average more than 5.8%/year for Noah to win his bet.
And, as I said before, the question remains of what wine we should brown-bag to Zachary's: I am partial to a Chateau Mouton myself, but perhaps better values are had in Haut Medocs or in Francis Ford Coppola's Archimedes, and we could always invite Paul Ryan to come to learn some real economics and drink an Échezeaux, if we felt like following the taste of the House of Valois-Burgogne rather than the House of Plantagenet, and going for wines descended from the Burgundy served to Duchesse Marie la Riche rather than from the Bordeaux served to King Edward IV...
But perhaps the most interesting thing I learn today about my bet with Noah is this: A bunch of the people whose astonishing unwisdom originally provoked it are not marking their beliefs to market and hedging, but rather doubling down:
Caleb Melby, Laura Marcinek and Danielle Burger: Fed Critics Say ’10 Letter Warning Inflation Still Right: "Signatories of a letter sent to then-Federal Reserve Chairman Ben S. Bernanke in 2010...
...are standing by their claims... that the Federal Reserve... risked “currency debasement and inflation”... “distort[ed] financial markets”....
I think there’s plenty of inflation--not at the checkout counter, necessarily, but on Wall Street... at the expense of other things, including the people who saved all their lives and are now earning nothing on their savings....
inflation, [un]employment... destroy[ed] financial markets, complicate[d]... normaliz[ation]... all have happened....
The clever thing... is never give a number and a date. They are going to generate an uptick in core inflation.... I don’t know when, but they will.
Niall Ferguson... saying his thoughts haven’t changed....
This bull market has been accompanied by significant financial market distortions, just as we foresaw. Note that word ‘risk.’ And note the absence of a date. There is in fact still a risk of currency debasement and inflation.
The letter was correct”....
Inflation could come... the nation is not prepared....
All of us... have never seen anything like what’s happened here. This recovery... by far the slowest... in the last 50 years.
Everything has panned out.... If the Fed doesn’t ease money growth into it, inflation could arrive.
Someone’s got to prove to me that inflation did not increase in the areas where the Fed put the money....
Cliff Asness... declined to comment. Michael Boskin... didn’t immediately respond.... Charles Calomiris... was traveling and unavailable.... Jim Chanos... didn’t return a phone call or an e-mail.... John Cogan... didn’t respond.... Nicole Gelinas... didn’t respond.... Phone calls... and an e-mail... to Kevin A. Hassett... weren’t returned. Roger Hertog... declined to comment.... Gregory Hess... didn’t immediately return.... Diana DeSocio... said Klarman stands by the position.... William Kristol... didn’t immediately return a call.... Ronald McKinnon... died yesterday prior to a Bloomberg call.... Dan Senor... didn’t respond.... Stephen Spruiell... declined to comment...
I am sorry that I will never learn what Ron McKinnon would have said--the last time I talked to him, at the San Francisco Fed, he said he was working on some ideas about why and where the enormous money-printing by the Fed had been soaked up.
And I do not know which is worse and less professional:
Asness, Boskin, Calomiris, Chanos, Cogan, Gelinas, Hassett, Hertog, Hess, Klarman, Kristol, and Spruiell; who stand mute.
Grant, Taylor, Ferguson, Malpass, and Wood, and Bove; who claim that the letter's warnings were prescient: "The letter mentioned several things... inflation, employment... destroy financial markets, complicate the Fed’s effort to normalize... and all have happened..."
Holtz-Eakin, Shlaes, and Ferguson (again); who claim it was always the "there are risks!" con: “The clever thing forecasters do is never give a number and a date. They are going to generate an uptick in core inflation. They are going to go above 2 percent. I don’t know when, but they will.”
The only one who emerges from this with any credit at all is Peter Wallison:
But even he gives no further reflections on why the clear and present economic dangers and imminent economic threats he saw back then have shown no signs at all of any existence.
My take: Mark your beliefs to market, people! Learn from history, people! As George Santayana said: "Those who do not remember the past are condemned to repeat it." You can argue that that is a form of justice for you. But it is not a form of justice for us--because your amnesia dooms us to repeat the bad parts of it with you sometime in the future.
It is very clear to me that the Cato Institute's health-care economists Michael Cannon, Jagadeesh Gokhale "Estimating the Effect of the Patient Protection and Affordable Care Act on Kansas Medicaid Expenditures", Should Kansas Expand Medicaid Under the Affordable Care Act? A Perspective On Weighing the Costs and Benefits, and Angela Erickson (Jagadeesh Gokhale and Angela Erickson The Effect of Federal Health Care ‘Reform’ on Kansas General Fund Medicaid Expenditures) did not believe that turning down the Medicaid expansion was in the interest of the people of Kansas. They sold it to the Kansas legislature that way, but what they thought was that if enough states rejected the Medicaid expansion then congressional Democratic support for ObamaCare would collapse and a better deal could then be negotiated at the federal level. It is very clear to me that Arthur Laffer did not believe that Sam Brownback's tax-cut proposals would immediately jump-start Kansas's economy the way he told the Kansas Republican Party that they would.
There was a con.
The question is: who was in on the con? Was it Cannon, Gokhale, Erickson, Laffer, Crane, and company conning Charles Koch? Was it Cannon, Gokhale, Erickson, Laffer, Crane, Koch, and company conning Sam Brownback? Was it Cannon, Gokhale, Erickson, Laffer, Crane, Koch, Brownback, and company conning the Kansas Republican Party? Or was it Cannon, Gokhale, Erickson, Laffer, Crane, Koch, Brownback, the Kansas Republican Party, and company conning the voters of Kansas? I would dearly like to know the inside story...
The University of California Press has put out a new edition of Charles Kindleberger's World in Depression early next year.
J Bradford DeLong and Barry J. Eichengreen: New preface to Charles Kindleberger,* The World in Depression 1929-1939*:
The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening. We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right.
Joshua Brown: “Do we need to fire PIMCO?”: "In February of 2011, [Bill] Gross loudly proclaimed...
[that] Pimco Total Return had taken its allocation to US Treasury bonds down to zero. As recently as the previous December, Pimco Total Return had been carrying as much as 22 percent of its AUM in Treasurys.... Gross compounded the move by being extremely vocal about his rationale--he went so far as to call Treasury bonds a 'robbery' of investors given their ultra-low interest rates and the potential for inflation. He talked about the need for investors to 'exorcise' US bonds from their portfolios, as though the asset class itself was demonic. He called investors in Treasury bonds 'frogs being cooked alive in a pot'. The rhetoric was every bit as bold as the fund’s positioning. It’s really hard to pound the table like this and then be flexible in the aftermath...
So I was updating my basic stock-index return-predictability lecture, and moving the files for it into R, and I made an unwise data transformation in annualizing the monthly return on the stock index:
YRETURN <- MRETURN^12
LNYRETURN <- 12*log(MRETURN,exp(1))
And I got into a surprising amount of trouble...
...from which I was rescued by the bootstrap. Take a look, if you care:
Lives lost from Ebola to date are tiny, even in West Africa, compared to HIV, TB, and malaria. Ebola still not (yet) the biggest public health problem in West Africa.
Yes, the epidemic will spread to more countries.
Ebola will not become the biggest public health problem in West Africa unless deaths reach the high seven figures--which they may: it is highly likely that deaths in the six figures are now baked in the cake.
Unless the virus changes dramatically, we are almost surely safe. If you want to worry, worry that influenza or something already airborne will become more deadly, not that Ebola will become airborne.
Those at risk from the Ebola virus are overwhelmingly (a) those who love them and (b) those medical professionals who treat them--you get it from direct fluid contact with symptomatic patients. Thus risks here in the United States are very low. It is scary, but unlikely to be a serious problem here.
Why, then, are risks high in West Africa? The major problem with control is that there is no functioning health system in most of sub-Saharan Africa. Not only are resources poor, but they are uncoordinated. What we really need is a helicopter drop of trained people.
The health system was especially poor in Liberia. You have issues like no supply of gloves to hospitals. Few doctors even to begin. Had the epidemic started in Ethiopia or even Uganda, the probability of it getting out-of-control epidemic would have been much less--Uganda, for example, has excellent hospitals, good supply, competent public health, and even a decent medical school. Just how bad Liberia’s system was should not be underestimated.
Secondary problems in West Africa are that: (1) Ebola can be difficult to diagnose; (2) Ebola is easily transmitted in cultures where people are expected to die at home in non-sterile and non-antiseptic environments; and (3) Ebola is easily transmitted in cultures where people--still infectious--are prepared for burial at home.
The economic cost of Ebola to the countries most affected is and will be immense, in addition to the loss of life.
In general, we are not well-equipped for some types of global pandemics. The advance from years of nothing on AIDS to stopping SARS in its tracks was immense. But it relies on functional organizations--and we did and do not have any such in the affected West African areas.
Nevertheless, it is surprising how unprepared the WHO and international community was for for this kind of emergency. The WHO is a UN organization, and it is a mistake to expect much bureaucratic competence of UN organizations. Nevertheless, the international response should have been swifter and more effective.
The Ebola crisis is eating up resources in West Africa that are desperately needed in other areas of health and society. It's not so much money as people--doctors pulled in from caring for pregnant women to manage Ebola patients, NGOs working on violence reduction in Sierra Leone now counting the dead. Really sad. We are likely to lose most of the health-care professionals in the most severely affected sub-Saharan African countries.
The importance of investing in strong public health infrastructure--which is both massively underfunded and very cost-effective compared with acute care.
Courtesy of Chris Blattman, David Cutler, Ann Marie Marciarille, and others...
[that] PIMCO Total Return had taken its allocation to US Treasury bonds down to zero. As recently as the previous December, PIMCO Total Return had been carrying as much as 22 percent of its AUM in Treasurys.... Gross compounded the move by being extremely vocal about his rationale--he went so far as to call Treasury bonds a 'robbery' of investors given their ultra-low interest rates and the potential for inflation. He talked about the need for investors to 'exorcise' US bonds from their portfolios, as though the asset class itself was demonic. He called investors in Treasury bonds 'frogs being cooked alive in a pot'. The rhetoric was every bit as bold as the fund’s positioning. It’s really hard to pound the table like this and then be flexible in the aftermath...
Yes, Bill Gross's judgment in February 2011 that U.S. Treasuries were overbought has been an absolute disaster for PIMCO's Total Return Fund vis-a-vis the market portfolio: READ MOAR
Over at Project Syndicate: The extremely sharp but differently-thinking Peter Thiel:
Peter Thiel: Robots Are Our Saviours, Not the Enemy: "Americans today dream less often of feats that computers will help us to accomplish...
...[and] more and more we have nightmares about computers taking away our jobs.... Fear of replacement is not new.... But... unlike fellow humans of different nationalities, computers are not substitutes for American labour. Men and machines are good at different things. People form plans and make decisions.... Computers... excel at efficient data processing but struggle to make basic judgments that would be simple for any human.... [At] PayPal... we were losing upwards of $10m a month to credit card fraud.... We tried to solve the problem by writing software.... But... after an hour or two, the thieves would catch on and change their tactics to fool our algorithms. Human analysts, however, were not easily fooled.... So we rewrote the software... the computer would flag the most suspicious transactions, and human operators would make the final judgment. This kind of man-machine symbiosis enabled PayPal to stay in business.... Computers do not eat.... The alternative to working with computers... is [a world] in which wages decline and prices rise as the whole world competes both to work and to spend. We are our own greatest enemies. Our most important allies are the machines that enable us to do new things...
During the past two weeks the drought of high-quality DeLong smackdowns on the internet has resumed. So it is time to turn back to the promise I made myself on April Fools Day 2013, and see whether the rest of the chapters of David Graeber's Debt: The First Five Thousand Mistakes are of as low quality as the utterly bolixed up chapter 12.
As you will recall, David Graeber is infamous for:
Apple Computers is a famous example: it was founded by (mostly Republican) computer engineers who broke from IBM in Silicon Valley in the 1980s, forming little democratic circles of twenty to forty people with their laptops in each other's garages...
and for having, concurrently and subsequently, offered three different explanations of how this howler came to be written and published:
He has claimed that it it all perfectly true, just not of Apple but of other companies (none of which he has ever named).
He has claimed that he had been misled by Richard Wolff, who taught him about Silicon Valley's communal garage laptop circles of the 1980s.
He has claimed that what he had written was coherent and accurate, but that (for some unexplained reason) his editor and publisher had bolixed it all up.
This passage is, in the words of the very sharp LizardBreath:
The Thirteenth Chime... that make[s] me wonder whether any fact in the book I don't know for certain to be true can be trusted...
And things have gone downhill from there...
Over at Equitable Growth: That U.S. policy since 2008 has been so much more successful than Eurozone policy even though the center of the financial crash was in the U.S., in the desert between Los Angeles and Albuquerque, should have caused the Eurozone to revise its economic policies and move them closer to the more-stimulative policies of the U.S. And it should have caused the U.S. to revise its policies and moved them further away from the hyper-austere policies of the Eurozone. But no.
Joe Stiglitz is, unsurprisingly, in despair:
Joe Stiglitz: [Europe’s Austerity Zombies:a “Austerity has failed. But its defenders are willing to claim victory on the basis of the weakest possible evidence: [that] the economy is no longer collapsing.... To say that the medicine is working because the unemployment rate has decreased by a couple of percentage points, or because one can see a glimmer of meager growth, is akin to a medieval barber saying that a bloodletting is working, because the patient has not died yet.... The long recession is lowering Europe’s potential growth. Young people who should be accumulating skills are not.... Meanwhile, Germany is forcing other countries to follow policies that are weakening their economies--and their democracies.... Privatization of pensions, for example, has proved costly in those countries that have tried the experiment. America’s mostly private health-care system is the least efficient in the world.... Selling state-owned assets at low prices is not a good way to improve long-run financial strength. All of the suffering in Europe... is even more tragic for being unnecessary. Though the evidence that austerity is not working continues to mount, Germany and the other hawks have doubled down on it, betting Europe’s future on a long-discredited theory. Why provide economists with more facts to prove the point? READ MOAR
Charles Evans: Patience Is a Virtue When Normalizing Monetary Policy: "I would like to thank the Peterson Institute and Adam Posen...
...for organizing this conference focusing on labor market issues. The functioning of the labor market is always of great interest to both academics and policymakers. But today, with the collapse of labor demand during the Great Recession and ongoing structural changes, judging the health and future of labor markets is both especially challenging and important. The work presented at this conference and others like it offers an opportunity to integrate the most recent research with the thinking of policymakers. In keeping with this theme, I will first offer my views on the labor market and how the issues raised here influence my thinking on monetary policy, and I will then discuss my more general strategy for considering when and how we should begin to normalize monetary policy.
Paul Krugman: 'Seven Bad Ideas,' by Jeff Madrick: "The economics profession has not, to say the least...
...covered itself in glory these past six years. Hardly any economists predicted the 2008 crisis — and the handful who did tended to be people who also predicted crises that didn’t happen. More significant, many and arguably most economists were claiming, right up to the moment of collapse, that nothing like this could even happen.
Furthermore, once crisis struck economists seemed unable to agree on a response. They’d had 75 years since the Great Depression to figure out what to do if something similar happened again, but the profession was utterly divided when the moment of truth arrived.
Paul Krugman: Those Lazy Jobless - NYTimes.com Last week John Boehner, the speaker of the House, explained...
...People, he said, have “this idea” that “I really don’t have to work. I don’t really want to do this. I think I’d rather just sit around.” Holy 47 percent, Batman! It’s hardly the first time a prominent conservative has said something along these lines.... But it’s still amazing — and revealing — to hear this line being repeated now. For the blame-the-victim crowd has gotten everything it wanted: Benefits, especially for the long-term unemployed, have been slashed or eliminated. So now we have rants against the bums on welfare when they aren’t bums — they never were — and there’s no welfare. Why? First things first: I don’t know how many people realize just how successful the campaign against any kind of relief for those who can’t find jobs has been. But it’s a striking picture.... The total value of unemployment benefits is less than 0.25 percent of G.D.P., half what it was in 2003, when the unemployment rate was roughly the same as it is now.... Strange to say, this outbreak of anti-compassionate conservatism hasn’t produced a job surge.... Why is there so much animus against the unemployed, such a strong conviction that they’re getting away with something, at a time when they’re actually being treated with unprecedented harshness?...
Every time I think that the east and west coasts are too over-bureaucratized I visit the Missouri-Mississippi-Ohio valley and find something like this--and I haven't even gone to the real south, or to Texas.
Remind me again why the Federal Reserve hasn't Incorporated every single American as a bank holding company? It makes payday loans for banks, so why doesn't it make payday loans for individuals? Remind me again please why you don't have a post office small banking and payday loan business?
David Hudnall, in Kansas City:
David Hudnall: A closer look at the Feds' crackdown on two KC-based predatory lenders: "On Wednesday, September 10...
...U.S. Marshals, local law enforcement and a temporary receiver appointed by a federal judge arrived at the headquarters of CWB Services LLC, at 6700 Squibb, in Mission.
Larry Cook, the temporary receiver, ordered all employees present to step away from their desks. Photos and video were taken of the premises. Employees submitted to in-depth interviews and filled out questionnaires about their roles in the company. All items in the office that could contain information about the business — desktop computers, laptops, filing cabinets, phones — were seized.
Over at Equitable Growth: Chicago Federal Reserve Bank President Charles Evans's position seems to me to be the position that ought to be the center of gravity of the Federal Open Market Committee's thoughts right now, with wings on all sides of it taking different views as part of a diversified intellectual portfolio. Charles Evans:
Charles Evans: Patience Is a Virtue When Normalizing Monetary Policy: "At the end of the second quarter of 2014...
...the labor force participation rate was between 1/2 and 1-1/4 percentage points below trend... as much as 3/4 of a percentage point below predictions based on its historical relationship with the unemployment rate.... Virtually all the gap during this cycle has been due to withdrawal from the labor market of workers without a college degree.... If skills mismatch were an ongoing problem, we’d expect to see wages rising for those with the skills in demand.... Pools of potential workers other than the short-term unemployed, notably the medium-term unemployed and the involuntary part-time work force, substantially influence wage growth at the state or metropolitan statistical area level.... Current circumstances and a weighing of alternative risks mean that a balanced policy approach calls for being patient in reducing accommodation.... The biggest risk we face today is prematurely engineering restrictive monetary conditions.... If we were to... reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the ZLB environment.... There are great risks to premature liftoff.... And the costs of being mired in the zero lower bound are simply very large...
Yet Evans is out there on his own--with perhaps Narayana Kocherlakota beside him.[] READ MOAR
: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140917.pdf (￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼Percent Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2014: Advance release of table 1 of the Summary of Economic Projections to be released with the FOMC minutes)
Live Multi Bit Rate Player (1:16 video from September 19, 2014)
This is not good news--it is, in a sense, "mission accomplished" for the wingnuts to have managed to do so much damage so quickly that it reverses their natural partisan political advantage in Kansas. But it is remarkable that the consequences of their policies have been so negative as to make Kansas competitive at all levels...
We see that Pat Roberts has given up arguing that he would be a good senator:
Thomas Beaumont: Sen. Roberts Takes Partisan Tone Campaigning In Crucial East Kansas: "Sen. Pat Roberts of Kansas took his conservative re-election message into the state's swing-voting east...
...Saturday in his latest effort chip away any advantage from independent candidate Greg Orman in a U.S. Senate race that has unexpectedly become one of the most hotly contested in the nation.... Roberts stuck to his argument that the election is a referendum on President Barack Obama and the Democratic-controlled Senate.
That really is the issue: whether (Senate Majority Leader) Harry Reid continues to be a one-man rules committee in the Senate.... Orman is a liberal Democrat and a vote for Harry Reid. That really is the issue....
Orman ran for Senate in 2008 as a Democrat but dropped out of the primary. He has also made financial contributions to President Obama and others. He had also been a registered Republican and made contributions to GOP candidates.
Senator Roberts' increasingly desperate campaign is turning to the only playbook his new handlers from Washington, DC know: throw out a lot of baseless negative attacks, and continue to try to divide people along partisan lines. Kansans of all parties are fed up with the broken system in Washington. They want an independent voice in the Senate, and that's why every day more and more Republicans, Democrats and Independents are supporting Greg Orman for Senate...
...by higher wages. Via Reuters:
Fisher said on Friday he worries that further declines in unemployment nationally could lead to broader wage inflation. To head that off, and also to address what he called rising excesses in financial markets, Fisher said he prefers to raise rates by springtime, sooner than many investors currently anticipate....
I wondered if he was not misquoted or misinterpreted. But he definitely warns that wage growth is set to accelerate in his Fox News interview.... READ MOAR
Over at Equitable Growth: I am still thinking about the best assessment of potential output and productivity growth that we have--that of the extremely-sharp John Fernald's "Productivity and Potential Output Before, During, and After the Great Recession". And I am--slowly, hesitantly, and unwillingly--coming to the conclusion that I have to mark my beliefs about the process of economic technological change to market, and revise them significantly.
Let's start with what I wrote last July: READ MOAR
Over at the
Grauniad Guardian: Why is Thomas Piketty's 700-page book a bestseller? I like Thomas Piketty’s Capital in the Twenty-First Century a lot. It follows Larry Summers’s advice – which I have always thought wise--that the further ahead in time we want to forecast, the further back in time we should look. It deals with very big and important questions. It takes a broad moral-philosophical view, rather than a narrow technical-economist view. It combines history, quantitative estimation, social science theory, and a deep concern with societal welfare in a way that is too rare these days.