Over at Equitable Growth: It is the absence of any recognition of the asymmetric power of the Federal Reserve's policy tools that leaves me most puzzled by the extremely-sharp Marty Feldstein this morning:
Only in 2017 would the real fed-funds rate even exceed 1%.... The Fed is... projecting that its policies will cause unemployment to decline to 5% by the end of 2015 and even lower in the next two years. Historical experience suggests that means inflation would eventually increase year after year.... READ MOAR
Live from the Roasterie: Why the Hegemony of the New Keynesian Model? The baseline New Keynesian model was not, originally, intended to become a workhorse.
It was intended as a proof-of-concept: to demonstrate that introducing very small market-imperfection frictions into a DSGE framework generated very Keynesian-monetarist conclusions. But the extraordinary shortcuts needed for tractability were and are a straitjacket that makes it extremely hazardous for policy analysis. It cannot fit the time series. And when it does fit the time series, it does so for the wrong reasons.
So why require everything to fit in this Procrustean Box? This is a serious question--closely related to the question of why models that are microfounded in ways we know to be wrong are preferable in the discourse to models that try to get the aggregate emergent properties right.
Over at Project Syndicate: The Monetarist Mistake:
Two months ago here, I briefly noted that I had found the best explanation for why the collective economic policymakers of the North Atlantic have left and continue to leave the job of fighting and guiding recovery from our Lesser Depression at most half-done. The best explanation is to be found in my friend, teacher, and patron, Barry Eichengreen’s Hall of Mirrors.
But I have short shrift to both the argument of the book, and to its praise. It is the best book on 2008-present that has yet been written. And Eichengreen’s book’s central argument deserves to be the centerpiece of a much larger discussion. READ MOAR
Over at Equitable Growth: It is always instructive to look at the materials that the Federal Reserve's Federal Open Market Committee pumps out, especially their semi-anonymized (hi, Charlie Evans, with your 3% longer-run value) estimates of what the appropriate federal funds rate would be.
Thus we can see, comparing January 2012 when the Federal Reserve began publishing its dot-plots to today, the Federal Reserve collectively and slowly come to recognize current reality. Back at the start of 2012 the FOMC participants all thought that in the "longer run"--which at the beginning of 2012 I take to be next year, 2016--the federal funds rate ought to be back at its normal mid-expansion level, which they all took to be in the 3.75%-4.5% per year range. Today, of course, only one participant (Charles Plosser?) still thinks the federal funds rate ought to be in that range next year, and at the very bottom of it. READ MOAR
I would like to thank President Williams for his kind introduction and the Federal Reserve Bank of San Francisco for inviting me to what promises to be a very stimulating and important conference.
As you know, last week the Federal Open Market Committee (FOMC) changed its forward guidance pertaining to the federal funds rate. With continued improvement in economic conditions, an increase in the target range for that rate may well be warranted later this year. Of course, the timing of the first increase in the federal funds rate and its subsequent path will be determined by the Committee in light of incoming data on labor market conditions, inflation, and other aspects of the current expansion.
...The bearing of the foregoing theory on the first of these is obvious. But there are also two important respects in which it is relevant to the second.... The removal of very great disparities of wealth and income... through... direct taxation... [is] deterred by... the fear of making skilful evasions too much worth while... of diminishing unduly the motive towards risk-taking, but mainly, I think, by the belief that the growth of capital depends upon the strength of the motive towards individual saving, and that for a large proportion of this growth we are dependent on the savings of the rich out of their superfluity.
Oh, this is going to be fun!
Let's start with J.W. Mason:
...One of Krugman’s bugaboos is the persistence of claims that expansionary monetary policy must lead to higher inflation.... As an empirical matter, of course, Krugman is right. But where could someone have gotten this idea that an increase in the money supply must always lead to higher inflation? Perhaps from an undergraduate economics class? Very possibly--if that class used Krugman’s textbook.
...is mainly due to the way in which the marginal efficiency of capital fluctuates.... By a cyclical movement we mean that as the system progresses in, e.g., the upward direction, the forces propelling it upwards at first gather force and have a cumulative effect on one another but gradually lose their strength until at a certain point they tend to be replaced by forces operating in the opposite direction... until they too, having reached their maximum development, wane and give place to their opposite.... [And] the substitution of a downward for an upward tendency often takes place suddenly and violently, whereas there is, as a rule, no such sharp turning-point when an upward is substituted for a downward tendency....
April Fools' Festival, Day XVII: Note that the Insane Clown Posse picture at the top right is not a happy clown. This is an insane clown. And this is a somewhat dangerous clown...
Shorter Thomas Friedman: Because my cell phone company drops calls when I take the Acela, it is very important that Michael Bloomberg run for President in 2012. He should run on the platform of Obama's policies. Thus he should split the vote for those policies between two candidates, and so raise the chances for Mitt Romney--who is running against those policies--to squeak in.
Paul Krugman is the picador:
...Whenever someone steps up to declare that "Keynesian" economics is logically and empirically flawed... you know what comes next: a series of logical and empirical howlers — crude errors of reasoning, assertions of fact that can be checked and rejected in a minute or two. Levine doesn’t disappoint. Right at the beginning... he says:
Now suppose that the phone guy suddenly decides he doesn’t like tattoos enough to be bothered building a phone.
OK, stop right there. That’s an adverse supply shock, and no Keynesian claims that demand-side policies can cure the economy from the effects of such shocks.
Over at Equitable Growth: A question I will never ask any Federal Reserve policymakers— not in public, not in private. They do not need their elbows jiggled in this way: The decision by the Federal Reserve in the mid-1990s to settle on a 2% per year target inflation rate depended on three facts — or, rather, on three things that were presumed to be facts back in the mid-1990s: READ MOAR
Over at Equitable Growth: Fixed: "Beginning the normalization of policy will be a significant step toward the
restoration entrenchment of... normal abnormal dynamics
...However it is widely expected that the rate will lift off before the end of this year, as the normalization of monetary policy gets underway. The approach of liftoff reflects the significant progress we have made toward our objectives of maximum employment and price stability. The extraordinary monetary policy accommodation that the Federal Reserve has undertaken in response to the crisis has contributed importantly to the economic recovery, though the recovery has taken longer than we expected. The unemployment rate, at 5.5 percent in February, is nearing estimates of its natural rate, and we expect that inflation will gradually rise toward the Fed's target of 2 percent. Beginning the normalization of policy will be a significant step toward the restoration of the economy's normal dynamics, allowing monetary policy to respond to shocks without recourse to unconventional tools... READ MOAR
As I have said (often), I am on Mian and Sufi's side of this argument. But Dean Baker is not without points on his side: "What would our saving rate be if we didn't have [a] debt [overhang]?"
Dean Baker: Question for Brad DeLong and the Debt School of the Downturn: What Would Our Saving Rate Be If We Didn't Have Debt?: "Brad DeLong tells us that he is moving away from the cult of the financial crisis...
Scott Sumner.... 'Simon Wren-Lewis also gets the GDP growth data wrong, in a way that makes austerity look worse'.... Sumner is not using ‘wrong’ and ‘claim’ in their ordinary sense.... What he means is that by choosing to use the (correct) annual data, I’m (accidentally, deliberately?) hiding something important. He then quotes two figures that supposedly prove his case. No analysis, no graphs....
The Federal Reserve:
Today's Must-Must-Read: This is an important point that is worth saying as often as necessary--perhaps as often as possible:
Over at Equitable Growth: Apropos of my too-hot-for-Equitable-Growth, Time for a Rant!: Why Oh Why Cannot We Have Better Economists?, Paul Krugman inquires asks whether:
have forgotten, or perhaps never noticed, was Levine’s rant against me back in 2009, accusing me of failing to understand the depth and power of modern economic analysis.
I cannot remember reading it. It is a doozy--I will put it way down at the bottom. I will cut off the list of errors and just note the first four things I found wrong with it: READ MOAR
...dressed in my TV-from-the-Princeton-studio uniform: dress shirt, jacket, tie, shorts, and sandals (the camera doesn’t pan below the belly button). With me, Andy Serwer of Fortune and Stephen Moore of the WSJ.
In which Robert Lucas demonstrates that he understands first-year macro less well than many horseflies understand Apple's supply chain:
...I've already said I think what the Fed is now doing is going to be enough to get a reasonably quick recovery committed. But, could we do even better with fiscal stimulus? I just don't see this at all. If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that's just a monetary policy.... The only part of the stimulus package that's stimulating is the monetary part....
...TPP... will almost certainly have nothing on currency... It will not make it any easier, and could well make it more difficult, for the United States to address the trade deficit that results from having an over-valued dollar....
J. Bradford DeLong on March 12, 2015 at 09:23 AM in Economics: Growth, Economics: Inequality, Economics: Information, Economics: Macro, Obama Administration, Political Economy, Politics, Streams: Across the Wide Missouri, Streams: Economics, Streams: Equitable Growth | Permalink | Comments (27)
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...The Federal Reserve Banks would open on Saturday so that member banks of the Federal Reserve System could open on Monday. A reporter asked if the banks would be open ‘[a]ll along the line, Mr. President; that is, all functions?’ Roosevelt replied, ‘Yes, all functions. Except, of course, as to gold. That is a different thing. I am keeping my finger on gold.’
The kha-khan Cosma Shalizi smacks me down for seeing the Federal Reserve as afflicted by intellectual errors, rather than as a prisoner of Gramscian top 0.1% hegemony and the revolving door.
He has a point, a definite point.
In a good world the Janet Yellens and the Charles Evanses would be the vital center of the Federal Reserve, not its left wing. And they would be acting as its left wing, pointing out the manifold benefits of labor-force upgrading in a high-pressure economy, the extraordinary quiescence of core inflation, and the continued overoptimism of the Fed model. READ MOAR
Over at Equitable Growth: Adding to a point made in In Lieu of a Focus Post: March 2, 2015 (Brad DeLong's Grasping Reality...):
April Fools Day Is Coming Early This Year/Hoisted from Comments/Live from Le Pain Quotidien: We have, checking back through the archives, a very good question from the estimable Kaleberg:
Kaleberg: Comment on "Noted for Your Afternoon Procrastination for January 2, 2015: "So Robert Lucas rejects the idea of chemistry...
He is commenting on:
Robert Lucas: Economics tries to... make predictions about the way... say, 280 million people are going to respond if you change something in the tax structure, something in the inflation rate, or whatever.... Kahnemann and Tversky haven’t even gotten to two people; they can’t even tell us anything interesting about how a couple that’s been married for ten years splits or makes decisions about what city to live in--let alone 250 million. This is like saying that we ought to build it up from knowledge of molecules or--no, that won’t do either, because there are a lot of subatomic particles.... We’re not going to build up useful economics in the sense of things that help us think about the policy issues that we should be thinking about starting from individuals and, somehow, building it up from there. Behavioral economics should be on the reading list.... But to think of it as an alternative to what macroeconomics or public finance people are doing or trying to do... not in my lifetime...
In their essay last fall on the state of economics, Seth Ackerman and Mike Beggs charged that today’s mainstream is irredeemably captured by conservative ideology. The good news is they’re wrong — Piketty’s work testiﬁes to that.
In the past year, the cyclical employment gap for prime-aged males has shrunk and is now smaller than the structural employment gap:
That is all.
The estimable Miles Kimball emails that after http://www.wsj.com/articles/the-depression-that-was-fixed-by-doing-nothing-1420212315, he wonders whether 1920-1921 is not perhaps worthy of more attention.
I agree that it is a very interesting episode: it appears to be the only time in American history in which significant deflationary pressure did not produce a prolonged, deep, grinding slump. Certainly we see a prolonged, deep, grinding slump today; we saw one in the 1930s; and we think we see one back in the Jacksonian era with Jackson's war on the Second Bank of the United States.
It is time for me to reedit and revise this before I give it again. How should it change? What does it say that no longer needs to be said? What does it not say that now needs to be said?
Zimbabwe!: Here is a piece of currency, a dollar bill. It is from Zimbabwe. It is for $100,000,000,000,000 Zimbabwean dollars.
J. Bradford DeLong on March 02, 2015 at 09:57 AM in Economics: Health, Economics: History, Economics: Macro, History, Long Form, Obama Administration, Political Economy, Politics, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted, Streams: The Honest Broker | Permalink | Comments (6)
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...but averting the prospect of unemployment getting too low, and encouraging the election of Republican presidents--see http://utip.gov.utexas.edu/papers/utip_42.pdf. (It would be good to update that paper with another ten years of data.) The phrase "executive committee of the bourgeoisie" comes to mind. To say it another way--this post, and those of our host's like it, seem far to close to saying: "If only the Little Fathers knew knew what was going on were more careful about their decision theory, they would set things right". And yet, as a wise man used to say often, the cossacks work for the Czar.
I do think it is more complicated than that...
Over at Equitable Growth: Vir illustris Martin Feldstein starts by saying: downward nominal price stickiness is such a thing that we do not have to worry about deflationary spirals in consumer prices. I agree. But I do not understand where his argument ends up:
Live from the Roasterie: For those who missed this last fall...
Paul Krugman on Allan H. Meltzer:
...when you look at the pronouncements of seemingly reputable economists. In May 2009, Allan Meltzer, a well-known monetary economist and historian of the Federal Reserve, had an Op-Ed article published in The New York Times warning that a sharp rise in inflation was imminent unless the Fed changed course...
Over at Project Syndicate: If we as a species can avoid nuclear war; curb those among us who are violent because they are God-maddened, state-maddened, or ethnicity-maddened; properly coordinate global action to reduce global warming from its current intolerable projected path to a tolerable one, adapt to the global warming that occurs, and distribute paying for the costs of that adaptation--well, if we can do all of those things, the human race can have a very bright future indeed.
Some Hoisted from the Archives from Six Years Ago, Most Newer...: Speaking of people who had not done their homework, were spreading lots of wrong information, and who lack the ovaries to have ever marked their beliefs to market or apologize for their purveying misinformation, we have Allan Meltzer starting in February 2009 as the Paul Revere of the coming upward breakout of inflation.
It is a real clown show.
One of the things that was supposed to get done in January but didn't was a revision of this piece--it is now three years out-of-date, after all, and while it is still useful it is less useful than it was, or would be were I to properly review and update it. But it did not get done in January. It is not going to get done in February. So I am putting it up both as a useful (albeit somewhat out of date) resource, but primarily as a reproach to myself to get cracking on the revision in my copious spare time...
FEBRUARY 2012 VERSION: Budgeting and Macroeconomic Policy: A Primer
by J. Bradford DeLong
Budgeting and Macroeconomic Policy: A Primer
Peter Temin's "Two Views of the Industrial Revolution" is a very good paper.
Crafts, Harley, and by now many others--most recently the scarily-smart Robert Allen--have argued that technological change during the British Industrial Revolution was largely confined to the leading sectors. They are opposed by Ashton, Landes, and many, many others--most recently the truly-scarily-smart Joel Mokyr--arguing that the British Industrial Revolution was a broad-based sea-change in economy and society as a whole. The stakes are rather large.
Right now, the financial markets are telling us that for the next 20 years at least they expect not a surplus but rather a shortage of federal debt.
The interest rates at which investors are willing to hold federal debt now and expect to hold federal debt in the future tell us that it is an extraordinary valuable asset
Those interest rates tell us that investors at least think the world economy would be better off with more federal debt than with less. READ MOAR
Over at Equitable Growth: I see that the femina spectabilis Diane Lim is a very unhappy camper:
...‘Critical investments’ and ‘shared prosperity’ are ‘in.’ Deficits are down to an economically sustainable range.... Our policymakers are no doubt relieved to take a break from having to talk about the hard stuff (spending cuts and tax increases) and getting to focus on the nice-sounding stuff (spending increases and tax cuts).... Dismissing fiscal responsibility as a socially irresponsible idea is irresponsible.... READ MOAR
Wikipedia: Vir illustris - Wikipedia, the free encyclopedia: "The title vir illustris ('illustrious man') is used...
...as a formal indication of standing in late antiquity to describe the highest ranks within the senates of Rome and Constantinople. All senators had the title vir clarissimus ('very famous man'); but from the mid fourth century onwards, vir illustris and vir spectabilis ('admirable man', a lower rank than illustris) were used to distinguish holders of high office....
Over at Equitable Growth:
It is Eric Rauchway in the Times Literary Supplement. My only complaints about the review are:
It was more than just the desire of rapidly-growing emerging markets not to find themselves under the hammer of a 1998 that produced the global savings glut. It was increased income inequality in the North Atlantic core, plus increased wealth in the periphery seeking a North Atlantic bolthole as a form of political risk insurance as well and in addition.
Although Keynes argued that deflation was worse than inflation, he sought to avoid both rather than lean on the inflation side.
Keynes did not win at Bretton Woods: Bretton Woods did not mandate symmetrical adjustment. Keynes's victory was partial, and for the most part came after his death: policy during his life was hardly Keynesian.
Summers served Obama; Summers's preferred policies were not adopted by Obama. But that failure was by no means written in the stars. It was contingent--depending on both a Treasury Secretary and senior political advisors who did not understand the situation and on Obama's imprinting on them rather than on Summers. It was a near-run thing, in the United States at least. A much better world is only a butterfly wing-flap away on some alternative quantum frequency of the multiverse.
Here it is:
Eric Rauchway: Debt Piled Up: "Martin Wolf THE SHIFTS AND THE SHOCKS: What we’ve learned--and still have to learn--from the financial crisis. 496pp. Allen Lane. £25. 978 1 84614 697 8 Published: 29 December 2014:
Over the course of his new book on the current economic unpleasantness, Martin Wolf conveys a sense of increasing frustration. He begins with a sober account of recent history and a capsule proposal for how to solve the malaise with which we are confronted, and then begins to evaluate competing accounts and proposed solutions, often with a single word. Here is a non-exhaustive list of those words: nonsensical, simplistic, mistaken, childish, asinine, self-refuting, nonsense, silly, insouciant and grotesquely dangerous, and--most frequently--wrong (at least once, totally so).
Many, many are saying complimentary things. From Sullivan himself comes a much worth-reading self pat-on-the-back about what he regards as his many, many successes intermixed with a cri de coeur about his mistakes in The Arc Of The Dish 2000-2015. IMHO, he pulls a number of punches in his self-criticism, but "my own traumatized loss of judgment... shameful outbursts... my colossal failure of judgment..." is much further than most people go.
Sullivan asks: "What was your favorite moment of Dishness?".
My answer is that when I think of The Dish, I find I don't have a favorite moment. I think of the incompleteness of Andrew Sullivan's self-criticism. I think of him casting himself as Curly of The Three Stooges in his enthusiastic prosecution of the intellectual War on Paul Krugman that, IIRC, began in 2001 with things like:
November 13, 2001: My revulsion at Paul Krugman’s increasingly hysterical attacks on the good faith of this administration...
May 11, 2001: NOSTRADAMUS AWARD: “Ah, but the details. The Krugmans and the Chaits will shortly have a cow, if not a whole herd of them.”... last week. “The Bush Tax Cut Is A Lie--Part I”--by Paul Krugman, The New Republic, this week. “The Bush Tax Cut Is A Lie--Part II”--by Jonathan Chait, The New Republic, same issue. Honest, I had no idea when I wrote my piece.
And, of course, the promises of and forecasts by the Bush administration of the consequences of passing its tax cut did not come true--and if Andrew Sullivan thought in 2001 that it was aimed at improving the lives of "waitress moms", he was the only one.
But the fact that, in general in the 2000s, Paul Krugman was right did not keep Sullivan from continuing to carry on his long, doomed, twilight struggle against realistic assessments of the economic situation. For example:
JUN 21, 2010: The Smug Condescension Of Paul Krugman: Kinsley takes aim:
Krugman himself looks at CBO projections of deficits declining from 10 percent of GDP now to four percent in 2014 before starting to rise again, and concedes that this is 'not enough.' Then he cavalierly says that all you need to solve the problem is (a) to bring health costs under control, and (b) a five-percent value added tax. Oh, is that all? I have no doubt that if Paul Krugman were economic dictator, we could impose these or other solutions. In the real world (or should I say 'unreal world') of current American politics, either one of these partial solutions is unthinkable without a catastrophic crisis to force our hand.
How hard is that to understand?
Well, Paul Krugman's forecast of what would happen to the deficit was correct. We have--at least for now--health-care costs under control without a catastrophic crisis. Not a value-added tax but a carbon tax is definitely on the agenda for 2021 if not 2017. Tuesday night George W. Bush's first Chair of the Council of Economic Advisers, Glenn Hubbard, was speaking besides me and pushing for not a value-added but for the enormous broadening of the tax base that comes from a shift to a consumption tax. And this morning Republican Committee Chairs Burr, Hatch, and Upton called for moving an ever-increasing share of the cost of employer-sponsored health insurance into the tax base as well.
Looks to me--just like back in 2001--like Krugman 3, Kinsley and Sullivan 0.
And it is not as though that piece is an outlier. A quick search through the Dish's archives for most recent mentions of Krugman pulls up these recent headlines:
The "Dick Morris Award" is not complimentary. And somehow I think "Krugman and Frum, Together At Last" is intended to be as uncomplimentary as Sullivan's November 2001 rhetorical attribution to Paul of a disordered womb was intended to be.
My bottom line: Dean Wormer and Spiderman did not say: great rhetorical powers and influence used irresponsibly is no way to go through life...
Needless to say, Emporia State University professor Michael Smith's Wichita Eagle column is dead-on correct...
What 1st amendment? KS politicians introduce bill to ban college professors from criticizing politicians in newspaper columns. (more)— Yael T. Abouhalkah (@YaelTAbouhalkah) February 5, 2015
From The Wichita Eagle:
...or will economic growth save the day?
People have been asking me about this recently, and I keep thinking it is a set of issues I should revisit, reconsider, expand, and write about at length. But I have failed to do so.
So here it is again, hoisted from the archives:
The first school of thought, broadly that of the United States’ Republican Party, was that financial regulation was bad because all regulation was bad. The second, broadly that of the Democratic Party, was somewhat more complicated, and was based on four observations:
Apropos of people regarding the models they teach as ritualistic incantations to be thrown away the moment they contradict their political masters' ideological prejudices...
The way to analyze whether, at the margin, it is raising or lowering government spending that is better for the economy right now is to do a benefit-cost analysis.
Following DeLong and Summers (2012), let the parameters for an economy at the zero lower bound of nominal interest rates and with anchored inflation expectations be:
Let me (surprise, surprise!) back up Paul here: There is no doubt that, technocratically, reflation is the low-hanging fruit to boosting equitable growth. Successfully returning to full employment would boost real GDP in the North Atlantic by 10% today, would boost future economic growth substantially as well, and would lift all economic classes more-or-less equally. No plausible policy shifts to produce "structural reform"--save possibly the "structural reform" of raising the price level in Germany and Holland relative to Italy and Spain by 20%--promises North Atlantic-wide benefits even a fifth as much.
But for many, suppose you were to endorse Keynesian fiscal of Friedmanite monetary régime-change policies right now...
Sokrates Son of Sophroniskos: You are out of your century, and out of your country...
Titus Pomponius Atticus: I claim this to be my country, and here by the docks of the Piraeus to be my place. I am not called "Atticus" for nothing, you know...
Axiothea: Why are you called "Atticus"? It doesn't sound like a very Roman name...
Atticus: I made it up. My father had only two names--good old Titus Pomponius, no claims to triple-barreled noble senatorial-class names he, just an equestrian.