Over at Equitable Growth: Ah. The debate continues:
Did The Fed Fail To Save Lehman Brothers Because It Legally Couldn't?: "The Fed's lawyers said, after the fact, that no, they didn't have the legal power to bail out Lehman... READ MOAR:
Over at Equitable Growth: Ah. The debate continues:
David Zaring: Did The Fed Fail To Save Lehman Brothers Because It Legally Couldn't?: "The Fed's lawyers said, after the fact, that no, they didn't have the legal power to bail out Lehman... READ MOAR
Over at Equitable Growth: On about four of the seven days in a week, my view is that the problems lumped under the heading of "secular stagnation" are primarily monetary-financial problems. Now comes Barry Eichengreen to review the case that these problems are at their root instead of also technological-fundamental. And I must say he has raised the frequency of my view that the problems are primarily monetary-financial from four days a week to five. READ MOAR
Kevin Hoover: The Poverty of Microfoundationalist Fantasies: "The microfoundationalist’s fantasy has a powerful hold on macroeconomists...
Must-Watch: Really, really bad news for the American economy. Alan Krueger concludes that we are now near "full employment" in a monetary policy-Federal Reserve-inflation sense. The implications? The implications are:
Alan Krueger: Labor Force Participation: <(https://vimeo.com/134932856)>:
Via Mark Thoma.
Alfred Marshall and Mary Marshall (1885), Economics of Industry, Book III: Market Value: Chapter 1: Changes in the Purchasing Power of Money http://tinyurl.com/dl20110818j:
(4) After every crisis, in every period of commercial depression, it is said that supply is in excess of demand. Of course there may easily be an excessive supply of some particular commodities.... But something more than this is meant.... The warehouses are overstocked... in almost every important trade; scarcely any trade can continue undiminished production so as to afford a good rate of proﬁts....
Over at Equitable Growth: Last month the sharp and hard-working Jeff Spross wrote:
Jeff Spross: Why Americans Are so nostalgic About the Manufacturing Industry: "The U.S. still manufactures a lot of stuff, but most of it isn't stuff average American consumers buy...
...These days, we mostly make heavy industrial equipment, circuitry, aircraft, and other big and expensive goods and high-end products.... A lot of manufacturing went overseas... so we get imports for a lower cost, which improves our standard of living. People in other, less developed nations get new jobs, which... improves theirs. A win-win, theoretically speaking. Same goes for rising automation.... But the 1950s economy was also a delicately balanced ecosystem... where wages were good, health and pension benefits... plentiful... job security was high....
Globalization gave certain interests and centers of power in our society the wedge and hammer.... Unions became far weaker, business owners and management got much freer hands, and worker bargaining power collapsed. The economic benefits... weren't broadly shared.... Other Western countries also endured globalization, but managed to keep their levels of inequality lower.... If we'd found some sort of alternative economic strategy for producing those same results, it's unlikely voters or politicians would be nostalgically lamenting any [manufacturing] decline. READ MOAR
Live from Evans Hall (Must-Read If You Could): Jeremie Cohen-Setton**: How Binding Is the Trilemma in a Currency Union?: Evidence from the Fed: The semi-autonomy of the regional reserve banks and...
[Over at Equitable Growth]: The current and the greater onrushing disaster that is macroeconomic policy in the eurozone is, in my opinion, the result of two things:
Setting up a Single currency in the region much broader than any optimum currency area.
Abysmal macroeconomic management by would-be economic hegemons that do not understand that system management needs to keep him employment high and thus make adjustment easy.
Even if dismantling the eurozone is not possible, transferring authority for North Atlantic macroeconomic management as a whole out of Europe is possible.
Ben Bernanke: Greece and Europe: Is Europe holding up its end of the bargain? No: "Is the euro zone’s leadership delivering the broad-based economic recovery that is needed to give stressed countries like Greece…
…a reasonable chance to meet their growth, employment, and fiscal objectives?…. Unfortunately, the answers… are… obvious… (1) the weak performance of the euro zone as a whole; and (2) the highly asymmetric outcomes among countries within the euro zone…. In late 2009 and early 2010 unemployment rates in Europe and the United States were roughly equal, at about 10 percent of the labor force. Today... the unemployment rate in the euro zone is more than 11 percent... a very large share of... younger workers; the inability of these workers to gain skills and work experience will adversely affect Europe’s longer-term growth potential…. [READ MOAR]
Mark Thoma (2011): Where are My Liberal-Neo-Liberal Technocrats?: "Brad DeLong's recent post on 'Left Neoliberals Like Me' brings a response from Arin Dube:
Arin Dube: Dude, Where are my Liberal-Neo-Liberal technocrats? …or… Where Paul R. Krugman from 1996 argues against J. Bradford DeLong in 2011 regarding the political economy of policy-making:
Alfred Marshall and Mary Marshall (1885), Economics of Industry, Book III: Market Value: Chapter 1: Changes in the Purchasing Power of Money http://tinyurl.com/dl20110818j: "If all trades which make goods for direct consumption...
...agreed to work on and to buy each other's goods as in ordinary times, they would supply one another with the means of earning a moderate rate of proﬁts and of wages. The trades which make fixed capital might have to wait a little longer, but they too would get employment when conﬁdence had revived so far that those who had capital to invest had made up their minds how to invest it.
Comment of the Day: Robert Waldmann: The "Structural Problems" Ideology is not Superstructure.: "Brad DeLong notes that Friedman has few disciples and that Hayek has many...
Daniel Davies: What would the German export sector look like?: "German Economic Thought and the European Crisis...
...What would the German export sector look like?
Just consider what the state of Germany’s export sector would be right now if Germany were not part of the euro, and had the real exchange rate of Switzerland.’
I’ve considered it, and I think the answer is actually ‘more or less the same’.
Over at Project Syndicate: Depression’s Advocates: Back in the darker days of late 2008 and 2009, I had one line in my talks that sometimes got applause, usually got a laugh, and always made people more optimistic. Because the North Atlantic had lived through the 1930s, I would say, this time we will not make the same mistakes policymakers made in the 1930s. This time we will make our own, different--and hopefully lesser--mistakes.
Over at Equitable Growth: most interesting thing about this, looking back, is my failure to fully believe--in spite of Japan since 1990, in spite of the global savings glut, in spite of so many things that make it seem obvious in retrospect--that the naive Hicksian short run--which had already lasted for three years--could last for, potentially, more than ten years:
The Interest Rate That Did Not Bark in the Night: The Surge in U.S. Treasury Debt and the Non-Reaction of Rates (Summer 2011): At the very start of the 2000s in the years of the Clinton budget surpluses--remember those?--the U.S. government was repaying its debt at the rate of $60 billion a quarter: each quarter saw $60 billion less of U.S. Treasury debt out there in the private market for savers to hold.
An excellent choice by the IMF: Maurice Obstfeld becomes the new Blanchard: "Living up to Mr Blanchard will be difficult...
...One insider remarked that while Mr Obstfeld should do:
much better than his co-author Rogoff did as Director at the Fund in terms of getting good results [and] influencing the Board... no one is Blanchard. Any economist in the world would have a huge gap to do even part of what Blanchard accomplished.
Not, mind you, that Ken Rogoff did at all badly badly in speaking the technocratic truth that is the IMF Research view of the world to the power that is the IMF Managing Director and Board's role in global economic governance...
Must-Read: Dean Baker: The 2001 Recession Actually Was Really Bad News: "I see that I have to disagree with Brad DeLong again...
...Brad wants to see the 2008 downturn as a uniquely bad event due to the overextension of credit and the ensuing financial collapse. I see it as overwhelmingly a story of a burst housing bubble and the resulting fallout in the real sector....
Over at Equitable Growth: It is a commonplace among Anglo-Saxon economists that Saxon-Saxon "ordoliberalism" was a post-World War II success only because somebody else--the United States--was both looking after the level of demand in the system as a whole, and also willing to act as an importer of last resort to allow other countries that had insufficient domestic demand to use the United States consumer to rebalance their individual economies at full employment even when domestic demand was grossly insufficient. READ MOAR
Over at Equitable Growth: The very sharp Nick Rowe has a useful piece today giving the baby-step intuition behind Schmidt and Woodford's argument that, no, expected and actual inflation do not as a rule decline one-for-one when a central bank lowers nominal interest rates:
Nick Rowe: Understanding Schmidt and Woodford on Neo-Fisherianism: "Suppose you are really bad at algebra... can't solve...
...X = 0.5X. So you make a tentative first guess at the answer, say X=1, plug your guess into the right hand side, get X=0.5, which is your second guess, which you plug into the right hand side again, to get X=0.25, which is your third guess, and so on. Eventually your guesses converge to X=0... tatonnement (groping) towards the answer, just like the Walrasian auctioneer who solves the supply and demand equations in micro by raising prices if there's excess demand, and cutting prices if there's excess supply. But... if the equation is X = 2X... your guesses will diverge further and further away from the right answer.... READ MOAR
###Some Talking Points from Fall 2014:###
Over at Equitable Growth: I never turned this into a proper piece...
At some deep level, the overwhelming problem is that Eurocrat elites--and, to a remarkably and unhealthy degree, American elites and not just republican legislators--believe that:
We are indeed trapped in the sewer of Romulus... READ MOAR
Over at Equitable Growth: The big cost to the Eurozone of Greece's exit is that then the Eurozone becomes transformed from a currency union into a fixed exchange rate system, and fixed exchange rate systems are unstable. Therefore the economic integration an increased prosperity that was anticipated from the currency union will vanish. READ MOAR
Live from La Farine: Theodoric of York, Medieval Eurozone Technocrat:
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.
Both the existence of these parallels and their tragic nature would not have escaped Charles Kindleberger, whose World in Depression, 1929-1939 was published exactly 40 years ago, in 1973. Where Kindleberger’s canvas was the world, his focus was Europe. While much of the earlier literature, often authored by Americans, focused on the Great Depression in the US, Kindleberger emphasised that the Depression had a prominent international and, in particular, European dimension. It was in Europe where many of the Depression’s worst effects, political as well as economic, played out. And it was in Europe where the absence of a public policy authority at the level of the continent and the inability of any individual national government or central bank to exercise adequate leadership had the most calamitous economic and financial effects.
David Glasner: Trying to Make Sense of the Insane Policy of the Bank of France and Other Catastrophes: "I have occasionally referred to the insane Bank of France...
...or to the insane policy of the Bank of France, a mental disorder that helped cause the deflation that produced the Great Depression. The insane policy began in 1928 when the Bank of France began converting its rapidly growing stockpile of foreign-exchange reserves (i.e., dollar- or sterling-denominated financial instruments) into gold. The conversion of foreign exchange was precipitated by the enactment of a law restoring the legal convertibility of the franc into gold and requiring the Bank of France to hold gold reserves equal to at least 35% of its outstanding banknotes.
Over at Equitable Growth: Introduction
Olivier Blanchard, when he parachuted me into this panel, asked me to “be provocative”.
So let me provoke:
My assigned focus on “fiscal policy in the medium term” has implications. It requires me to assume that things are or will be true that are not now or may not be true in the future, at least not for the rest of this and into the next decade. It makes sense to distinguish the medium from the short term only if the North Atlantic economies will relatively soon enter a régime in which the economy is not at the zero lower bound on safe nominal interest rates. The medium term is at a horizon at which monetary policy can adequately handle all of the demand-stabilization role. READ MOAR
Must-Must-Must Read in Its Entirety: The reason that I find the Princeton Economics Department's refusal to tenure Pierre-Olivier Gourinchas in the early 2000s incomprehensible, save as the sign of a massive collective cognitive disfunction:
Pierre-Olivier Gourinchas (2002): Comment on Blanchard and Giavazzi: "This is a very nice paper...
...It is simple and intuitive and elegantly fits an interesting fact to the theory. Blanchard and Giavazzi argue that large current account deficits in Portugal and Greece, two small and relatively poor members of the European Union, are exactly what the neoclassical growth model predicts should happen when such economies integrate their financial and goods markets with the rest of the world. And that these large deficits are not cause for worry.
ABSTRACT: I have a problem here: This talk was supposed to take place after the spring 2015 revision of the Greek program. It was supposed to use that revision as a springboard to launch into (a) the extent to which the current macroeconomic difficulties of Europe are caused by the euro, (b) the difficulties of burden-sharing within the eurozone, and (c) what the political-economic options were for turning the euro zone into enough of an optimum currency area for the euro to make economic sense for the continent. Clearly, this is all now down the drain: On August 7, we will have to talk about... whatever we think we should talk about. It may be what I originally planned. It may by options for and consequences of Greek exit from the eurozone. It may be the road from 2010 to 2015...
Comment of the Day: Robert Waldmann: Department of "Huh?!": Greek Exit Scenario Evaluation: "I am puzzled too [by Daniel Davies]...
...I note that the tragedy for Greece assertion is an aside. I will sincerely try to understand:
This strongly suggests to me that of the 7%-points by which Greek growth fell below IMF estimates in 2010-2011, 5%-points of that were due to the fiscal consolidation that the IMF had forecast would be imposed on Greece. Consider that the IMF had already expected the Greek economy under baseline to shrink by 4%-points, and for fiscal consolidation to shrink the Greek economy by 3%-points, and we have 4/5 of the damage to the Greek economy--relative to a counterfactual forecast under some zero-spending-austerity baseline was due to austerity.
I find this hard to square with the very-sharp Olivier Blanchard's contribution of today: READ MOAR
Over at Equitable Growth: I truly do not understand this argument by the very sharp Daniel Davies:
Daniel Davies: Comment on Greece, Decision Theory, and the Sure-Thing Principle: "If Greece stays in the Euro it is likely to need constant transfers forever...
...If it leaves, but stays in the EU, then these can be reduced from a level in the tens of billions to something like what Romania or Bulgaria get....
The reason, of course, the transfers can then be reduced is that a Greece out of the euro re-denominates its debt in Greekeuros--drachmas--which go to a substantial discount vis-a-vis the euro, thus devalues, begins to have an export boom, and sees a strong economic recovery. What's the problem? READ MOAR
Hoisted from Other People's Archives from Five Years Ago: Paul Krugman** (2010): The Conventional Superstition: "Calculated Risk points us to a speech by Kevin Warsh...
that strikes me as almost the perfect illustration of the predicament we’re in, in which policy is paralyzed by fear of invisible bond vigilantes. Warsh isn’t an especially bad example — but that’s the point: this is what Serious People sound like these days. The bottom line of Warsh’s speech — although expressed indirectly — is that it’s time for fiscal austerity, even though the economy remains deeply depressed; and no, the Fed can’t offset the effects of fiscal contraction with more quantitative easing. In short, the responsible thing is just to accept 10 percent unemployment. And why is this the responsible thing? On fiscal policy:
Over at Equitable Growth: Paul Krugman succumbs once again to shrill unholy madness: Ph'nglui mglw'nafh Friedman R'lyeh wgah'nagl fhtagn!! This time it is over the observation that, as I put it:
Over at Equitable Growth: Dean Baker once again marvels at the Washington Post's inability to figure out that the calculus of debts and deficits is fundamentally different today than back in the early 1980s. When long-term interest rates on government debt are 2%/year below the growth rate of the economy, things are very different from what they are when they are 3%/year above the growth rate of the economy. READ MOAR
Over at Equitable Growth: Angel Ubide writes:
"Pre-Syriza growth" would return Greek GDP to its 1975-1999 trend... never.
"Pre-Syriza growth" was at a pace that would not return Greek real GDP to the 2007 level of the 1975-1999 trend (if you think that was Greece's "real" potential output in 2007) until... 2023. READ MOAR
Arthur Goldhammer: The Old Continent Creaks: Austerity and the failures of the technocratic elite have created the current populist backlash. France’s experience is instructive—and, possibly, ominous:
What’s the matter with Europe? Wherever one looks these days, there are signs of deep trouble. Economic growth has stagnated. Deflation threatens. Unemployment is rampant in many member states of the European Union. Support for the former mainstream parties of the center-right and center-left is waning. Populist parties of the far right and far left are on the rise. Anti-Islamic movements such as PEGIDA in Germany have attracted worrisome support, while in France the xenophobic National Front has topped all other parties in recent polls. Terrorist attacks by native-born citizens in Paris and Copenhagen have raised fears that the social fabric has irreparably deteriorated—fears compounded by the flight of several thousand young Europeans to join the Islamic State in Syria. And to top it all off, Ukraine has been racked by civil war and threatened with disintegration since Russian-backed separatists rejected the rule of the government in Kiev.
The parallels with the antinomies of the thought of the Ludwig von Mises of today--John Taylor--are, I think, rather striking:
In looking up some sources for my previous post on the gold-exchange standard, I checked, as I like to do from time to time, my old copy of The Theory of Money and Credit by Ludwig von Mises. Mises published The Theory of Money and Credit in 1912 (in German of course) when he was about 31 years old, a significant achievement. In 1924 he published a second enlarged edition addressing many issues that became relevant in the aftermath the World War and the attempts then underway to restore the gold standard. So one finds in the 1934 English translation of the 1924 German edition a whole section of Part III, chapter 6 devoted to the Gold-Exchange Standard.
Keynes says that they must be "inexperienced persons".
John Maynard Keynes (1936): The General Theory of Employment, Interest and Money: Chapter 19: Changes in Money-Wages: "The method of increasing the quantity of money...
...in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former...
John Maynard Keynes (1936): The General Theory of Employment, Interest and Money by John Maynard Keynes: "A moderate increase in the quantity of money...
...may exert an inadequate influence over the long-term rate of interest [to restore full employment], whilst an immoderate increase may offset its other advantages by its disturbing effect on confidence...
Comment of the Day/Early Monday DeLong Smackdown: Robert Waldmann: Comment on "More Musings on "Monetary Economics": "Also:
it is not the case that curing the excess demand for safe and liquid assets always requires painful 'liquidation' and austerity...
is true but doesn't go very far.
Over at Equitable Growth: There is, I think, a profound reason why those who have been able to understand the business cycle over the past two centuries have been those who have defined themselves as doing "monetary economics", and those who have not been able to understand the business cycle have not...
Let us remember the days when the Old New Republic, under the ownership of Marty Peretz and the editorship of Franklin Foer put forward people who are, shall we say, not very quantitative to make "the case against Keynes... [and] Krugman", and for austerity.
William Galston (June 2010): The Case Against Keynes (With Some Questions for Krugman, Too): "As President Obama’s bipartisan fiscal commission gets set to convene...
J. Bradford DeLong on July 01, 2015 at 05:52 AM in Economics: Macro, Information: Better Press Corps/Journamalism, Moral Responsibility, Streams: (Monthly) Old New Republic, Streams: (Tuesday) Hoisted from Archives, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (3)
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Samuel Brittan--who I believe is extremely perceptive and penetrating (although not at all unsympathetic)--on Friedrich Hayek. From 'Hayek, Freedom, and Interest Groups,' in The Role and Limits of Government (London: Maurice Temple Smith, 1983):
The first page of the first chapter of Hayek's own Constitution of Liberty starts with the sentence:
We are concerned in this book with that condition of men in which coercion of some by others is reduced as much as possible.
J. Bradford DeLong on June 30, 2015 at 10:45 AM in Economics: History, Economics: Information, Economics: Macro, History, Moral Responsibility, Political Economy, Politics, Streams: (Tuesday) Hoisted from Archives, Streams: (Wednesday) Economic History, Streams: Economics, Streams: Equitable Growth, Streams: Highlighted | Permalink | Comments (0)
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Comment of the Day: Charles Steindel: Monday Austrian-Economists Smackdown: The "Hangover Theory" of the 2008-2009 Crash Fails Because of Timing: "Yes, the housing slump started well before the actual recession...
Comment of the Day: Charles Steindel: State-Level Fiscal Policy: "Well, yes, taxes aren't the largest factor in location decisions...
...but of that list, which can state governments fairly readily control?
David Glasner: "[Murray] Rothbard’s selective quotation from the memorandum summarizing Strong’s 1928 conversation...
with Sir Arthur Salter, which I will discuss below, gives a very inaccurate impression of Strong’s position on money management...
Over at Equitable Growth: By coincidence, two people this past weekend have soberly informed me of what they call a "hard truth": that nationwide employment simply had to go down in 2008 and 2009.
You see, they said, we had to move people out of me industry of building houses and the occupations connected to that industry, and it was impossible to do that without lowering employment. READ MOAR
Three things strike me while rereading Schumpeter's 1934 "Depressions" (and also his 1927 Explanation of the Business Cycle):
How much smarter Schumpeter is than our modern liquidationists and austerians--he says a great many true things in and amongst the chaff, which is created by his fundamentally mistaken belief that structural adjustment must be triggered by a downturn and a wave of bankruptcies that releases resources into unemployment. How much more fun and useful it would be right now to be debating a Schumpeter right now than the ideologues calling for, say, more austerity for and more unemployment in Greece!
How very strange it is for Schumpeter to be laying out his depressions-cause-structural-change-and-growth theory of business cycles at the very same moment that he is also laying out his entrepreneurs-disrupt-the-circular-flow-and-cause-structural-change-and-growth-theory of enterprise. It is, of course, the second that is correct: Growth comes from entrepreneurs pulling resources into the sectors, enterprises, products, and production methods of the future. It does not come from depressions pushing resources into unemployment. Indeed, as Keynes noted, times of depression and fear of future depression are powerful brakes halting Schumpeterian entrepreneurship: "If effective demand is deficient... the individual enterpriser... is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros.... Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough..."
How Schumpeter genuinely seems to have no clue at all that the business cycle is a feature of a monetary economy--how very badly indeed he needed to learn, and how he never did learn, what Nick Rowe and company teach today about the effects of monetary stringency on economic coordination.
Joseph Schumpeter (1934): [Depressions: What Can We Learn from Past Experience?](https://books.google.com/books?id=WVMUGqMU5bAC&pg=PA115&dq=schumpeter+depressions+are+not+simply+evils,+which+we+might+attempt+to+suppress&hl=en&sa=X&ei=rQ2QVZTfHsnvoASqpYaAAw&ved=0CCwQuwUwAg#v=onepage&q=schumpeter depressions are not simply evils, which we might attempt to suppress&f=false)
The problems presented by periods of depression may be grouped as follows: First, removal of extra economic injuries to the economic mechanism: Mostly impossible on political grounds. Second, relief: Not only imperative on moral and social grounds, but also an important means to keep up the current of economic life and to steady demand, although no cure for fundamental cases.
Third, remedies: The chief difficulty of which lies in the fact that depressions are not simply evils, which we might attempt to suppress, but--perhaps undesirable--forms of something which has to be done, namely, adjustment to previous economic change.
Must-Read: And my loyal readers inform me that the only even half-economist half-clown they have seen carrying water for Jeb Bush's 4%/Year Growth Plan is... John Cochrane.
I do not know why back in 2008 John Cochrane decided to start turning himself into a clown. But he did. And now he is three-quarters of the way there.
Matthew Yglesias: Jeb Bush's 4% Growth Promise Is 104% Nonsense: "Asked by Reuters to describe his thought process...