The New York Times > Washington > Social Security, Growth and Stock Returns: In barnstorming the country over Social Security, administration officials predict that American economic growth will slow to an anemic rate of 1.9 percent as baby boomers reach retirement. Yet as they extol the rewards of letting people invest some of their payroll taxes in personal retirement accounts, President Bush and his allies assume that stock returns will be almost as high as ever, about 6.5 percent a year after inflation.
Over at the Washington Center for Equitable Growth: Reading the Federal Reserve’s 2008 Meeting Transcripts: Over at Project Syndicate: Revisiting the Fed’s Crisis: It has been busy days: reading through the transcripts from the 2008 Federal Reserve Open Market Committee meetings in the interstices between pieces of the day job. As I read, I find myself asking the same overarching question: how did the FOMC get into the mindset that it had in 2008?
Oh, there are five voices that seem to me to broadly see and understand the situation.... William Dudley.... Janet Yellen... Eric Rosengren... Rick Mishkin and Don Kohn... get it. But the other members of the FOMC?... The old Federal Reserve had a charismatic, autocratic, bullying, professional central banker at its head: Benjamin Strong, Marriner Eccles, William McChesney Martin, Paul Volcker, Alan Greenspan. When it worked–and it did not always work–the Chair ruled the FOMC with an iron hand and with the near-lockstep voting support of the Governors.... If the Bernanke Fed had been the old Fed–if Rosengren, Yellen, and Mishkin and Kohn on the one hand; and Geithner, Plosser, Fisher, and so forth on the other; had to make their cases to Bernanke in private; and if he had then said “this is what we are going to do” rather than building a within-meeting consensus–would we then have had better monetary policy decisions in 2008? READ MORE
Over at the Washington Center for Equitable Growth: My excerpts of Matthew O'Brien: How the Fed Let the World Blow Up in 2008: "It was the day after Lehman failed, and the Federal Reserve was trying to decide what to do....
The Fed was blinded. It had been all summer. That's when high oil prices started distracting it from the slow-burning financial crisis. They kept distracting it in September, even though oil had fallen far below its July highs. And they're the reason that the Fed decided to do nothing on September 16th... and said that "the downside risks to growth and the upside risks to inflation are both significant concerns." In other words, the Fed was just as worried about an inflation scare that was already passing as it was about a once-in-three-generations crisis.... The world changed on August 9, 2007. That's when French bank BNP Paribas announced that it wouldn't let investors withdraw money.... You can see this credit crunch in the chart... [that] shows the TED spread... during a financial crisis, it blows up: banks charge each other punitively high interest rates, and pile into government bonds they know are safe.... We might [have] muddle[d] through with something like the 1990 recession.... This is the three-chapter story of why that didn't happen, the story of the three Fed meetings that took place during the summer of 2008.... READ MORE
Four years ago:
The Keynesians are certain that deficit spending is contributing much to short-term economic performance, and they are uncertain that it is contributing much to long-term fiscal instability. The Rogoffians are certain that deficit spending is contributing much to long-term fiscal instability, and they are uncertain that it is contributing much to short-term economic performance. I am to the right of the Rogoffians. That is, the U.S. fiscal stimulus is so poorly designed that I doubt that it is contributing anything positive to short-term economic performance. And, given the outlook for Medicare (stare at the table), we cannot afford to be casual about deficits.... Part of me wishes that folks like Brad DeLong and Paul Krugman could be forced to put their money where their mouths are and sell credit default swaps on U.S. government debt. My advice to everyone else would be to take the other side of that trade.
How is that working out for him?
Note: no policy changes since 2010 with any long-run spending and tax oomph except for the Arnold Kling-hated ACA.
And note that the Rogoffians never said that current deficit spending is contributing much to long-term fiscal instability--the Rogoffians were, IIRC, on balance opposed to short-run fiscal contraction, although much in favor (as was I) of putting long-run policies of fiscal restraint in stone...
Over at the Washington Center for Equitable Growth: One of the many, many interesting things in the Federal Reserve's 2008 transcripts is the staff briefing materials for the mid-December FOMC meeting, which include:
Over at the Washington Center for Equitable Growth: I Am Sorry. What Was Tim Geithner Looking at in January 2008?: Saturday Focus: February 22, 2014: "Steven Perlberg:
Tim Geithner January 2008 FOMC Minutes: “The World Is Still Looking Pretty Good”: “In January 2008–right as the U.S. economy entered a recession–the former Federal Reserve Vice Chairman (and later Treasury Secretary) was still very optimistic….
You know, we have the implausible kind of Goldilocks view of the world, which is it’s going to be a little slower, taking some of the edge off inflation risk, without being so slow that it’s going to amplify downside risks to growth in the United States. That may be too optimistic, but the world still is looking pretty good. Central banks in a lot of places are starting to soften their link to the dollar so that they can get more freedom to direct monetary policy to respond to inflation pressure. That’s a good thing. U.S. external imbalances are adjusting at a pace well ahead of expectations. That’s all good, I think. As many people pointed out, the fact that we don’t have a lot of imbalances outside of housing coming into this slowdown is helpful. There’s a little sign of incipient optimism on the productivity outlook or maybe a little less pessimism that we’re in a much slower structural productivity growth outlook than before. The market is building an expectation for housing prices that is very, very steep. That could be a source of darkness or strength, but some people are starting to call the bottom ahead, and that’s the first time. It has been a long time since we’ve seen any sense that maybe the turn is ahead. It seems unlikely, but maybe they’re right. In the financial markets, I think it is true that there is some sign that the process of repair is starting. Having said that, though, I think it is quite dark still out there…. Like everyone else, we have revised down our growth forecast. We expect very little growth, if any, in the first half of the year before policy starts to bring growth back up to potential....
What was he looking at in January 2008 to say that? READ MORE
Damien Pouzo, "A Framework for Modeling Bounded Rationality: Mis-specified Bayesian-Markov Decision Processes" http://events.berkeley.edu/?event_ID=74254&date=2014-02-18&tab=all_events
Janet Yellen: Humphrey-Hawkins Testimony:
Chairman Hensarling, Ranking Member Waters and other members of the Committee, I am pleased to present the Federal Reserve's semiannual Monetary Policy Report to the Congress. In my remarks today, I will discuss the current economic situation and outlook before turning to monetary policy. I will conclude with an update on our continuing work on regulatory reform.
The University of Michigan's Chris House appears to suffer from the searching-for-false-balance disease.
It's not a big deal.
But it is a neat, clean, and comprehensible example of the damage done by the opinions-of-shape-of-earth-differ disease that Chris House and many others have: the net effect is to excuse the bad faith, ideological partisanship, and failure to do their homework on the part of those working to degrade the quality of our public sphere--and to aid in the drip-drip-drip eroding-away at the influence of those working hard to improve it. Not good. Not good...
Chris House: The Wisdom of Laureates: "Ed Prescott... [has the] most people talking...
is quoted as saying:
It is an established scientific fact that monetary policy has had virtually no effect on output and employment in the U.S. since the formation of the Fed....
Prescott is wrong. It is NOT an established fact the monetary policy has no effect on economic activity. The balance of the evidence suggests the opposite. Monetary policy seems to have clear measurable effects on the economy....
Should we grant Ed Prescott, or Paul Krugman, or Robert Lucas, or Peter Diamond much more credence than other smart observers?... Nobel Prize winners have typically devoted their entire careers to a rather narrow study of a particular area.... They are also often radical thinkers.... Academics are rewarded... for having path-breaking ideas.... An academic who has one or two... might well be viewed as... worthy of a Nobel, even if most of their ideas are crazy.... The price we pay for having unusual insights might be that we often have unorthodox approaches.... Prescott didn’t win the Nobel Prize for having a balanced assessment.... This isn’t limited to Prescott. Even Paul Krugman has been known to say some rather nutty things at times.
The biggest bit that is idiocy is the claim that Nobel Prize winners in general are prone to say "rather nutty things" because saying such is closely linked to what makes them Nobel Prize-caliber. Prescott says nutty things--very nutty things, hugely nutty things, completely nutty things--about what is supposed to be the core area of his expert knowledge on a regular basis. But Krugman? Diamond? Lucas might come within two orders of magnitude of Prescott, but not one (or, if every one, only very rarely). And I see whatever wrong things Krugman and Diamond says as at least three orders of magnitude less than Prescott on the nuttiness scale.
So I (and others) asked Chris House where his ideas were coming from: what evidence made him generalize from Prescott; to the quartet of Prescott, Lucas, Krugman, and Diamond; and then to the quartet of Nobel Prize winners in general?
The conversation did not go terribly well. Samples:
Back last August, Jim Tankersley on the erosion of the "Obama=Policy Uncertainty=Depressed Economy" argument:
‘Uncertainty’ isn’t a problem anymore: Another month, another dive in the Stanford/University of Chicago Economic Policy Uncertainty Index. It’s now down to its lowest level since 2008. The index seeks to measure the effect of policy uncertainty, including pending regulations and expiring tax provisions, on the economy. As you may have heard once or twice over the last few years, many conservatives blame uncertainty for holding back hiring and growth in this recovery. Those lawmakers love to cite this index as proof of elevated uncertainty.
According to the index, the decline of uncertainty this year is clear. And the hiring boom that was supposed to follow? Well…
BERKELEY – Back in the late 1980’s, Japan seemingly could do no wrong in economists’ eyes. They saw a clear edge in Japan’s competitiveness relative to the North Atlantic across a broad range of high-tech precision and mass-production industries manufacturing tradable goods. They also saw an economy that, since reconstruction began after World War II, had significantly outperformed the expected growth of European economies. And they saw an economy growing considerably faster than North Atlantic economies had when they possessed the same absolute and relative economy-wide productivity level.
Robert Waldmann: Angry Bear » John Quiggin is, as usual, Brilliant: "John Quiggin provides an excellent discussion of macroeconomics. It is much too good to summarize. Just click the link and read.... [But] I can think of a few things to add:
The claim that medium and long run outcomes are determined by tastes and technology does not imply that there is a unique long run equilibrium growth path.... It is standard in business cycle theory to assume that technological progress is exogenous, but really believing that it is exogenous is much crazier than believing in rational expectations and such....
There was a rather large literature on coordination failures which cause fluctuations (you know Benhabib and Farmer and such like). There was nothing wrong with this literature as math or fun theory. It seems to have vanished....
Actual general equilibrium theory did not stagnate from 1950 on. Actual general equilibrium theorists studied models with incomplete markets in which equilibria can be indeterminate, sunspots can affect outcomes and equilibria are generically not constrained Pareto efficient.
Persistent fluctuations do to aggregate demand were renamed “hysteresis” by Blanchard and Summers in 1986. European data already massively rejected the not-yet developed old-new-Keynesian models. This paper was considered to be relevant to a relatively minor field (the study of strange countries which aren’t the USA) and ignored in mainstream macroeconomics (eg by Blanchard and Quah in 1987). The study of the strange unusual case of developed countries other than the USA didn’t even remain central to the modeling of European macroeconomies by European central banks.
All four points imply that the very widespread conviction among macroeconomists that long run outcomes are unique and determined by exogenous variables had no basis in theory.... The assumption of a unique exogenous long run growth path absolutely does not follow from the D, S, G or E parts of DSGE. It is a separate assumption...
Over at the Washington Center for Equitable Growth Equitablog, I read Mike Koncal and wonder why the market monetarists are declaring that 2013 was a victory for their ideas. Were they happy with the pace of recovery in 2013? Do they think the Fed was happy with the pace of recovery and the trend of inflation in 2013?
As I have said, I used to think that under a “neutral” policy–neither unusually stimulative or contractionary–the U.S. economy would close 40% of the gap between its current position and full employment each year. I have had to give that up: now I’m down to thinking that, at least at the zero lower bound and under conditions of ultra-low inflation, it looks to be 20%. But we haven’t had that 10% gap-closing in the past year. And monetary policy has certainly not been neutral, or perhaps it would be better to say that the Federal Reserve thinks that monetary policy has been dangerously expansionary. That leaves me concluding that fiscal policy is indeed powerful: that contractionary austerity is contractionary, and austere.
So I really don’t understand why the likes of Beckworth and Sumner are declaring that the absence of a return to formal recession in 2013 increases their confidence that fiscal policy does not matter. It does not increase my confidence.
Let me try it this way...
Here's Brad DeLong:
So, by continuity, somewhere between policies of austerity that that produce deflationary depression due to an excess demand for safe assets and policies of fiscal license that produce inflationary boom caused by an excess supply of government debt, there must be a sweet spot: enough new issues of government debt to eliminate the excess demand for safe assets and so cure the depression, but not so much in the way of new issues of government debt to produce destructive inflation, right?
Is continuity assured?
(I'm sorry to pick on Brad, but he made the mistake of writing too clearly, and laying out the implicit assumption too explicitly.)
Over at the Washington Center for Equitable Growth: “Beer Goggles”, Forward Guidance, Quantitative Easing, and the Risks from Expansionary Monetary Policy: Friday Focus (January 17, 2014)...
I forget who it was who told me that one of British classical economist J.R. McCulloch's lines was: "it is straightforward to make of a parrot a plausible political economist--all you need to do is to teach it to say 'supply and demand'. And I have never been able to adequately source the quote.
Jerry Moran Voices Opposition to Janet Yellen Confirmation:
As a member of the Senate Banking Committee, I had the opportunity to ask Dr. Yellen direct questions about her views of our monetary policy. Her answers did nothing to alleviate my concerns about current Federal Reserve policies, including quantitative easing. For five years, the Fed’s asset-purchasing program has masked the true size of our deficit and made it easier for Washington to spend money it does not have. While it has been good for Wall Street, Main Street has been left with limited credit, a higher cost of living, and a lack of job opportunities. We cannot continue on this path without regard to the consequences; massive inflation is around the corner.
How long must "massive inflation" be delayed before Jerry Moran realizes that the economists he has been listening to really do not know what they are talking about, and that neither he nor they are worthy to untie the thong of Janet Yellen's sandals?
Shall we set a date? How about January 2018: If the core CPI inflation rate for 2017 is not 10%/year, Jerry Moran will stand up and apologize, and regret his vote against Janet Yellen, and explain it as a result of his excessive trust in unworthy counselors? How about that?
Science likes to play God. Macroeconomics simply assumes God is a stationary AR(1) process, and calibrates Him.— Noah Smith (@Noahpinion) January 15, 2014
John Howard Brown: Comment on "What Market Failures Underlie Our Fears of 'Secular Stagnation'?":
Although this is argued with your usual eloquence, there is one short-coming that I see. The problem is not a market failure per se. Instead, the problem is one of political economy. The experience of the last thirty years has been increasing financialization of the the United States economy. The removal of regulatory constraint has permitted the financial industry to extract increasing amounts of rent from the real economy. This is one potential source of secular stagnation and is covered above. However, I don't believe that it is the most important source.
Instead, the accumulating rents are deforming the political process. Both parties are largely dependent on the finance industries for their funding. This is manifest both in the ridiculously weak new regulation following the 2008 crisis and in secular stagnation. As Krugman pointed out on his blog last week, along stronger demand would be desirable, weak demand strips workers of bargaining power. Thus it is not in the interests of the plutocrats to see a stronger economy. Income redistribution is the central plank of any attempt to avoid secular stagnation and the demise of democratic self-government.
The first part of our lesson for today consists of a piece based on his AEA presentation by the terrifyingly brilliant Lawrence Summers: Strategies for sustainable growth: "Last month I argued that the U.S. and global economies may be in a period... in which sluggish growth and output, and employment levels well below potential... coincide... with problematically low real interest rates....
This I had planned to push across the line on Sunday. But it is not done--and it is not going to be done by Sunday unless inspiration strikes. Why not? Because I find myself a Bear of Too-Little Brain to think these issues through sufficiently clearly.
Therefore let me push the first draft out the door now, in the hope that somebody smarter than I am will give me an intellectual nudge...
The first part of our lesson for today consists of a piece based on his AEA presentation by the terrifyingly brilliant Lawrence Summers: Strategies for sustainable growth: "Last month I argued that the U.S. and global economies may be in a period... in which sluggish growth and output, and employment levels well below potential... coincide... with problematically low real interest rates....
Since 1950 and before 2007, the way to bet was that, whatever the current gap between U.S. real GDP and potential output was, the U.S. economy would close 2/5 of that gap over the course of the next year with roughly neutral policy. Unusually stimulative policies given the state of the economy would push it up; unusually contractionary policies given the state of the economy would push it down; but the way to bet was that the output gap in a year would be only 60% of its current value, in two years 35%, in three years 20%.
Then came 2008.
Real GDP fell 7.5% below potential output. But--in spite of policies that would have been classified as very stimulative indeed back in 2007--the economy did not then bounce back, closing 2/5 of the gap vis-a-vis potential in each year. Instead, over the past four years the gap has been closed at a pace of only 1/12 per year--and that gap-closing has been accomplished not by real GDP growing faster than the pre-2007 trend but rather by potential output growing more slowly post- than pre-2007.
And toward the end of 2012 two shifts took place in macroeconomic policy:
The thoughtful and hard-working John Aziz on Twitter:
John B. Taylor: "There is little evidence of a savings glut" http://t.co/tquaxSCfbs
Er, what? http://t.co/hv7bP40M1x
Indeed. I cannot follow it either.
John Aziz provides some context and explanation
John Aziz (April 30, 2013): A Visual Representation of the Zero Bound:
This graph shows savings at depository institutions as a percentage of GDP against the Federal Funds Rate. The actual cause of the desire to save rather than consume or invest is uncertain... demographic trend... psychological trend... shortage of “safe” assets... anticipation of deflation.... But whatever it is, we know that there is an extraordinary savings glut. There have been a lot of assertions that interest rates at present are unnaturally or artificially low. Well, what can we expect in the context of such a glut?... Theoretically, lower[ing] interest rates ceteris paribus should inhibit the desire to save, by lowering the reward for doing so. But interest rates cannot fall below zero, at least not within our current monetary system.... Even tripling the monetary base — an act that Bernanke at least believes stimulates an interest rate cut at the zero bound — has not discouraged the saving of greater and greater levels of the national income.... Investors are not finding better investment opportunities for their savings and the structure of production does not appear to be adjusting very fast to open up new opportunities for all of that idle cash.
(for the year-end issue of the Neue Zuercher Zeitung )
In the industrial core of the world economy 1998 saw the trends of 1997 continue. The Japanese economy continued to stagnate. The Japanese government continued to fail to take the obvious steps to end what is now a near-decade of economic stagnation. As Europe approached the eve of its Monetary Union, some continued to fear that EMU would see a great amplification of the size of recessions (as governments gave up their power to use monetary policy tools to stabilize production and employment) while others continued to eagerly look forward to the productivity boom they expected once exchange-rate risk stopped hobbling intra-European trade.The United States continued to see the most favorable inflation-unemployment tradeoff since World War II. But American stock market values continued to be very high multiples of corporate profits. Financial analysts forecast an average of 18 percent growth in corporate profits in 1999. It is hard to see how this can be anything other than "irrational exuberance." When earnings forecasts come back into correspondence with reality the shoe may drop and U.S. stock market values crash.
Paul Krugman reminds me of Noah Smith in July 2012:
Back in 2009 [John] Cochrane predicted inflation, it hasn't happened yet, and DeLong made fun of Cochrane for that fact. Cochrane... [responds] The inflation prediction was (and is) a statement about risks, not a time-specific forecast.... This is a very fair retort. Predictions are not necessarily forecasts...
Naughty, naughty Noah!
Matt Taibi: GrifTopia: from chapter 7:
My contribution to this was to launch a debate over whether or not it was appropriate for a reputable mainstream media organization to publicly call Lloyd Blankfein a motherf---er. This was really what most of the "vampire squid" uproar boiled down to. The substance of most of the freak-outs by mainstream financial reporters and the bank itself over the Rolling Stone piece was oddly nonspecific. Goldman spokesman Lucas van Praag called the piece "vaguely entertaining" and "an hysterical compilation of conspiracy theories." Van Praag even made an attempt at humor, saying, "Notable ones missing are Goldman Sachs as the third shooter [in John F. Kennedy's assassination] and faking the first lunar landing."
But at no time did the bank ever deny any of the information in the piece. Their only real factual quibble was with the assertion that they were a major player in the mortgage market-the bank somewhat gleefully noted that its "former competitors," like the since-vaporized Bear Stearns, were much bigger players.
By the end of the May 2009 NYRB/PEN symposium on "The Crisis and How to Deal with It",, Niall Ferguson was interrupting Bill Bradley to say that he was "not to blame for AIG" and condemning Paul Krugman's calls for expansionary fiscal policy when monetary policy was tapped out at the zero lower bound as "the Soviet model".
None of that made it into the version of the symposium published in the New York Review of Books.
Here's the end of the symposium, with what the NYRB dropped between what was said and what it printed in bold:
Noah Smith has a nice post this morning:
Noah Smith: Risk premia or behavioral craziness?:
John Cochrane is quite critical of Robert Shiller.... He... thinks that Shiller is trying to make finance less quantitative and more literary (I somehow doubt this, given that Shiller is first and foremost an econometrician, and not that literary of a guy).
But the most interesting criticism is about Shiller's interpretation of his own work. Shiller showed... stock prices mean-revert. He interprets this as meaning that the market is inefficient and irrational... "behavioral craziness". But others--such as Gene Fama--interpret long-run predictability as being due to predictable, slow swings in risk premia.
Who is right? As Cochrane astutely notes, we can't tell who is right just by looking at the markets themselves. We have to have some other kind of corroborating evidence. If it's behavioral craziness, then we should be able to observe evidence of the craziness elsewhere in the world. If it's predictably varying risk premia, then we should be able to measure risk premia using some independent data source...
The Sokal Hoax occurred when physicist Alan Sokal conducted a rather mean-spirited cognitive-science experiment on the editors of Social Text: would this journal of post-modern cultural studies publish an article that made no sense at all--that was complete word-salad, and where it was not word salad was wrong? So he submitted ""Transgressing the Boundaries: Towards a Transformative Hermeneutics of Quantum Gravity". And they did indeed publish it.
Now comes Nick Rowe to shakedown Stephen Williamson for making the absurd and wrong argument that quantitative easing is contractionary based on a model Williamson has built that Williamson does not understand. Agreed.
Then he tries to smack down the rest of the economics weblogosphere for failing to agree immediately on just why Williamson was wrong and absurd. Here I disagree: to make any sense of Williamson, you had to add a great deal of coherence mix to his paper to get it to jell. And because you can add coherence mix in a great many different ways, and how his argument was absurd depends on which way it jells, everyone I at least have read has contributed something useful.
And I think "Economics's Sokal Hoax" is much too strong.
Let me sharply, sharply, sharply dissent from this from Scott Sumner, who begins a weblog post:
One amusing sidelight of Nick Rowe’s recent post was all sorts of people agreeing that they can never understand what Izabella Kaminska is talking about (including Nick and I.) The lazy way out would be to assume that Kaminska is a phony...
That is completely wrong. Almost always, almost everybody I talk to who has read Izabella Kaminska (a) understands what she is saying, and (b) thinks it smart. And (c) I agree: it is smart. The occasions on which individual people I talk to who read IK don't understand what she is saying are rare. The occasions on which most of the people I talk to about an IK article think she is confused are even rarer.
Scott is correct in the concluding sentence of his paragraph:
She probably has valuable things to say...
She does. If he doesn't read her regularly, he should. And he owes her a big post highlighting some of the very smart coverage she provides. She is an important art of the press corps that we need to have.
Yes. She is not an expert on either multiple equilibria in models of monetary dynamics or on the disequilibrium foundations of equilibrium economics. So? It isn't her job to be...
I do think that the monoculture they had developed was unhealthy--it did leave them completely unable to even think about the world post-2007 at all.
You can put me down as suspecting that Mark Thoma is right, but I have no insight:
Stephen Williamson: Problems in the Great White North:
You think I'm going to discuss the mess the Mayor of Toronto [Rob Ford] is making in his city, and the embarrassment faced by those of us who have an attachment to the place? Actually, the problem I'm going to focus on is located in Minneapolis--otherwise known as Toronto On a Bad Day. The Minneapolis fracas has some parallels to the Toronto fracas.... Kocherlakota has declared war on his own research department, and seems intent on destroying the place.... If the greater good is supposed to be better policy, then it seems that many sharp macroeconomists beg to differ. So, what's to be done? Like the Mayor of Toronto, Narayana Kocherlakota seems locked in his own bubble. The Mayor of Toronto doesn't seem good for much of anything. He should do the world a favor, resign, and go live as far away from other human beings as possible. Narayana, though, is indeed good for something.... There are plenty of first rate academic research departments that would be happy to give him a good home. Central banking, however, is not his calling, and he should quit--and do everyone, including himself, a favor.
Lawrence Jacobs: Right vs. Left in the Midwest:
MINNESOTA and Wisconsin... in 2010... diverged... began a natural experiment.... Wisconsin elected Republicans to majorities in the Legislature and selected a... Republican governor, Scott Walker.... Which side of the experiment--the new right or modern progressivism--has been most effective in increasing jobs and improving business opportunities, not to mention living conditions?... Three years into Mr. Walker’s term, Wisconsin lags behind Minnesota in job creation and economic growth.... Higher taxes and economic growth in Minnesota have attracted a surprisingly broad coalition...
Three years is too short a time to draw any conclusions about state-level economic policies and economic growth. But if the political differences persist, the two states do make a very good matched pair for comparisons: it's not as though one has oil and the other does not, after all.
On a broader scale, there is the possibility of learning a lot about American political economy by comparing the places where the "throw the bums out" effect of the 2010 election was strong enough to, well, throw the bums out and divert the course of governance from its previous pattern, and where the effect was not.
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Why oh why can't we have a better press corps?
When Larry Summers said::
Even a great bubble [first in high-tech and then in housing] wasn’t enough to produce any excess of aggregate demand.... Even with artificial stimulus to demand, coming from all this financial imprudence, you wouldn’t see any excess...
He wasn't calling for more bubbles. He was pointing out that an economy that can only attain anything like full employment with stable inflation in a bubble is an economy with something deeply and structurally wrong with it--something that needs to be fixed.
Thus when Clive Crook wrote "No, Larry Summers, We Don’t Need More Bubbles" he was either too dishonest to report straight what Summers meant or too stupid to follow the thread of the speech.
There's a moral responsibility here: either raise your game and don't be stupid, or play your hand honestly.
The immersion in the River Lethe that time provides is truly a blessed boon. Unfortunately, today we have internet archives. And so I am cursed as I read my archives to be forced to recall things like this from four years ago: http://delong.typepad.com/sdj/2009/11/truly-a-dark-age-for-economics-in-the-midwest.html.
Here we go:
When last we saw the University of Chicago's Eugene Fama, he was mistakenly claiming that the NIPA savings-investment identity had as its consequence that increases in government spending necessarily could not boost employment and production.
It is hard to characterize the level of this mistake. I would like to say freshman-level, but my freshmen don't make it. At least, those who pass with a grade higher than a D do not.
Barry Ritholtz has been waiting around for the third anniversary of the publication of this remarkable document:
Barry Ritholtz: 2010 Reminder: QE = Currency Debasement and Inflation:
One of my biggest complaints about the media is the lack of accountability. People say things on TV in print an on radio, and then... Poof! No consequences. They influence public perception of issues, affect policy debates, drive legislation. This is a perfect example of a stern warning of currency debasement and inflation due to QE. Let me point out this was made 3 years ago today — hence, it has been terribly wrong. I won’t give you advice--but I keep track of who is consistently wrong, whose histrionic forecasts are both silly and wrong. Their future comments are valued accordingly.
Cliff Asness, Michael J. Boskin, Richard X. Bove, Charles W. Calomiris, Jim Chanos, John F. Cogan, Niall Ferguson, Nicole Gelinas, James Grant, Kevin A. Hassett, Roger Hertog, Gregory Hess, Douglas Holtz-Eakin, Seth Klarman, William Kristol, David Malpass, Ronald I. McKinnon, Joshua Rosner, Dan Senor, Amity Shlaes, Paul E. Singer, John B. Taylor, Peter J. Wallison, and Geoffrey Wood have considerable explaining to do.
And they have done none of it.
If any of them have made any attempt to mark their beliefs to market, or any attempt to explain why their assessment of the situation in November 2010 was so completely and totally wrong, I have not seen it. Neither has Paul Krugman. Neither have others that I have talked to. And we have all been looking. Hard.
So: Cliff: Did you actually invest your clients' money according to the predictions in that letter? If so, how are you still in business? Have you apologized to your clients for losing their money? If not, have you apologized to America for bullshitting us? How do you think differently about the economy today than you did three years ago? So, Mike: What were you thinking? How has the fact that you were so wrong led you to change your mind? And why haven't you written about how your mind has changed? So, Richard: Are you just a pure bullshit analyst--taking extreme positions in the hopes of getting press and paying clients? Or is there actually a reasoned view of the economy back there somewhere? So: Charlie: Same questions as for Mike. So: Jim: Same questions as for Cliff. So: Niall: WTF did you think you were doing? WTF do you think you are doing?...
Attention Conservation Notice: 2600 words reiterating the points made by Reinhart and Tashiro (and also by others like Raghu Rajan) that the East Asian financial crisis of 1997-98 appears to have triggered a permanent downward trend break in economic growth on the Asian Pacific Rim.
November 3-5, 2013: Federal Reserve Bank of San Francisco Asia Economic Policy Conference 2013
Let me second what Alan Taylor said. This, by Carmen Reinhart and Takeshi Tashiro, is another high-quality paper. And it shares the four standard high-quality characteristics of Carmen Reinhart papers: 1. It takes data that we have not looked at before or that we have not looked at in this way before. 2. It presents the data in a very interesting and thoughtful manner that makes us think very hard about important questions. 3. It does not focus on either the trend or the cycle exclusively, but looks hard at the interrelationships between them--interrelationships between the cycle and the trend that are traditionally ruled out, or at least not at the forefront of, our back-of-our-envelope first-cut. 4. It does not bow to current theoretical perceptions, but attempts to focus our attention on what the important and interesting features of the economy are.
Over at Bloomberg News, the smart and very industrious Carmen Reinhart lays out why she fears the debt--thinks that expansionary fiscal policy to rebalance an economy is unwise even when monetary policy is hobbled by the zero lower bound on interest rates and even when long-term interest rates remain low:
Carmen Reinhart: Of Debt, Growth, Interest Rates and History:
Vincent Reinhart, Kenneth Rogoff and I... examined 26 high-debt episodes between 1800 and 2011, looking both at growth rates and at levels of real interest rates. We found that in 23 of the 26 high-debt cases, growth was low as compared with the relevant country’s performance in periods when debt was less. Table 1... sets out this result. You’ll notice it makes clear that the U.K.’s high-debt episode of 1830-1868 is one of the three exceptions...
This gives me an excuse to once again--but for the first time in this space--explain why I cannot follow her to this conclusion.
First, note that I have drawn in red pen all over the Reinhart-Reinhart-Rogoff Table 1. I have scribbled because the fact that growth was slow in Australia, Canada, and the United States as they demobilized from World War II is not a consequence of the fact that World War II left them with high debt-to-GDP ratios. Those data points deserve asterisks. Similarly, Japan's transition from fast growth before 1990 to slow growth afterwards was not a consequence of high debt. That point deserves an asterisk as well.
So what we are left with are three cases in which (a) interest rates remained relatively low or fell and growth accelerated--the UK 1830-1868, Belgium 1920-1926, and the Netherlands 1932-1954--and three cases in which interest rates remained relatively low or fell and growth decelerated--France 1920-1945, New Zealand 1881-1951, Netherlands 1886-1898, and the United Kingdom 1917-1964.
And if I were feeling grinchy, I would point out that high-debt New Zealand's growth tracks non-high-debt Australia's growth exactly from 1881-1951:
And I would demand that that datapoint be asterisked too, leaving us 3-to-3.
Thus the claim fails that historic experience tells us that even if interest rates remain low it is dangerous for growth to undertake debt accumulation of the magnitude we have seen in the North Atlantic since 2007 (or are contemplating when we contemplate expansionary fiscal policy as a way of boosting employment and getting economies moving again).
The claim that such policies are dangerous for long-run growth rests, rather, on the belief that (a) our debt is about to trigger a transition to a period of destructively high interest rates, or (b) we dare not risk the possibility that our debt might trigger a transition to a period of destructively high interest rates. And assessing those arguments requires that we move away from history into theory, for history does not tell us a great deal about the conditions under which countries like the United States today that have the exorbitant privilege of providing safe asset reserves to the global financial system see their interest rates spike.
More on that anon. But for this Monday I just want you to focus on the Paul Krugman chart showing how Britain's high nineteenth-century debt level was perfectly compatible with the then-unprecedented growth acceleration that was the British Industrial Revolution, for that was the impetus for Carmen's Bloomberg column:
Paul Krugman: Three Centuries of Debt and Interest Rates - NYTimes.com:
Aha--somehow I didn’t know this existed. The Bank of England has produced some very, very long-term series; spreadsheet can be downloaded here. Here’s debt and interest rates... the blue line is the ratio of public debt to GDP... the red line is the yield on long-term government debt, measured on the left. You might think that these data, and the relationship they show--or, actually, don’t show--should have some impact on our current debate, especially given the tendency of many players to reject modeling and appeal to what they claim are the lessons of history.
Or are they claiming that this time is different?
And, yes, for those of you following at home without a program, this last line from Paul is a... subtweet... subblog... reference to Carmen Reinhart and Ken Rogoff (and by association Vince Reinhart)--remember that the title of the excellent 2008 Reinhart-Rogoff book about financial crises and their impacts in historical perspective is This Time Is Different: Eight Centuries of Financial Folly
Hoisted from the archives from four years ago:
Andrew Samwick is shrill:
A Question for Peggy Noonan: When Did Our Callous Childhood Begin: A friend pointed me to this column by Peggy Noonan in last week's WSJ, "We're Governed by Callous Children." I think she is right in her main point about a disheartened leadership class in business and a mindless leadership class in government.
The extremely smart Dani Rodrik is meditating this morning on export-led growth miracles, and alternatives: The large, dangerous external imbalances that underpin the fastest-growing economies' performance:
Led by China... [some] developing countries have registered record-high growth rates over recent decades... [plus] advanced economies... such as Germany and Sweden. “Do as we do,” these countries’ leaders often say, “and you will prosper, too.” Look more closely, however, and you will discover that these countries’ vaunted growth models cannot possibly be replicated everywhere, because they rely on large external surpluses to stimulate the tradable sector and the rest of the economy... not all countries can run trade surpluses at the same time.
In fact, the successful economies’ superlative growth performance has been enabled by other countries’ choice not to emulate them. But one would never know that from listening, for example, to Germany’s finance minister, Wolfgang Schäuble, extolling his country’s virtues.... As the Financial Times’ Martin Wolf, among others, has pointed out, the German economy has been free-riding on global demand.
Paul Krugman: Free-Floating Inflation Hysteria:
What remains notable, however, is just what all Republicans are obliged to say: Ron Paul monetary theory has become obligatory:
Vice Chair Yellen will continue the destructive and inflationary policy of pouring billions of newly printed money every month into our economy, and artificially holding interest rates to near zero. This policy has been in place far too long.
So, the Fed began rapidly expanding its balance sheet when Lehman fell — more than five years ago. [What's been] the result of that “destructive and inflationary” policy so far[?] It’s not often that you see an economic theory fail so utterly and completely. Yet that theory’s grip on the GOP has only strengthened as its failure becomes ever more undeniable....
I can, in a way, understand refusing to believe in global warming--that’s a noisy process, with lots of local variation, and the overall measures are devised by pointy-headed intellectuals who probably vote Democratic. I can even more easily understand refusing to believe in evolution. But the failure of predicted inflation to materialize is happening in real time, right in front of our eyes; people who kept believing in inflation just around the corner lost a lot of money. Yet the denial remains total.
I guess it’s a matter of who you’re gonna believe — Ayn Rand or your own lying eyes.
Marc Labonte: The FY2014 Government Shutdown: Economic Effects:
The federal government experienced a funding gap beginning on October 1, 2013, which ended... on October 17, 2013.... This report discusses the effects of the FY2014 government shutdown... reviews third-party estimates... which predicted a reduction in gross domestic product (GDP) growth of at least 0.1 percentage points for each week of the shutdown, with a cumulative effect of up to 0.6 percentage points in the fourth quarter of 2013.... Where detail was provided, most forecasters did not factor in any multiplier or indirect effects of the shutdown. In that sense, the estimates reviewed can be thought of as a lower bound on the overall effects on economic activity.
Paul Krugman: Europe's Inflation Problem :
There are two reasons moderate inflation is actually a good thing for modern economies — one involving demand, one involving supply. On the demand side, inflation reduces the problem of the zero lower bound: nominal interest rates can’t go negative, but real rates can to the extent that modest inflation is embedded in expectations. On the supply side, inflation reduces the problem of downward nominal wage rigidity: people are very reluctant to demand or accept actual wage cuts, which becomes a serious constraint if the relative wages of large groups of workers “need” to fall.
Both problems are very much present in the United States, but they’re even worse in the euro area...
Dave Reifschneider, William Wascher, and David Wilcox: Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy:
The recent financial crisis and ensuing recession appear to have put the productive capacity of the economy on a lower and shallower trajectory than the one that seemed to be in place prior to 2007. Using a version of an unobserved components model introduced by Fleischman and Roberts (2011), we estimate that potential GDP is currently about 7 percent below the trajectory it appeared to be on prior to 2007.
We also examine the recent performance of the labor market. While the available indicators are still inconclusive, some indicators suggest that hysteresis should be a more present concern now than it has been during previous periods of economic recovery in the United States. We go on to argue that a significant portion of the recent damage to the supply side of the economy plausibly was endogenous to the weakness in aggregate demand—contrary to the conventional view that policymakers must simply accommodate themselves to aggregate supply conditions.
Endogeneity of supply with respect to demand provides a strong motivation for a vigorous policy response to a weakening in aggregate demand, and we present optimal-control simulations showing how monetary policy might respond to such endogeneity in the absence of other considerations. We then discuss how other considerations— such as increased risks of financial instability or inflation instability—could cause policymakers to exercise restraint in their response to cyclical weakness.