Brad DeLong

Ken Rogoff (1998) on Optimal Policy in a Liquidity Trap

Ken Rogoff: Comment on Paul Krugman: "It's Baaack: Japan's Slump and the Returnof the LiquidityTrap":

Kenneth Rogoff: This is a truly inspired paper on Japan's ongoing "Great Recession," although I have to keep pinching myself to ask if its main thesis can really be true. Is the equilibrium (full-employment) medium-term real interest rate for Japan actually negative, so that un- less the Bank of Japan (BOJ) resigns itself to sustained inflation, the zero bound on nominal interest rates will present serious problems? Has the BOJ so thoroughly convinced the public of its anti-inflation credibility that it has lost the power to rekindle inflation now that Japan needs it?

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

Eric Rauchway:

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

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

http://eurofuture2013.wordpress.com

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

---

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

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

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

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

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

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

Paul Krugman: Europhilia, Euromania, Eurocrisis

Paul Krugman:

Tim Duy asks, when can we all admit that the euro is a failure? The answer, of course, is never. Too much history, too many declarations, too much ego is invested…. Even if the project ends in total disaster, they will insist that the euro didn’t fail Europe, Europe failed the euro.

But it it occurs to me that it might be a good idea for me to recapitulate my view of what really ails Europe, and what could yet be done.

The Future of the Euro: Lessons from History

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

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

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

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

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

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

9:00 a.m. Political Union

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

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

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

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

10:45 a.m. Coffee and Refreshments

Global Trends in Inequality Are Not the Result of Local Factors: Tuesday DeLong Smackdown Watch

Kindred Winnekoff:

Global Trends Are Not Caused by Local Factors: Brad DeLong describes three types of inequality: 1. Global inequality, which was expanding from 1800-1975, and receding since (due primarily to China and India). 2. US inequality, which was declining from 1925-1980, but increasing since, in two ways: 2.a. The separation of the top 20% from the bottom 80%, partially as a function of college wage premium. 2.b. The separation of the top 0.1% from the rest of the top 20%, for reasons unexplained. 3. The rise of the top 1% globally -- the development of a new international plutocracy -- since... 1980 or so?

For reasons that escape me he does not link the three together…. This is something that has disappointed me about the conversation regarding American inequality over the past few years more generally. (I've written about it before.) Folks like DeLong, Krugman, Cowen, and others think in global terms quite frequently. But when they seek to explain the Great Stagnation and the rise of inequality they concern themselves almost entirely with local explanations. I think such analyses are very likely to suffer from omitted variable bias.

Around the 43rd minute, DeLong takes a direct question about this from the audience. He answers it fairly well, but still downplays the role of the global economy in influencing outcomes in the US, favoring cultural explanations (e.g. explosion of CEO pay) and changes to marginal tax rates. He does not consider that these might be related to global dynamics either. If global forces eroded the bargaining power of American Labor, then maybe that's why society has tolerated the enormous increase in executive pay. If global forces are pressuring American corporations through new competition, then maybe we've cut top-end taxation in an attempt to gain back some competitiveness.

Tyler Cowen: Cyprus "Leaves the Euro"

Tyler Cowen:

What to look for in the Cyprus deal: The capital controls will have to be strict. What will the price of a Cypriot euro be, relative to a German euro? 50%? I call this Cyprus leaving the euro but keeping the word “euro” to save face.

Comment on Ricardo Reis (2013, forthcoming), "Mis-Allocation of Capital Flows: The Portuguese Lost Decade(s) and the Euro-Crisis", Brookings Papers on Economic Activity

Comment on Ricardo Reis (2013, forthcoming), "Mis-Allocation of Capital Flows: The Portuguese Lost Decade(s) and the Euro-Crisis", Brookings Papers on Economic Activity:

Nineteen years ago I was sitting in this exact same seat, in this exact same room. I don't think David Wessel was sitting behind me--I think he was sitting along the exterior wall. And up on the podium was not Ricardo Reis but the late Rudi Dornbusch, presenting his paper with Alejandro Werner on Mexico: "Mexico: Stabilization, Reform, and No Growth".

Mexico had, Rudi said, "come to be viewed as a showcase of successful stabilization and economic reform, institutional stability, and financial predictability… becoming what Chile already had become and what all of Latin America hoped to be…. The stabilization strategy has led to an overvaluation of the exchange rate, a precarious financial situation, and a lack of growth…."

"An avalanche of capital," Dornbusch and Werner continued, "has strengthened the currency in real terms… financing not only investment but also a high level of consumption and intermediate goods imports, with the large external deficit dampening demand for domestic goods…. To a large extent… real depreciation is needed to improve the long-term economic prospects of Mexico and secure the benefits of economic reform."

Ricardo did not express the thought that I think lay behind Rudi's calls for large real depreciation in Mexico two decades ago. It was, I believe, precisely that real depreciation gives you a set of obvious places to productively direct the inflow of capital--to export agriculture and industry--that is exactly what an economy that has a difficult time productively allocating capital internally needs.

And it is not just Latin America. It is not just southern Europe where this happens. Can any of us think of an economy that had very large capital inflows between 2000 and 2007 and decided to allocate a great deal of them to building 4-bedroom houses with swimming pools and cathedral ceilings in the desert between Los Angeles and Albuquerque?

Matt O'Brien vs. the Chicken Littles Who Think the U.S. Faces an Imminent Debt Tipping Point That Will Turn It into Greece

Matt O'Brien:

No, the United States Will Never, Ever Turn Into Greece: Have you read the opinion section of any newspaper in the last three years? Yes? Then there is a better-than-even chance you have come across some impressive-sounding analyst predict that the United States is "turning into Greece."… As far as scare stories go, this is pretty damn scary. It's also just a story….

[An] 80 percent… [debt-to-annual-GDP ratio] was the bright white line drawn in a recent paper by David Greenlaw, James Hamilton, Peter Hooper and Frederic Mishkin. Greenlaw & Co. ran regressions on 20 advanced economies from 2000 to 2011 to see if there's a relationship between a country's borrowing costs one year and its… debt… the previous one…. They found a link… increasing… debt levels [above 80%] by 1 percentage point of GDP would increase borrowing costs by 4.5 basis points (or 0.045 percentage points)… This is a big deal…. Our gross debt to GDP is already at 102 percent -- enough to send our borrowing costs soaring…. If they are right. They almost certainly are not…. (1) For countries that can borrow in their own currency, like the U.S., higher debt doesn't clearly lead to higher interest rates. (2) For countries that don't control their currencies, like Greece, it's borrowing too much from foreigners (NOT borrowing too much in general) that clearly leads to much higher borrowing costs….

Laura Panza and Jeffrey G Williamson on Early Nineteenth-Century Egypt

Laura Panza and Jeffrey G Williamson:

CEPR Discussion Paper Abstracts: DP9363 Did Muhammad Ali Foster Industrialization in Early 19th Century Egypt?: Muhammad Ali, who ruled Egypt between 1805 and 1849, intervened in Egyptian markets in an attempt to foster industrialization, especially between 1812 and 1840.

Like a modern marketing board, the state purchased agricultural commodities (cotton, wheat) at low prices and sold them on world markets at much higher prices, a policy equivalent to an export tax. Ali also replaced tax farming with his own land taxes. The revenues so derived were used in part to finance manufacturing investment and to build irrigation canals. In addition, Ali supplied flax and cotton at those cheap purchase prices to domestic textile manufacturing, thus subsidizing the industry. He also used non-tariff barriers to exclude foreign competition from domestic markets.

Were Ali’s state-led policies successful in fostering industry? The answer is no easier to extract from this phase of Egyptian history than from other poor countries at that time since Egypt faced the same terms of trade boom typical of most poor commodity exporters – Egyptian export commodity prices soared relative to manufactured imports, forces that were causing de-industrialization everywhere else in the poor periphery. Ali picked a very difficult time to pursue his agenda, but we show that his policies were successful.

No, China Is Not Paying Tribute to the U.S.: Henry Farrell vs. David Graeber, Part CXXVII

Needless to say, I score this for Farrell 6-0, 6-0, 6-0. The incoherence of the argument of Graeber's Debt is perhaps best highlighted by noting that he says that (a) fear of US airstrikes is forcing China to lend the US money at exploitatively-low interest rates, and yet (b) the way to cure the problems of debt is to forgive it--and thus lower the real interest rate on the debt the US has borrowed from China from 0% to -100%. If China is being exploited, lowering the interest rate it receives from 0% to -100% does not solve the problem.

An aside: from my perspective, when I look at David Graeber's Debt I see:

• a chapter XII that is a disaster; and
• a whole bunch of stuff in the first half of the book that seems to me very interesting.

I wonder if I should tell my students that the book is (a) untrustworthy and best avoided--that since chapter XII is such a disaster the rest of it is unreliable--or (b) tell my students that the first half of the book is worth reading, and they should ignore the fact that the book goes more-or-less completely off the rails at the end.

I am coming to the conclusion that I cannot say that--that I have more and more reason to believe that the pre-chapter XII parts of the book are a dog's breakfast as well.

Brad DeLong: Are Your Wages Set in Beijing?

CENTER FOR LATIN AMERICAN STUDIES, UC BERKELEY: INEQUALITY: DIALOGUES FOR THE AMERICAS, FALL 2012: OCTOBER 15, 2012 http://www.clas.berkeley.edu/Events/series/inequalityfall2012/index.html

• Full cleaned-up transcript
• Video

---

This is I think an argument from my old teacher Richard Freeman, about how in the eighties and nineties effectively 2 billion workers were added to the potential global manufacturing work force. Developments in communication and trade, the coming of the container, the coming of the Deng Xiaoping policy reforms in China, reform in India, confidence these policy changes would persist--all these meant that businesses all around the world wondering where to locate manufacturing could be confident that they could if they wanted to, if it made sense, draw on a labor force that was 2 billion bigger than it had been in the 1970s.

In that context, the fact that the United States had a lot of highly-skilled manufacturing workers who had an immense productivity edge was no long an effective factor in world production. Thus the claim is that an awful lot of the rise in inequality in the United States between 1980 and today is the result of this global pressure on the American economy.

Back in the mid 1990s when I was working for the Clinton Administration, I wrote a bunch of memos about how this was then nonsense--that is, it was simply too small to matter.

Since the mid 1990s, this factor has become significantly larger.

Brad DeLong: Three Dimensions of Inequality: Global, Educational/Technological, and Plutocratic

CENTER FOR LATIN AMERICAN STUDIES, UC BERKELEY: INEQUALITY: DIALOGUES FOR THE AMERICAS, FALL 2012: OCTOBER 15, 2012 http://www.clas.berkeley.edu/Events/series/inequalityfall2012/index.html

• Full cleaned-up transcript
• Video

---

There are, broadly speaking, three dimensions of Inequality.

The first dimension is global inequality between nations. The fact is that the technologies of the industrial revolution--which are now the common heritage of all humankind--have been successfully implemented much much much much more in some parts of the world than in others. Up until 1975 I would say that the relative gap was growing. The rich North Atlantic plus Japan was successfully adapting these technologies extraordinarily rapidly. But by and large the rest of the world was adopting these technologies significantly more slowly,. Thus the relative gap between the North Atlantic core and the rest was in almost all cases growing rapidly, with the exception of the Southern Cone of South America which played a unique and puzzling role that shifted from decade to decade.

Since 1975, we have become much more optimistic. Our statistics about global inequality since 1975 have shown rapid increases in equality. They have shown an end to the 1800-1975 trend of rising inequality, whereby if you picked two people at random across the globe you would find the relative gap between their standards of living more unequal at later dates than earlier dates.

A potential problem with this shift is that this is entirely due to good growth performance over the past generation in two countries: China and India. That they have had a good generation is wonderful. Will they have another good generation? We hope so.

Bond Market: Vigilantes, or Cavalry?

Paul Krugman: https://webspace.princeton.edu/users/pkrugman/The%20Simple%20Analytics%20of%20Invisible%20Bond%20Vigilantes.pdf writes:

an attack by bond vigilantes has very different effects on a country with a fixed exchange rate (or a shared currency) versus a country with a floating exchange rate. In the latter case, in fact, loss of confidence is expansionary…

You gain more from the extra exports triggered by the decline in the value of the currency than you lose from depressed interest-sensitive spending--in fact, as long as interest rates stay at their zero lower bound and on their previous path, you lose nothing from depressed interest-sensitive spending from an attack by bond-market vigilantes. It would have to be not just a financial market affair but hit business investment committee confidence at all for there to be any drawback. At least, that is what happens if the exchange rate is floating.

The Morgenthau Plan and the Marshall Plan

J. Bradford DeLong: Comment on Albrecht Ritschl on the Morgenthau and Marshall Plans: University of Pennsylvania Social Science History Seminar: November 2, 2012:

Let me pick up on some threads we’ve already heard this afternoon.

Let me provide a complementary, but I think supportive, perspective on what was going on with Morgenthau versus Marshall in Washington DC in the three or four years after World War II. Possibly my story will have some lessons for the present and the future. But possibly it will not.

Perhaps the most fruitful way to look at the debate between Morgenthau and Marshall that was carried on--largely below the surface, largely without explicit confrontation--at the end of WWII is that it was an attempt to figure out how to resolve call it two historical problems: the problem of European military culture, and the problem of modern industrial war.

Cleaned-Up Transcript from October 15, 2012: Center for Latin American Studies: A Dialogue: Inequality in the Americas: Brad DeLong Opening Remarks

Harley Shaiken: Hello. I’d like to welcome everyone on behalf of the Center for Latin American Studies at UC Berkeley, and on behalf of the University of Chile's School of Economics and Business. This is part of a series that the University of Chile and Berkeley are doing: "Inequality: A Dialogue Across the Americas".

The issue of inequality in the United States is a central one at this moment, with an election upcoming with broad concerns about the economy. It is clearly also a central concern in Chile, and throughout the Americas. This is the second of a series that we are doing. The first was in early September, with former president Ricardo Lagos, of Chile and Robert Reich from here at Berkeley.

Today, I am going to introduce both our speakers, one in Berkeley, one in Chile, and then after brief opening presentations we will ask a question of a speaker in another country--in fact, on another continent.Then we will open for questions here at Berkeley, at the University of Chile, and several questions that we’ve received on the internet.

jonathan Portes on Self-Defeating Austerity

Jonathan Portes:

Not the Treasury view...: Self-defeating austerity?: Is austerity – particularly the fiscal consolidation programmes currently under way in most European Union countries  - self-defeating? This question has been thrown into sharp focus by the IMF’s belated reassessment of the magnitude of the “fiscal multiplier”… New research from NIESR makes the first attempt – to our knowledge – to model the quantitative impact of coordinated fiscal consolidation across the EU…. [I]n "normal times", fiscal consolidation would lead to a fall in debt-GDP ratios, in current circumstances, fiscal consolidation is indeed likely to be "self-defeating" for the EU collectively, and for most individual member states, including the UK.

Immigrants Needed, and All Kinds

By the end of 2012 there were 312 million Americans out of 7 billion people on the planet. By 2062--if we stay on the current policy track--there will be 500 million Americans out of 10 billion people on the planet, as compared to 340 million if we were to end net immigration now and if birthrates remained the same. In this sense, America in 2062 will--if we stay on our current policy track--be a nation that is 1/3 post-2012 immigrants.

The thoughtful Adam Ozimek thinks that isn't enough.

He thinks the United States needs more high-skill immigrants. I think the United States needs more immigrants--more people willing to take risks and work hard to seek a better life for themselves and their children, and illiterates from Chiapas seem to me as good as doctors from Calcutta:

Adam Ozimek:

[A] great article from Noah Smith on why we need a huge amount of Asian immigration. Noah is good at thinking about immigration more broadly than typical economists, and this article is no exception:

East Asia, South Asia, and Southeast Asia together have over half the world’s population, but Asians make up only 5% of the United States. If our ethnic makeup was a portfolio of stocks, we would be severely underweight Asia. Asia is important not just because it is huge, but because it is growing rapidly. Trade with these countries will be incredibly important to the American economy this…. Furthermore, I believe that the cultural benefits of Asian immigration will be just as big as the economic and political benefits. Adding diversity to our melting pot will speed up America’s inevitable and necessary transition from a “nation of all European races” to a “nation of all races.”…

The second article is from Matt Yglesias who emphasizes what is perhaps the most important and least appreciated truth of our times: immigration is more important than most of the issues we spend all our time arguing about.

Imagine a counterfactual history of the United States… in which we never opened our borders to the ethnic “others” of the past—the Catholics and Jews of Eastern and Southern Europe, then more recently Asians and Latin Americans. That is a very different vision of America. Not a bad place, necessarily, but probably one that looks a lot more like New Zealand—pleasant, much less densely populated, much more focused on primary commodities, somewhat poorer, and much more monolithically focused on the originally settled port cities.

It’s the most important economic issue of our time, far more important than tax reform, and it is a lever that could help improve a lot of problems we have in this country. We should be shouting this from the rooftops daily.

Josh Bivens: Not dead yet: Currency Management and the Need for a More Competitive Dollar | Economy In Crisis

http://economyincrisis.org/content/not-dead-yet-currency-management-and-the-need-for-a-more-competitive-dollar

Mark Thoma: We Should Stop Blaming China For Our Economic Problems

http://economistsview.typepad.com/economistsview/2012/10/we-should-stop-blaming-china-for-our-economic-problems.html

Failure to Understand Basic Macroeconomics

If China were to decide to spend less of its earnings from exports to the U.S. buying our debt and more buying our goods, interest rates would not go up--remember, the Federal Reserve is pegging short-term safe nominal interest rates at zero--but production and employment would.

Paging Rob Portman to the white courtesy phone, please.

The fact that Republican High Politicians do not get briefings teaching them basic income-expenditure macroeconomics is one of many, many, many reasons not to vote Republican. And it is a reason to ask senior Republican economists--I'm looking at you, Glenn Hubbard, Greg Mankiw, John Taylor, Marty Feldstein, Eddie Lazear--what the f*&$ they think they are doing.

Paul Krugman tries, once again, to teach the lesson:

Fear-of-China Syndrome: Rob Portman… offered a nice break from all the lies in Tampa… offered us some good old-fashioned bad macroeconomics… castigated the Obama administration for not taking a tougher line on China--which is actually something I’ve complained about too--then offered a completely wrong explanation. Obama won’t take on China, Portman said, because

Obama could not run up his record trillion dollar deficits if the Chinese did not buy our bonds to finance them

OK, let’s ask the question: how much overseas financing does the United States as a whole need? The answer is… an accounting identity: capital inflows = current account deficit…. So what has happened to the current account deficit as a share of GDP in the Obama era? Um, it’s way down…. How is it possible that we’re borrowing much less from foreigners when the government deficit has gone up so much? The answer is that the private sector is deleveraging…. So who’s actually financing the US budget deficit? The US private sector. We don’t need Chinese bond purchases….

To make excuses for Portman, lots of people keep getting this wrong, even after all these years. But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.

Video: Brad DeLong and Oscar Landerretche, "The Politics of Inequality": Berkeley Center for Latin American Studies

http://www.youtube.com/watch?v=80zPkYzDFfU

Earlier

Martin Wolf: The IMF warns and encourages…

http://www.ft.com/intl/cms/s/0/b68b970e-16af-11e2-957a-00144feabdc0.html#axzz29VsGltOl

Unclear whether the European great and good in fact consult it…

If the IMF Is Correct, Excessive Austerity Is Not Solving But Exacerbating the Long-Run Debt Problem: The Non-IMF Members of the European Troika Are Missing the Point Weblogging

Alan Beattie and Peter Spiegel:

Troika a barrier to IMF new fiscal faith: Christine Lagarde’s open disagreement with Wolfgang Schäuble on Thursday showed the EU’s most influential member state starkly disagreeing with the IMF. And the ECB, whose prospective use of “outright monetary transactions” or direct bond purchases will give it much more prominence in any rescue for Spain or Italy, will probably be even slower to come around…. Throughout this year, the fund has been struggling to get the other troika members to accept that their debt sustainability analyses for Greece have systematically been too optimistic…. If rapid fiscal tightening is exacerbating rather than ameliorating Greece’s debt burden, the implication is that official money in the form of fresh lending or writing down existing loans will have to fill the financing gap. Paul de Grauwe… says of eurozone officials: “Sometimes when you talk with them, they accept the intellectual argument – but then claim they are bound by treaties and are unable to act on it”.

12:00 Noon PDT: Politics of Inequality

12pm today @clasberkeley "Politics of Inequality" with Cal Econ Prof @delong & Chilean scholar @olanderretche on.fb.me/TdVesd

— CLAS Berkeley(@clasberkeley) October 15, 2012

Audio

Monday: Inequality in the Americas

UPDATE: Video

Monday: Inequality in the Americas: Center for Latin American Studies University of California, Berkeley:

Economic and social inequality is critical throughout the Americas. CLAS has organized a path-breaking real-time dialogue across the hemisphere. Using the web, we are connecting Berkeley professors and audiences to colleagues and audiences throughout Latin America.

MONDAY

Oscar Landerretche and Brad DeLong: The Politics of Inequality

Oscar Landerretche is the director of the School of Economics and Business at Universidad de Chile. Previously, he worked as the Chilean consultant for Global Source Partners’ Consulting Network in New York (2006-2011) and was the Executive Secretary of the first phase of Michelle Bachelet’s presidential campaign. He is an editorial columnist for La Tercera.

Brad DeLong is a professor of economics at UC Berkeley, chair of the Political Economy of Industrial Societies major, and a research associate at the National Bureau of Economic Research. He served as the Deputy Assistant Secretary of the Treasury for Economic Policy from 1993 to 1995.  

Monday, October 15, 12:00 PM Room 370, Dwinelle Hall

Liveblogging Olivier Blanchard: The Global Outlook and Risks

MODERATOR: Olivier came to the IMF in the summer of 2008…

BLANCHARD: Euro area as of the end of 2013 now projected to be 2.9% lower than was projected in October 2012; 0.6% lower than the 2011:IV level…

BLANCHARD: Achieving fiscal consolidation while sustaining growth in advanced economies is not an easy task…

BLANCHARD: Churchill vs. Keynes: Britain runs 6% of GDP primary surpluses for the 1920s, but British debt rises from 120% to 200% of GDP: debt-increasing fiscal consolidation with a vengeance…

BLANCHARD: One accelerator, three brakes: monetary policy is the accelerator; fiscal consolidation, weak financial sector, and uncertainty are the brakes. (Household deleveraging and housing finance were but are no longer brakes…)

BLANCHARD: Growth forecast error vs. fiscal consolidation forecast: multiplier error of 1.2--multiplier of 1.7. (DELONG: Identification very clever…)

BLANCHARD: This has implications for the speed of fiscal consolidation. (DELONG: i.e., credit-worthy sovereigns should not do any final consolidation as long as i=0 if it is the case that η>ρ…)

BLANCHARD: Claim: financial intermediation failures a major brake to growth in Europe, but not in U.S. (DELONG: But what about housing?…)

BLANCHARD: Japanese for "uncertainty": "one inch forward is darkness"…

BLANCHARD: In U.S., "uncertainty" produced not by Obama policies but by Lehmann, the debt ceiling, and the fiscal cliff. "Uncertainty" not present in the VIX…

BLANCHARD: Emerging markets: victims of the crisis; trade collapse much stronger than would infer from trade/GDP ratios; capital flow volatility;

BLANCHARD: Global imbalances--adjustment since 2007 by deficit but not surplus countries, and adjustment not structural but cyclical--driven by output declines…

BLANCHARD: We do not recommend further fiscal stimulus for any country…

BLANCHARD: Aim to hit structural deficit-reduction targets, not nominal headline targets…

Olli Rehn vs. Christine Lagarde: This Is Not Encouraging Weblogging

The FT:

UPDATED: Is IMF pushing for an end to austerity?: After a meeting of EU finance ministers in Luxembourg, Olli Rehn, the European Commission’s economic chief, said he would read the IMF’s analysis on the way back to Brussels. But he cautioned that while the impact of austerity on growth was important to consider, it was also essential to take into account the “confidence effect” budget consolidation has. He pointed to Belgium, which has gone from market laggard to nearly a safe haven after implementing tough austerity measures earlier this year.

It is now 2012. European policymakers should know that the reason an economy as open as Belgium can do well by focusing on fiscal balance and financial prudence and let others worry about the overall level of aggregate demand and the sustainability of the system is that in an economy as open a Belgium the multiplier really is about 0.3, and thus the costs of austerity in Belgium to Belgium are low. And European policymakers should know that things are different in larger and less open European countries where the multiplier is 1.5--and that things are different for the eurozone as a whole where multipliers are even larger.

Until European policymakers recognize that extremely-open Belgium is not a relevant model, I recommend that they postpone their returns to Brussels and, instead, ascend Mt. Fuji, repeatedly, until they do recognize that extremely-open Belgium is not a relevant model.

Project Syndicate: That the Euro Crisis Is No Longer So Acute Does Not Mean It Is Being Resolved

Stage Three for the Euro Crisis? by J. Bradford DeLong - Project Syndicate: BERKELEY – The first two components of the euro crisis – a banking crisis that resulted from excessive leverage in both the public and private sectors, followed by a sharp fall in confidence in eurozone governments – have been addressed successfully, or at least partly so. But that leaves the third, longest-term, and most dangerous factor underlying the crisis: the structural imbalance between the eurozone’s north and south.

First, the good news: The fear that Europe’s banks could collapse, with panicked investors’ flight to safety producing a European Great Depression, now seems to have passed. Likewise, the fear, fueled entirely by the European Union’s dysfunctional politics, that eurozone governments might default – thereby causing the same dire consequences – has begun to dissipate.

Whether Europe would avoid a deep depression hinged on whether it dealt properly with these two aspects of the crisis. But whether Europe as a whole avoids lost decades of economic growth still hangs in the balance, and depends on whether southern European governments can rapidly restore competitiveness.

The process by which southern Europe became uncompetitive in the first place was driven by market price signals – by the incentives those signals created for entrepreneurs, and by how entrepreneurs’ individually rational responses played out in macroeconomic terms. Northern Europeans with money to invest were willing to lend on extraordinarily easy terms to those in the south who wanted to spend, and ample pre-2007 spending made employers there willing to raise wages rapidly.

As a result, southern Europe adopted an economic configuration in which its wage, price, and productivity levels made sense only so long as it spent €13 for every €12 that it earned, with northern Europe financing the missing euro. Northern Europe, meanwhile, adopted wage and productivity levels that made sense only as long as it spent less than one euro for every euro that it earned.

Now, if, as appears to be the case, Europe does not want its south to spend more than it earns and its north to spend less, wages, prices, and productivity must shift. If we are not to look back in a generation and bemoan “lost” decades, southern European productivity levels need to rise relative to the north, and wage and price levels need to fall by roughly 30%, so that the south can pay its way with exports and northern Europe can spend its earnings on those products.

If the euro is to be preserved, and if stagnation is to be avoided, five policy measures could be attempted:

1. Northern Europe could tolerate higher inflation – an extra two percentage points for five years would take care of one-third of the total north-south adjustment;
2. Northern Europe could expand social democracy by making its welfare states more lavish;
3. Southern Europe could shrink its taxes and social services substantially;
4. Southern Europe could reconfigure its enterprises to become engines of productivity;
5. Southern Europe could enforce deflation.

The fifth option is perhaps the least wise, for it implies the lost decades and EU collapse that Europe is trying to avoid. The fourth option would be wonderful; but, if anyone knew how to bring southern Europe's enterprises up to the productivity levels of the north, it would have happened already.

So we are left with a combination of the first three options, also known as “policies to restore European growth” – a phrase that appears in every international communiqué. But the communiqués never get more specific. Europe’s technocrats understand what adoption of “policies to restore European growth” means. So do some of Europe’s politicians. But European voters do not, because politicians fear that spelling it out would be a career-limiting move.

But if Europe does not adopt some combination of the first three options as policy goals over the next five years, it will face a stark choice: either lost decades for southern Europe (and perhaps northern Europe as well), or continued north-south payment imbalances that will have to be financed through fiscal transfers – that is, by taxing the north.

Northern Europe’s politicians should become more explicit about what “policies to restore European growth” actually mean. Otherwise, ten years from now, they will be forced to confess that today’s dithering imposed enormous additional tax liabilities on northern Europe. That might turn out to be the ultimate career bummer.

The Prophet Isaiah on Free Trade

Isaiah 60:11:

Your gates [O Jerusalem] will be open continually; They will not be closed day or night, So that men may bring to you the wealth of the nations...

Failure to Understand Basic Macroeconomics

If China were to decide to spend less of its earnings from exports to the U.S. buying our debt and more buying our goods, interest rates would not go up--remember, the Federal Reserve is pegging short-term safe nominal interest rates at zero--but production and employment would.

Paging Rob Portman to the white courtesy phone, please.

The fact that Republican High Politicians do not get briefings teaching them basic income-expenditure macroeconomics is one of many, many, many reasons not to vote Republican. And it is a reason to ask senior Republican economists--I'm looking at you, Glenn Hubbard, Greg Mankiw, John Taylor, Marty Feldstein, Eddie Lazear--what the f*&$ they think they are doing.

Paul Krugman:

Fear-of-China Syndrome: Rob Portman… offered a nice break from all the lies in Tampa… offered us some good old-fashioned bad macroeconomics… castigated the Obama administration for not taking a tougher line on China--which is actually something I’ve complained about too--then offered a completely wrong explanation. Obama won’t take on China, Portman said, because

Obama could not run up his record trillion dollar deficits if the Chinese did not buy our bonds to finance them

OK, let’s ask the question: how much overseas financing does the United States as a whole need? The answer is… an accounting identity: capital inflows = current account deficit…. So what has happened to the current account deficit as a share of GDP in the Obama era? Um, it’s way down…. How is it possible that we’re borrowing much less from foreigners when the government deficit has gone up so much? The answer is that the private sector is deleveraging…. So who’s actually financing the US budget deficit? The US private sector. We don’t need Chinese bond purchases….

To make excuses for Portman, lots of people keep getting this wrong, even after all these years. But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.

Brazil Conference Blogging: Designing the Future: The Next Ten Years...

Exame.com:

Real pode ser moeda internacional, diz Eichengreen - EXAME.com: Rio - Brasil e Índia são as apostas do economista Barry Eichengreen, professor de Economia e Ciências Políticas da Universidade da Califórnia (UC), em Berkeley, para fornecerem moedas de reserva internacional num prazo de 10 ou 20 anos. Em apresentação no seminário "O Brasil e o mundo em 2022", nesta segunda-feira, no Rio, Eichengreen discorreu sobre as dificuldades dos Estados Unidos, sua perda de peso relativo na economia global e como isso afeta o dólar e os sistemas financeiros...

July 23: 2:30 PM: We have many more excellent speakers to hear over the next two days time. Therefore let me skip my remarks on the BNDES, on the great city of the River of January, on Tom Jobim, and also João Gilberto and Johnny Alf, the bossa nova, and the 50th anniversary of the composition of "Garota de Ipanema".

Let me instead jump right into the economics:

The purpose of this conference is to bring together smart and thoughtful people many of whom spend less time listening to each other than they should, and ask them how to design our future. The Brazilian Development Bank designs--in fact we all design our futures, only not under conditions of our own choosing. The future that Brazilians and the Brazilian Development Bank will attempt to design for themselves are enabled, influence, and constrained by the futures other regions of the globe are attempting to design as well..

And here I find myself at a quandary. I do not understand the future that the North Atlantic, the global North, is designing for itself.

Five years ago I would have confidently predicted that the North Atlantic industrial core of the global economy would continue on its relatively-smooth path of 5%/year growth in nominal GDP, 7%/year growth in nominal imports and exports, with about 2.5%/year of real GDP growth and 2.5%/year of inflation in both the dollar and the euro, and with interest rates and asset prices undergoing no major and few minor disturbances--with perhaps the then-anticipated slow deflation of the property bubble and the gradual unwinding of the global imbalance of East Asia's surplus as minor disturbing factors. The 1930s and 1940s had, I thought, taught the North Atlantic both the political urgency of avoiding mass unemployment and the demand-management tools to do so. The 1970s had, I thought, taught the North Atlantic both the political urgency of avoiding chronic even moderate-level inflation nd the demand-management tools to do so.

I was wrong. Wow! I was wrong.

Barry Eichengreen of the University of California at Berkeley, the National Bureau of Economic Research, and the Center for Economic Policy Research is without a doubt the world's leading expert on the international monetary economics of the Great Depression of the 1930s and, by virtue of that expertise, an expert on today. He is the only one still living of the four economists--Bagehot, Minsky, Kindleberger, and Eichengreen--whom last year Larry Summers told Martin Wolf knew the most about what has happened to the world economy since 2007.

Wolfgang Munchau of the Financial Times is one of the very, very best real-time observers of the global economy we have. On the phone to me last week Paul Krugman expressed envy at how he could not write the kinds of columns that Wolfgang could write and had the freedom to write for the Financial Times. Three months ago at breakfast Wolfgang's boss Gillian Tett described him as one of the invaluable contributors to the FT that keeps it at the very top of the financial-journalistic league table.

But first--roll the video...

Barry Eichengreen?

[Later] Friday afternoon I took a look at Barry's PowerPoint and was terrified--I did not see how he could do it in less than an hour. But he did. That was remarkable. I do find myself running backward in time: US dollar, British pound, Florentine florin, Venetian ducat, and then i get back to the Byzantine bezant under the reign of Irene Autocratix, who called herself equal to the Apostles--isoapostoles.

Wolfgang Munchau?

[Later] It was British 19th C. Romantic author Thomas Carlyle who famously complained that economists were no fun: dismal scientists. We have a couple of truly dismal scientists, here. Let me see if I can get either of these panelists to be more optimistic. Barry Eichengreen, if I could ask you--in two to five minutes--in your opinion, what did Wolfgang Munchau get wrong in the sense of being too gloomy?

[Later] Wolfgang Munchau, if I could now ask you, what in your opinion did Barry Eichengreen get right and what did he get wrong?

[Later] Before I ask for questions from the floor, I have a few questions of my own…

[Later] Questions from the floor?

[Later] That's the end of our time, and while I perhaps need coffee more than most--I left my home at 5 am yesterday yet did not get to Rio until noon today--the rule is that in Brazil you should never give up the chance to drink coffee…

July 23: 4:30 PM: It is now time for our second panel. If I might have your attention, please…

Let me start with two threads. The first--call it the neoliberal bet. The neoliberal bet starts from the observation that the market-heavy version of social democracy that evolved in the United States under the Progressive Republican President Roosevelt at the start of and the New Deal Democrat President Roosevelt in the middle of the twentieth century, and then spread to Western Europe after 1945 out of fear of Josef Stalin and desire to emulate Henry Ford. That--mode of production doesn't quite cover it--seemed to be the best institutional configuration for material prosperity and soft government we have yet seen. The neoliberal bet is the strong urging by the NAtl that other countries should emulate large chunks of its institutional setup and the promise that the NAtl economies will be prosperous and open enough to be importers of last resort--that what emerging markets make, the NAtl will buy. The conclusion i drew from the first panel is that the NAtl is drifting in the direction of welshing on its commitment to be the prosperous importer of last resort, as evidenced by a US presidential campaign in which two candidates who by advisors and intellectual pedigree are committed to free trade--these two candidates are competing to make the biggest product that no commodity currently produced in the US today will ever be produced in China...

In the very long-run sweep of history, Eurasian civilizations find themselves densest in first three and then four core regions--regions with rainfall and river valleys that provided sufficient water for the largest-scale effective farming. These are: East Asia--China--South Asia--India--the Fertile Crescent--the Arab Middle East--and, after the invention of the iron axe, the river valleys of northwest Europe. These economies have, since the invention of agriculture, dominated Eurasia and usually the world.

This session discusses the future economo-politic trajectories of two of these Eurasian core economies: China and the Arab world. Before the era of the Industrial Revolution these two core economies were crucial. It was only four centuries ago that we saw not English-speaking armies camped around Baghdad but a Turkish- and Arabic-speaking army camped around Vienna. The Ming Dynasty's voyages of exploration in the fifteenth century under Zheng He travelled as far as the Portuguese expeditions launched by the Infante Dom Henrique o Navegador--and did so with 20 times the number of ships.

Much of the history of the twenty-first century will be the return of these regions to their traditional relative influence within Eurasia--or their failure to do so, and the political consequences of economic events, and the economic consequences of political events.

We have asked Dr. FAN Gang and Ambassador Alfonso Celso de Ouro Preto here this afternoon. Among the ambassador's many accomplishments: being Brazil's Ambassador at Large to the Middle East from 2004-2009. They will speak on what futures China and the region that Europeans call the "Middle East" are going to design for themselves

Dr. Fan Gang of the National Institute of Economic Research is also Chairman of the China Reform Foundation. He is one of the world's top 100 global thinkers, according to Foreign Policy magazine.

Fan Gang? China: growth and overtaking, or relative stagnation a la Japan? Asset markets? Financial fragility? The drive to high mass consumption? International integration?

[Later] Mr. Ambassador? State, religion, society, and economy? The peculiar role of oil?

[Later] I know that there are many questions from the floor, but I am going to keep control of the microphone for a little while…

[Later] Questions from the floor?

[Later] And that reaches the end of our time for this panel. It is now too late for coffee--but it is not too early for cocktails

Adam Ozimek Gives Three Cheers for "Outsourcing"; I Give Minus Three Cheers for Bain Capital-Style LBOs

Adam Ozimek:

DeLong On Outsourcing: The political battle between Obama and Romney camps on outsourcing has prompted a lot of commentary… litigating whether Mitt Romney was responsible for outsourcing done by Bain Capital. Most people engaging in this issue, including many who absolutely know better, seem content to let outsourcing be used as mud….

Answers to Five Easy Euroquestions...

(1) Q: Who Should Eat the Losses from the Existing Greek Debt?

A: The German banks that made the loans to Greek politicians who did not have authority to impose taxes high enough to repay the debt--and the German government that backs the banks--should eat the losses from the existing Greek debt.

(2) Q: How Should Greece Balance Its Taxes and Its Government Spending Going Forward?

A: That's nobody's business but the Greeks'. It would, however, be nice if they would stop spending money like water in an attempt to maintain "strategic parity" vis-a-vis Turkey in the Aegean.

(3) Q: How Should Greece Balance Its Spending on Imports and Its Exports Going Forward?

A: Borrowing to cover the gap between imports and exports that exists at current exchange rates and price and wage levels is not going to happen, so Greece has a choice between (a) deep prolonged depression to make Greeks too poor to afford imports, (b) Grexit, devaluation, and a subsequent export boom, and (c ) Germans opening up the monetary spigots to produce higher inflation in northern Europe and meanwhile giving Greece an additional fortune to keep the pain in Greece low enough for adjustment to take place within the Eurozone framework.

(4) What Will Happen If Greece Exits the Euro?

A: Germany will then have a choice between (d) a Great Depression in Europe, and (e) a much bigger inflation in Europe and a much larger fortune given away to cushion adjustment than would be needed to make (c ) work.

(5) We Will Then See (c ), Right? Germans Opening Up the Monetary Spigots to Produce Higher Inflation in Northern Europe and Meanwhile Giving Greece an Additional Fortune to Keep the Pain Low?

A: Ha!!

Colin Danby: Don't Take David Graeber as Representative of Analysts of Modern U.S. Imperialism

Because: Imperialism! — Crooked Timber: Colin Danby:

Tim:

1. Again, I invite you to meditate on the question of what would be disconfirming evidence for Graeber.

2. Chapter 12 has an extremely thin scholarly apparatus, and standard sources are unmentioned. It is also sprinkled with howlers about central banking and money—the more Graeber purports to explain stuff e.g. fn9, the worse he gets. He hasn’t done the basic homework to understand how these institutions work. (Indeed, he seems to mock himself, beginning the chapter with a couple of word-salady pages about gold and conspiracy theories.)

3. Nonetheless the chapter is long on big claims e.g. that credit money rests on military power (364). (He footnotes Braudel a few lines down, but if he actually read Braudel he would find ample evidence of credit money emerging in merchant-and-finance circuits that circumvented state power.)

4. Key claims like the Iraq-dollar theory were defended by Graeber as being mere rumors, free of substantiation—a wholly circular argument that if enough people suspect something, their belief is grounded.

5. The discussion on 372 is symptomatic of the relations between evidence and assertion. We get in succession a weird claims that only certain U.S. “tributaries” were “allowed to catapult themselves out of poverty and into first-world status.” (what countries are we talking about? no evidence, not even names) and then “after 1971, as U.S. economic strength reltive to the rest of the world began to decline, they were gradually transformed back into a more old-fashioned sort of tributary.” I’m trying to think of any countries for which that might be the case, or whom even this sequence of events applies. But no referencing. What Graeber is doing, however, is clear: China (then and now) represents several obvious counterarguments to his glib claims about how U.S. power works. So he’s doing a bit of hand-waving around the idea of “tribute” to try and contain this.

6. So yes, the text of chapter 12 tells us that this is a deductive rather than inductive account, enlarging on Graeber’s pet ideas (some of which are good) and ornamenting them with a few details about international finance and the U.S. financial system, some of them wrong. This is not an account that starts by mastering the relevant literature or evidence, it is not even an account that takes the time necessary to get basic stuff right.

7. I would again invite you to read Block (1977) and indeed at any of the classic works of Amin, Frank, Furtado et al. because they are not just “theorizing” but actually attend to evidence about the world. I do hope people realize that Graeber’s shoddy drive-by is not typical of the lit on imperialism.

Agglomeration Economies and Industrial Policies

Paul Krugman:

Motor City Stories: Brian Palmer has a nice summary of the reasons behind the concentration of car companies in Michigan… historical accident perpetuated by agglomeration economies. What he doesn’t say is that there is a close relationship between such stories and the case for the auto bailout. Agglomeration economies exist because… the network of suppliers, the skills, the interchange of knowledge supported by a geographical industry concentration in turn gives firms in that industry concentration an advantage…. Now, the existence of important agglomeration economies immediately implies that there are social consequences to the success or failure of an individual firm that aren’t captured by the profit and loss statement of that firm alone. Let General Motors fail, and the resulting collapse of its suppliers will hurt other firms too, possibly driving them out of business too. You don’t want to overuse this sort of argument…. But it was surely a major consideration for the auto bailout — and a reason why hard-line opposition to any such action was bad economics.

In Which the IMF Takes Its Place at the Head of the Sixth International, and Calls for a Less Destructive and Contractionary Monetary Policy in Britain

Via Duncan Black, The Manchester Guardian on the eurocrisis:

Eurozone crisis live: IMF warns UK may need fiscal stimulus: 2.18pm: The Ernst & Young ITEM Club has welcomed the Christine Lagarde's recommendation that UK interest rates should be cut. Andrew Goodwin, its senior economic advisor, said:

Cutting interest rates from 0.5% would certainly be a good place to start – the Fed's target range is 0-0.25% and we have always said that ours should be the same. It won't be the solution on its own, but would certainly send out the right signal.

Goodwin is less convinced that yet more quantitative easing would work (another proposal from the IMF today). Instead, he favours more spending on infrastructure projects, such as high-speed broadband networks, the smart grid and the revival of projects for Carbon Capture at power stations, or new nuclear plants….

1.55pm: Here's economics editor Larry Elliott's take on this morning's announcement from the IMF:

Britain needs a plan B. That was the stark message from the International Monetary Fund on Tuesday as it announced the findings of its checkup on the UK economy. The Washington-based Fund says growth is weak, unemployment too high and the risks are clearly weighted to the downside. Extra stimulus, it says, is needed and needed now.

So, game and set and match to the shadow chancellor, Ed Balls, who has been warning George Osborne for the past 18 months that the government's austerity package is too much, too soon for an economy as enfeebled as Britain's at a time when its major trading partner, Europe, is involved in a life-or-death struggle to save the single currency?…

11.50am: Here's a quick summary of what happened at the International Monetary Fund's briefing in London this morning. The IMF has warned that the UK government should consider a new fiscal stimulus plan, if the British economy does not recover. Should growth remain below target, new fiscal easing measures should be considered -- including temporary tax cuts and more infrastructure spending.

Christine Lagarde, head of the IMF, said that economic growth was currently too low, while unemployment (especially among young people) was too high. The IMF also urged the Bank of England to stimulate the economy through another round of quantitative easing, and to also consider fresh interest rate cuts.

The IMF also congratulated the UK government on its progress in dealing with the crisis, but argued that Britain's current record low interest rates gave it the opportunity to borrow more today. As the FT puts it, Britain "should prepare for Plan B" (although Lagarde didn't put the issue such political terms)….

11.22am: You can also read the full details of the conclusion of the IMF's mission to the UK, here on the Treasury's website. The key points with regard to a new fiscal stimulus are number 12:

There is scope within the current overall fiscal stance to improve the quality of fiscal adjustment to support growth

and number 13:

Fiscal easing and further use of the government's balance sheet should be considered if downside risks materialize and the recovery fails to take off. In particular, if growth does not build momentum and is significantly below forecasts even after substantial additional monetary stimulus and further credit easing measures, planned fiscal adjustment would need to be reconsidered

11.12am: The UK Treasury has uploaded a copy of George Osborne's remarks at today's press conference, here on its website. They show that Osborne did not respond to the IMF's argument that a new fiscal stimulus could be required, but instead focused on the recommendation for the Bank of England to cut rates or create more electronic money now....and on the crisis in Europe. Osborne said:

The IMF identifies setbacks in the euro area as the key risk to the UK's economic prospects and financial stability. In the UK, we have a flexible exchange rate and independent monetary policy, which allows us to ease the process of fiscal adjustment with a lower exchange rate and supportive monetary policy. The IMF has advice for the Bank of England on that today. But in the eurozone, indebted countries have to deal with high budget deficits without that support.

Behind the scenes, Treasury officials are also briefing that the IMF has not made a dramatic change in position, and still supports the government's plans.

Steve Clemens Fears Wolfgang Schauble's Ordnungspolitik

Steve Clemens:

New Economic Thinking vs Ordnungspolitik: In other words, Germany is not only unwilling to extend a real lifeline to other sinking economies in Europe, it's using this moment in history to promote an ideological austerity that it wants to compel other nations -- when their economies are reeling -- to do the same as the price for German support. George Soros, anchor speaker among many luminaries at this INET conference, has offered contrarian views to those of Schäuble and published this oped in yesterday's Financial Times, "Europe's Future Not up to Bundesbank."  However, in the side chatter here, most believe that the gap between Germany's economic prescriptions and floundering European siblings won't be bridged.

There is sort of a feeling among many here that the European titanic is sinking and that Germany has control of all the life boats and won't let them out.

Henry Farrell vs. David Graeber on American "Imperialism"

Farrell 6-0, 6-0, 6-0:

Because: Imperialism!: Is my post, as Graeber claims, an example of deliberate delegitimization, a “case in point” of dismissing someone interested in “the actual connections between US military power, the banking system, and global trade … as a paranoid lunatic”

Hardly. And Graeber himself doesn’t seem to believe it – he later suggests that he isn’t sure what the difference is between our positions on imperialism. I have no problems at all with someone talking about the connections between US military power, the banking system and global trade. Nor do I think that the word ‘empire’ is at all provocative…. My issue is… [that] his particular account of empire is neither very plausible, nor supported by much in the way of evidence….

Greece Has Two Problems: (i) Who Is Going to Eat the Losses on Its Current Debt? (ii) How Is It Going to Balance Its Trade and Its Government Finances Going Forward?

The two are logically distinct--and practically distinct as well. The first is largely settled. The second is not. But the second must be done: nobody is going to lend Greece large amounts of money in the future, so if it does not balance its government finances and its current account, the market will balance them for us in ways we really will not like.

Olivier Blanchard:

The Logic and Fairness of Greece’s Program: To get back to health, Greece needs two things. First, a lower debt burden. Second, improved economic competitiveness. The new program addresses both….

Debt had to be restructured. The process was long and messy. After all, bargaining between creditors and debtors is rarely a love affair. In the process, foreign creditors were often vilified in Greece as bad guys—rich banks, who could and should be willing to take a hit…. [T]he PSI (private sector involvement) deal—the largest ever negotiated write-down of public debt—has reduced the debt burden of every man, woman, and child in Greece by close to €10,000 on average, a sizable contribution on the part of foreign savers.

That is the first.

Now for the second:

Greece now has to do its part―with sustained political commitment to implement the difficult but necessary set of fiscal, financial, and structural reforms that have been agreed as part of the program supported by Greece’s partners in the eurozone and the IMF…. [I]t has to bring down its fiscal deficit further. Otherwise, this will simply negate the progress which was just made on the debt. The fiscal effort which has been accomplished already is truly impressive, with the primary deficit coming down from 10 percent to less than 3 percent…. Equally, or perhaps more importantly, Greece has to reduce its current account deficit…. And Greece still has a very large current account deficit, at close to 10 percent of GDP, despite the depressed level of output…. [T]he country has to become more competitive, sell more abroad, and buy less from abroad. At the moment, Greece’s exports amount to only about 14 percent of the goods it produces…. There are two ways to become more competitive: become much more productive, or reduce wages and nonwage costs. The first way is much more appealing. But there is no magic wand…. This leaves decreases in relative wages, at least until higher productivity can kick in. In countries with flexible exchange rates, this can be achieved through currency depreciation. In a country which is part of a common currency area, it has to be achieved by decreasing nominal wages and prices….

The best way forward would have been a negotiation between social partners to reduce wages and prices, and avoid a long and painful process of adjustment. This did not happen. The program tries to accelerate the process, while protecting the most vulnerable. The harsh reality is that the adjustment has to take place one way or the other; otherwise competitiveness will not improve, demand will not increase, the current account deficit will continue, and unemployment will remain very high. The faster it does take place, the less pain there will be….

[T]he notion which is sometimes floated that large infrastructure projects might boost growth… is fanciful…. What about leaving the Eurozone? Euro exit followed by a sharp depreciation could achieve the relative wage and price decline that Greece needs, and achieve it faster…. Indeed, if Greece had had its own currency to start with, this would surely have been part of the program. But Greece is part of the Eurozone. And, leaving aside the large costs of no longer belonging to the Eurozone, the dislocations from a disorderly exit—from the collapse of the monetary and financial system, to the legal fights over the proper conversion rates for contracts—would be very, very large…

But are the costs of staying in the eurozone even larger? I suspect they are. If northern Europe wants to keep Greece in the eurozone, it ought to pay more--staying in the eurozone delays Greece's adjustment and makes balanced trade and government finances much more painful, and those costs should not rest on the Greeks.

Brookings Panel on Economic Activity: Spring 2012

http://www.brookings.edu/economics/bpea.aspx

NOTE: MOST OF THESE COMMENTS WERE NOT REPEAT NOT DELIVERED AT THE CONFERENCE:

"Fiscal Policy in a Depressed Economy", by J. Bradford DeLong, University of California, Berkeley and Lawrence Summers, Harvard University.

"Disentangling the Channels of the 2007-2009 Recession", by James Stock, Harvard University and Mark Watson, Princeton University:

Comments: Stock and Watson say policy uncertainty is liquidity squeeze is risk spreads: there is one single "financial shock". Stock and Watson say the old factors and old coefficient macro dynamics predict the macro dynamics of this recent recession. Thus the current business cycle is still the standard business cycle--only bigger, driven by bigger financial shocks. Alan Blinder queries: how can this recession be the same? It wan't caused by either inflation-fighting monetary policy or by an oil shock. So it ought to have been different, shouldn't it? In Ricardo Caballero's framework, a normal post-WWII recession was caused by a liquidity squeeze, but this was caused by a safety squeeze--there would have been a liquidity squeeze if not for extraordinary Fed action, and Milton Friedman would have said that fixing the liquidity squeeze would fix the problem. And it didn't...

If I understood Martin Baily, I think he was wondering whether an error-correction framework would show more of an anomaly in the recent episode. I want to second that.

"Macroeconomic Effects of FOMC Forward Guidance", by Jeffrey Campbell, Charles Evans, Jonas Fisher, Alejandro Justiniano, Federal Reserve Bank of Chicago

Comment: First, let me thank Michael Woodford for finally telling me how to pronounce Goy-tee. I have never before dared say anything other than "Eggertsson". Second, the point about nominal levels: when velocity undershot in the early 1980s Paul Volcker laid down the principle that base drift would not be reversd--admittedly, then it was base drift in the money stock. That precedent creates some difficulties for the Fed to adopt level targeting.

Third, with respect to commitments. The FOMC's voting membership turns over rather quickly. That makes commitment difficult. Commitment via appointing central bankers who are conservative in the Rogoff sense in having an unreasoning distaste for inflation solves some commitment problems, but not others. Odyssean commitment via QE is also difficult because QE transactions can easily and costlessly be reversed. So if you are a central bank that wants to commit to a higher future money stock, the natural way to do it is to increase the money supply by expanding your portfolio in ways that cannot be reversed. So, instead of buying GSE MBSs, buy bridges, human capital for twelve year olds, and biomedical knowledge--transactions the Fed cannot unwind. And Eggertsson and Woodford optimal ZLB monetary policy has just become monetary base-financed expansionary fiscal policy.

"Is the Debt Overhang Holding Back Consumption?", by Karen Dynan, Brookings Institution

Comment: Are the quarter of mortgage debtors who are underwater more of a drag on the economy than other homeowners who have lost wealth? Yes, clearly they are.

"The Euro’s Three Crises", by Jay Shambaugh, Georgetown University

Comment: Yes, interest rates have to be very high indeed for austerity to be worthwhile even on the metric of debt service burden alone...

When Jay's excellent paper arrived, I was rereading the late Charlie Kindleberger and thinking about his old line that Europe fell into the Great Depression in the 1930s because the world lacked an international monetary and financial hegemony, and also reading the transcript of the Bretton Woods Conference--where White and Keynes appear well aware of this, and working their hardest to make sure that this does not happen again by creating a hegemon: the IMF. Yet here we are again. And I think it is safe to say that we would not be here, but rather in an at least somewhat better place, either if the IMF had in the late 1990s been recapitalized at much more than its current scope or if Iceland, Ireland, and Greece had incorporated themselves in Delaware as bank holding companies and joined the Federal Reserve System.

If White and Keynes were here now, I think they would yell at us: of course, they would say, a dozen national governments cannot quickly strike a Coasian bargain under these circumstances. You need a hegemony. We gave you a hegemony. What have you done with it?

We are probably going to dodge the biggest bullets coming at us this time. But it really is not too early to start building institutions that will allow us to, next time, avoid both the policy mistakes of the 1970s and the policy mistakes of the 2000s so that we can make new and more original policy mistakes.

"Democratic Change in the Arab World, Past and Present," by Eric Chaney, Harvard University:

Comment: I like the focus of the long-term historical impact of "slaves on horses": the interaction of the ulema and the mamelukes from the Ummayid dynasty on, a pattern found in the regions of the 7th century conquests and the resultant expansion of the community of believers, but not elsewhere. I feel like I should channel the medieval historian Ibn Khaldun and wonder whether it is not 8th century institutions but rather, as Linda noted, desert ecology. The 7th century conquests are (with the exception of what is now Iran) places where desert power is important. And in deserts agriculture is not very productive: it is hard for the ruling institution to tax the surplus. Herding is even harder to tax. So the ruling institution taxes commerce, especially long-distance commerce, and does not embed its revenue sources in society. Thus you get a succession of dynasties playing the game of thrones whose major interest in the bulk of the population is autocratic domination rather than economic development, and this ecologically-driven political-economic equilibrium echoes down the centuries. It is then powerfully reinforced by oil.

Unfortunately, I see only one data point that was part of the 7th century conquests where desert power is not terribly important: the collapse of the Sassanid Empire. While the Byzantine Empire survived, and held the line where the desert turned into the Anatolian Plateau, the Sassanids collapsed and the Arab Conquest extended over the Iranian Plateau.

If Iran makes a successful democratic transition in the next fifty years, I would characterize that as strong evidence against Eric's hypothesis.

Econ 210a: Spring 2012: U.C. Berkeley: March 21, 2012: Globalization and Crises

Econ 210a: Spring 2012: U.C. Berkeley: March 21, 2012: Globalization and Crises:

• Class Slides

Agglomeration Economies and Industrial Policies

Paul Krugman:

Motor City Stories: Brian Palmer has a nice summary of the reasons behind the concentration of car companies in Michigan… historical accident perpetuated by agglomeration economies. What he doesn’t say is that there is a close relationship between such stories and the case for the auto bailout. Agglomeration economies exist because… the network of suppliers, the skills, the interchange of knowledge supported by a geographical industry concentration in turn gives firms in that industry concentration an advantage…. Now, the existence of important agglomeration economies immediately implies that there are social consequences to the success or failure of an individual firm that aren’t captured by the profit and loss statement of that firm alone. Let General Motors fail, and the resulting collapse of its suppliers will hurt other firms too, possibly driving them out of business too. You don’t want to overuse this sort of argument…. But it was surely a major consideration for the auto bailout — and a reason why hard-line opposition to any such action was bad economics.

Brian Palmer:

Why are all the big American car companies based in Michigan?: Detroit and its environs had a lot to offer the nascent auto industry around the turn of the 20th century. Iron ore… timber… [r]ail and water routes…. And Detroit already hosted heavy industry like machine shops and stove works…. Detroit’s eventual dominance probably had more to do with a couple of historical accidents than any geographic advantage. First, innovators like Henry Ford and Ransom Olds happened to live in Michigan. Second, automotive executives in early-20th-century Detroit behaved a lot like Silicon Valley executives today: They regularly switched companies and launched spinoffs and startups. This culture of cross-pollination spread innovative manufacturing and design ideas among the Detroit manufacturers. Distant competitors couldn’t keep up with Motown’s research and development….

[N]one of the 69 companies that entered the auto industry (PDF) between 1895 and 1900 was located in Detroit. Olds Motor Works became the city’s first major carmaker when it relocated from Lansing in 1900. Ransom Olds then made a decision that would shape the course of the industry—rather than creating hundreds of small components in-house for his Curved Dash Runabout, he subcontracted much of the work…. The people who built the car’s parts eventually learned so much about automotive manufacturing that they went on to launch their own brands….

The number of U.S. carmakers peaked at 272 in 1909, including major manufacturers in New England and Ohio. During the 1910s, however, the Detroit brands pulled away. In 1915, 13 out of the country’s 15 most popular car brands were in Detroit. Motor City executives, particularly Ford, invested heavily in research and development, distancing their products from the out-of-towners…

Trade and Dealing with Income Distribution

Mark Thoma:

Economist's View: Autor, Dorn, and Hanson: When (and Where) Work Disappears: The loss of manufacturing jobs to overseas producers has large negative impacts on workers and their communities. I'm with David Autor, one of the authors of the study described below, when he says "policymakers need new responses to the loss of manufacturing jobs: 'I’m not anti-trade, but it is important to realize that there are reasons why people worry about this issue.'... Trade may raise GDP, but it does make some people worse off. Almost all of us share in the gains. We could readily assist the minority of citizens who bear a disproportionate share of the costs and still be better off in the aggregate"….

A new study co-authored by MIT economist David Autor shows that the rapid rise in low-wage manufacturing industries overseas has ... had a significant impact on the United States. The disappearance of U.S. manufacturing jobs frequently leaves former manufacturing workers unemployed for years, if not permanently, while creating a drag on local economies and raising the amount of taxpayer-borne social insurance necessary to keep workers and their families afloat. Geographically, the research shows, foreign competition has hurt many U.S. metropolitan areas — not necessarily the ones built around heavy manufacturing in the industrial Midwest, but many areas in the South, the West and the Northeast, which once had abundant manual-labor manufacturing jobs, often involving the production of clothing, footwear, luggage, furniture and other household consumer items. Many of these jobs were held by workers without college degrees, who have since found it hard to gain new employment.

“The effects are very concentrated and very visible locally,” says Autor... “People drop out of the labor force, and the data strongly suggest that it takes some people a long time to get back on their feet, if they do at all.” Moreover, Autor notes, when a large manufacturer closes its doors, “it does not simply affect an industry, but affects a whole locality.”…

“Trade may raise GDP,” Autor says, “but it does make some people worse off. Almost all of us share in the gains. We could readily assist the minority of citizens who bear a disproportionate share of the costs and still be better off in the aggregate.”

Quote of the Day: January 31, 2012

"The [gold standard] system presupposed an intellectual climate in which governments attached priority to currency and exchange rate stability. It presupposed a political setting in which they were shielded from pressure to direct policy to other ends…"

--Barry Eichengreen, Globalizing Capital: A History of the International Monetary System

Quote of the Day: January 26, 2012

"A 25-ton container of coffeemakers can leave a factory in Malaysia, be loaded aboard a ship, and cover the 9,000 miles to Los Angeles in 16 days. A day later, the container is on a unit train to Chicago, where it is transferred immediately to a truck headed for Cincinnati. The 11,000-mile trip from the factory gate to the Ohio warehouse can take as little as 22 days, a rate of 500 miles per day, at a cost lower than that of a single first-class air ticket. More than likely, no one has touched the contents, or even opened the container, along the way."

--Marc Levinson, The Box: How the Shipping Container Made the World Smaller and the World…

Quote of the Day: January 1, 1942

"The advantage of an interchange of commodities between nations consists simply and solely in this, that it enables each to obtain, with a given amount of labour and capital, a greater quantity of all commodities taken together."

--John Stuart Mill, Essays on Some Unsettled Questions of Political Economy

Quote of the Day: December 2, 2011: Container Shipping Costs

"A 25-ton container of coffeemakers can leave a factory in Malaysia, be loaded aboard a ship, and cover the 9,000 miles to Los Angeles in 16 days. A day later, the container is on a unit train to Chicago, where it is transferred immediately to a truck headed for Cincinnati. The 11,000-mile trip from the factory gate to the Ohio warehouse can take as little as 22 days, a rate of 500 miles per day, at a cost lower than that of a single first-class air ticket. More than likely, no one has touched the contents, or even opened the container, along the way."

--Marc Levinson: The Box: How the Shipping Container Made the World Smaller

Quote of the Day: November 6, 2011

"Twenty-five million storage pots, a staggering number, were dumped here across three centuries. Most were used to ship olive oil—200 million gallons of it—from southern Spain to Rome, where urbanites put it on their food, washed with it, and burned it in their lamps. To stand on Monte Testaccio is to feel awe at what hungry humans can do. And this was just one of Rome’s artificial hills of garbage."

--Ian Morris, Why the West Rules--for Now

That's 2000 gallons a day--8000 liters, or 270000 ounces. For a population of Rome of 500,000, that's half an ounce of olive oil a day, or 125 calories of olive oil a day...

A Note on the U.S. Comparative Advantage in the Sale of "Political Risk Insurance"

The 4% of GDP trade deficit that we have on average run over the past decade is best viewed as yet another shift of the US economy into the insurance industry: in this case, a shift inro the "industry" of providing political risk insurance.

Poor-country governments desperately need economic growth for two reasons: first, to enhance the welfare of their people; second, to keep the heads of the rulers from winding up being carried through the streets on pikes. But the only reliable way we know him for a poor country to become richer is for it to grab some markets by exporting low and relatively simple manufactured goods to the rich industrial core. That requires a low value look for the domestic currency. And that requires that the government manipulate the currency by buying large amounts of dollars at prices that it knows damned well it will not be able to match when it comes time to sell its accumulation of dollar-denominated assets.

Developing country governments, especially in Asia, think that this political risk insurance policy is well worth buying.

That is about half of the past decade's trade deficit

The other half is the sale of political risk insurance not to poor-country governments but to rich people in poor countries. If the balloon goes up, if the revolution commences, and if the upper class of a poor country has to make a run for it in the Learjet or the rubber boat, it is then much better for them to arrive on the other side with a large securities account of dollar-denominated money at Citigroup or J.P. Morgan Chase than to arrive as penniless refugees. That in large part explains the extraordinary demand by the emerging rich of much of the rest of the world for dollar denominated assets.

That is the other half of our past decade's trade deficit.

Now from one perspective the sale of political risk insurance is a very lucrative business to be in indeed. The People's Bank of China pays eight renminbi for each dollar that it buys, and yet when it will come time to sell those dollars it will get only four renminbi in return. $30 billion at four renminbi per dollar profit means 120 billion renminbi a month in value to the United States from its trade deficit with China alone. That is $180 billion a year of value from the sale of political risk insurance to Greater China alone.

The question, however, is whether this American specialization in finance and in the sale of political risk insurance is truly intelligent. Are these the "industries" of the future? Or is this rather a path that leads to a dimmer future for middle-class America?