## The Federal Reserve in 2011 Debates Christina Romer's Ideas About the Need for "Regime Change": Weekend Reading

Weekend Reading: The Federal Reserve in 2011 Debates Christina Romer's Ideas About the Need for "Regime Change": https://www.federalreserve.gov/monetarypolicy/files/FOMC20111102meeting.pdf

I believe that in a generation or two the histories of the Bernanke Fed are overwhelmingly likely to concentrate on two puzzles:

1. The failure to seek an environment in which inflation was high enough to allow a Federal Funds rate of 5% or so at the [peak of the business cycle, so that Bernanke's successors would have room to respond to a downturn in aggregate demand.

2. The failure to use the credibility of its commitment to low inflation long and painfully built up by Volcker and Greenspan to support policies to rapidly return prime-age employment to its normal share of the population.

In late 2011, in a context in which prime-age employment was severely depressed and not going anywhere, the failure to see these two as policy priorities that called for, well, "regime change" is likely to appear largely inexplicable, and to be judged harshly:

Continue reading "The Federal Reserve in 2011 Debates Christina Romer's Ideas About the Need for "Regime Change": Weekend Reading" »

## The Market: As an Institution, Its Pros, and Its Cons

The Market as an Institution: “The Market” as an Institution:

• We start from what look like to us deep truths of human psychology

• People are acquisitive
• People engage in reciprocity—i.e., want to enter into reciprocal gift-exchange relationships
• In which they are neither cheaters nor saps
• With those they trust…
• We devised property as a way of constructing expectations of trust…

• We devised money as a substitute for trust…

Continue reading "The Market: As an Institution, Its Pros, and Its Cons" »

## Modes of Market Failure

At lunch last week Richard Thaler was skeptical that I had managed to identify ten different modes of market failure. I admit that this list has a little too much of the Borges-List Nature, but I do think it holds up. What do you think?: The Market Economy: Modes of Failure: Markets can go wrong—badly wrong. They can:

1. not fail, but be failed by governments, that do not properly structure and support them—or that break them via quotas, price floors/ceilings, etc....

2. be out-of-equilibrium...

3. possess actors have market power...

4. be afflicted—if that is the word—by non-rivalry (increasing returns to scale; natural monopolies)...

5. suffer externalities (in production and in consumption, positive and negative; closely related to non-excludibility)...

6. suffer from information lack or asymmetry...

7. suffer from maldistributions—for the market will only see you if you have a willingness to pay, which is predicated on an ability to pay…

8. suffer from non-excludability (public goods, etc.)...

9. suffer from miscalculations and behavioral biases...

10. suffer from failures of aggregate demand...

Continue reading "Modes of Market Failure" »

## Note: The Ten Americans Who Did the Most to Win the Cold War: Hoisted from the Archives

Hoisted from the Archives: Note: The Ten Americans Who Did the Most to Win the Cold War:

• Harry Dexter White: Treasury Assistant Secretary* who was the major force behind the Bretton Woods Conference and the institutional reconstruction of the post-World War II world economy. He accepted enough of John Maynard Keynes's proposals to lay the groundwork for the greatest generation of economic growth the world has ever seen. It was the extraordinary prosperity set in motion by the Bretton Woods' System and institutions--the "Thirty Glorious Years"--that demonstrated that political democracy and the mixed economy could deliver and distribute economic prosperity.

• George Kennan: Author of the "containment" strategy that won the Cold War. Argued--correctly--that World War III could be avoided if the Western Alliance made clear its determination to "contain" the Soviet Union and World Communism, and that the internal contradictions of the Soviet Union would lead it to evolve into something much less dangerous than Stalin's tyranny.

• George Marshall: Architect of victory in World War II. Post-World War II Secretary of State who proposed the Marshall Plan, another key step in the economic and institutional reconstruction of Western Europe after World War II.

• Arthur Vandenberg: Leading Republican Senator from Michigan who made foreign policy truly bipartisan for a few years. Without Vandenberg, it is doubtful that Truman, Marshall, Acheson, and company would have been able to muster enough Congressional support to do their work.

• Paul Hoffman: Chief Marshall Plan administrator. The man who did the most to turn the Marshall Plan from a good idea to an effective aid program.

• Dean Acheson: Principal architect of the post-World War II Western Alliance. That Britain, France, West Germany, Italy, and the United States reached broad consensus on how to wage Cold War is more due to Dean Acheson's diplomatic skill than to any single other person.

• Harry S Truman: The President who decided that the U.S. had to remain engaged overseas--had to fight the Cold War--and that the proper way to fight the Cold War was to adopt Kennan's proposed policy of containment. His strategic choices were, by and large, very good ones.

• Dwight D. Eisenhower: As first commander-in-chief of NATO, played an indispensable role in turning the alliance into a reality. His performance as President was less satisfactory: too many empty words about "rolling back" the Iron Curtain, too much of a willingness to try to skimp on the defense budget by adopting "massive retaliation" as a policy, too much trust in the erratic John Foster Dulles.

• Gerald Ford: In the end, the thing that played the biggest role in the rise of the dissident movement behind the Iron Curtain was Gerald Ford's convincing the Soviet Union to sign the Helsinki Accords. The Soviet Union thought that it had gained worldwide recognition of Stalin's land grabs. But what it had actually done was to commit itself and its allies to at least pretending to observe norms of civil and political liberties. And as the Communist Parties of the East Bloc forgot that in the last analysis they were tyrants seated on thrones of skulls, this Helsinki commitment emboldened their opponents and their governments' failures to observe it undermined their own morale.

• George Shultz: Convinced Ronald Reagan--correctly--that Mikhail Gorbachev's "perestroika" and "glasnost" were serious attempts at reform and liberalization, and needed to be taken seriously. Without Shultz, it is unlikely that Gorbachev would have met with any sort of encouragement from the United States--and unlikely that Gorbachev would have been able to remain in power long enough to make his attempts at reform irreversible. *Also, almost surely an "Agent of Influence" and perhaps an out-and-out spy for Stalin's Russia. If so, never did any intelligence service receive worse service from an agent than Stalin's Russia did from Harry Dexter White....

#hoistedfromthearchives #politics #security #history #highlighted


Note to Self: Thinking About Blanchard's Presidential Address...: Blanchard's calculations of the effect of debt on welfare in his AEA Presidential Address all take the form of evaluating the welfare of a generation of economic agents young in some period t after the resolution of all period-t stochastic elements. That is a fine thing to do. That is not quite the same thing as the effect on expected well-being behind the veil of ignorance, from the nunc stans, taken without any knowledge of the resolution of period-t or indeed of any earlier stochastic elements. But I have not yet been able to wrap my head around what the differences are, or how they matter for conclusions. My notes...

Note to Self: Current forecast for 2018QIV GDP growth: 2.0%. Current forecast for 2019Q1 GDP growth: 1.5%. All of these people are now very, very quiet:

• Robert J. Barro, Michael J. Boskin, John Cogan, Douglas Holtz-Eakin, Glenn Hubbard, Lawrence B. Lindsey, Harvey S. Rosen, George P. Shultz and John. B. Taylor: How Tax Reform Will Lift the Economy: "A conventional approach to economic modeling suggests that such an increase in the capital stock would **raise the level of GDP in the long run by just over 4%. If achieved over a decade, the associated increase in the annual rate of GDP growth would be about 0.4% per year...

• Robert Barro (endorsed by Mike Boskin): How US Corporate-Tax Reform Will Boost Growth: "Gauging the effects of the tax-law changes on the costs (referred to as user costs) that businesses attach to investment in equipment and structures. Then I estimate long-run responses of the capital-labor ratio to the changes in user costs.... If we thought of C-corporations as corresponding to the whole economy, the changes in capital-labor ratios would imply a rise in long-run real per capita GDP by about 8.4%.... I made a rough downward adjustment of the long-run level effect from 8.4% to 7%...

• James C. Miller III, Douglas Holtz-Eakin... Barry W. Poulson... Charles W. Calomiris... Donald Luskin... 95 others: Pass tax reform and watch the economy roar: "A twenty percent statutory rate on a permanent basis would, per the Council of Economic Advisers, help produce a GDP boost 'by between 3 and 5 percent'.... It is critical to consider that $1 trillion in new revenue for the federal government can be generated by four-tenths of a percentage in GDP growth. Sophisticated economic models show the macroeconomic feedback generated by the TCJA will exceed that amount—more than enough to compensate for the static revenue loss... • Susan Collins: Twitter: "On @MeetThePress today said that she had talked to [Holtz-]Eakin, Lindsay and Hubbard and they believed that the supply side stimulus would produce an increase on government revenue. This is problem when other side alleged serious people are really hacks. Continue reading " " » ## Jill Abramson, Formerly of the New York Times, Has Both a Depraved Heart and a Social Intelligence Deficit At one point, Jill Abramson formerly of the New York Times had something like this—the lead of an written by Jake Malooley—on her computer screen: She then copied the text from "when..." to the second "...Darfur" and pasted the three sentences it into an editing window in her manuscript: She then did not: 1. enclose it in quotation marks, 2. add "(quoted from Jake Maloolley: https://www.timeout.com/chicago/things-to-do/vice-cop)", or 3. move it to a "scratch-sources" part of the document. Instead, she first deleted the word "Jason": Continue reading "Jill Abramson, Formerly of the New York Times, Has Both a Depraved Heart and a Social Intelligence Deficit" » ## A Rant on Trump, Trade, and China... I'm still trying to come to terms with my Commonwealth Club event with Steve Moore last month. As therapy, I took some of my less-than-coherent ravings and tried to turn then into proper rant: Steve, what you are saying is simply delusional. You keep saying that Xi needs to deal. Why? Because, you say, Trump is deadly serious on China an sod will not back down. Do remember that Trump declared victory on reforming NAFTA, "the worst trade deal in the history of the world", with small adjustments on autoparts rules-of-origin. Small adjustment on auto parts were enough to transform NAFTA, in Trump's mind, from the worst trade deal in the history of the world into something he is now very proud of. Xi has to be thinking that he should deal with Trump the same way that Mexico did—hang tough, provide a few symbolic concessions only, and Trump will cave. then things will go go back to business-as-usual. What is there in the situation that would keep that from being the obvious strategy for Xi to follow? Continue reading "A Rant on Trump, Trade, and China..." » ## Debt Derangement Syndrome: Fresh at Project Syndicate Project Syndicate: Debt Derangement Syndrome: Standard policy economics dictates that the public sector needs to fill the gap in aggregate demand when the private sector is not spending enough. After a decade of denial, the Global North may finally be returning to economic basics: For the past decade, politics in the Global North has been in a state of high madness owing to excessive fear of government debts and deficits. But two recent straws in the wind suggest that this may at long last be changing.... Ken Rogoff.... Brendan Greeley... reported... “a panicked email” from the Committee for a Responsible Federal Budget (CRFB)... Olivier Blanchard.... What Rogoff and Blanchard are saying today is standard policy economics. In fact, I always found it hard to believe–and still do–that anybody can take exception to it. Whenever the private sector stops spending enough to keep unemployment low and jobs easy to find, the public sector needs to fill the gap in aggregate demand... Read MOAR at Project Syndicate Continue reading "Debt Derangement Syndrome: Fresh at Project Syndicate" » ## "Gunpowder Empire": Should We Generalize Mark Elvin's High-Level Equilibrium Trap?: Hoisted from the Archives Hoisted from the Archives: "Gunpowder Empire": Should We Generalize Mark Elvin's High-Level Equilibrium Trap?: OK. Popping the distraction stack again. A chance remark by the extremely sharp Cosma Shalizi when he came through Berkeley has caused me to spend a lot of time meditating upon a passage written by Bob Allen: Robert Allen (2006): The British Industrial Revolution in Global Perspective: "The different trajectories of the wage-rental ratio created different incentives to mechanize production.... It was not Newtonian science that inclined British inventors and entrepreneurs to seek machines that raised labour productivity but the rising cost of labour... due to... Britain’s success in the global economy... in part the result of state policy... Britain['s] vast and readily worked coal deposits... Continue reading ""Gunpowder Empire": Should We Generalize Mark Elvin's High-Level Equilibrium Trap?: Hoisted from the Archives" » ## Blogging: What to Expect Here... The purpose of this weblog is to be the best possible portal into what I am thinking, what I am reading, what I think about what I am reading, and what other smart people think about what I am reading... "Bring expertise, bring a willingness to learn, bring good humor, bring a desire to improve the world—and also bring a low tolerance for lies and bullshit..." — Brad DeLong "I have never subscribed to the notion that someone can unilaterally impose an obligation of confidentiality onto me simply by sending me an unsolicited letter—or an email..." — Patrick Nielsen Hayden "I can safely say that I have learned more than I ever would have imagined doing this.... I also have a much better sense of how the public views what we do. Every economist should have to sell ideas to the public once in awhile and listen to what they say. There's a lot to learn..." — Mark Thoma "Tone, engagement, cooperation, taking an interest in what others are saying, how the other commenters are reacting, the overall health of the conversation, and whether you're being a bore..." — Teresa Nielsen Hayden "With the arrival of Web logging... my invisible college is paradise squared, for an academic at least. Plus, web logging is an excellent procrastination tool.... Plus, every legitimate economist who has worked in government has left swearing to do everything possible to raise the level of debate and to communicate with a mass audience.... Web logging is a promising way to do that..." — Brad DeLong "Blogs are an outlet for unexpurgated, unreviewed, and occasionally unprofessional musings.... At Chicago, I found that some of my colleagues overestimated the time and effort I put into my blog—which led them to overestimate lost opportunities for scholarship. Other colleagues maintained that they never read blogs—and yet, without fail, they come into my office once every two weeks to talk about a post of mine..." — Daniel Drezner Continue reading "Blogging: What to Expect Here..." » ## Yes, There Are Individual Economists Worth Paying Respect to. But Is Economics Worth Paying Respect to? Blush. To be one of fifteen good economists name-checked by Larry Summers genuinely makes my day—nay, makes my week. But this gets into a topic I have been worrying at for a long time now. And so let me try once again to say what needs to be said, for I do have to admit that, contrary to what Larry maintains, Fareed Zakaria does have a point when he says that "events have hammered... nails into the coffin of traditional economics" and that, while the question mark at the end is important, it is time to speak of "the end of economics?". Yes, there are very many good economists worth listening to. But does economics as a whole have any claim to authority, or is it better for outsiders' first reaction to be to dismiss its claims as some combination of ideology on the one hand and obsequious toadying to political masters on the other? Open right now on my virtual desktop, as has been true about 5% of the time over the past fourteen months, is an article forecasting the economic effects of the 2017 Trump-McConnell-Ryan tax cut by nine academic economists: Robert J. Barro, Michael J. Boskin, John Cogan, Douglas Holtz-Eakin, Glenn Hubbard, Lawrence B. Lindsey, Harvey S. Rosen, George P. Shultz and John. B. Taylor: How Tax Reform Will Lift the Economy: We believe the Republican bills could boost GDP 3% to 4% long term by reducing the cost of capital. It is, bluntly, unprofessional. Continue reading "Yes, There Are Individual Economists Worth Paying Respect to. But Is Economics Worth Paying Respect to?" » ## Talking Points and Snippets from Commonwealth Club January 25, 2019 Forecast Event Forecasting: Because of the shutdown, we are flying much more blind than we would like to be. We are not getting the normal data flow. Thus there is more than the usual level of uncertainty. Given that: • I believe there is something like an 80 percent probability that Europe is now in a small recession. • The Chinese government continues to say that all is well. • But somehow six percent fewer cars were bought in China in late 2018 than in late 2017. • Over the past half century the reliable recession signal has been yield-curve inversion—since 1965 eight inversion signals: one false (1998), one near-recession (1966), and six recessions. • There have been no recessions not signaled by a yield-curve inversion. • The Federal Reserve currently plans are to invert the yield curve in June. • Neither Steve Moore nor I understand why the Fed thinks that this is a good thing to do. In the last yield-curve inversion, in 2006, they were worried about an inflationary spiral breaking out because of rising oil prices—they should not have been worrying about it, but they were. In the yield-curve inversion before that, in 2000, they were worried about the dot-com bubble. There is nothing like either of those going on now. Some people think the Federal Reserve is about to back off. Some people think that this time really is different—that the bond market is spooking at shadows this time. Give each of these a 25% chance of being right, and you have to say that there is a 50% chance the U.S. will be in recession in a year and a half. We hope the recession, if it comes, will be a small one. We hope we will, somehow, dodge the bullet and not have a recession. But, at least as I see it, that is the forecast: a 50% chance of 1.5%-2.5% growth over the next year and a half, and a 50% chance of negative growth. If you want a more precise forecast, my advice is to consult your Magic-8 Ball. Continue reading "Talking Points and Snippets from Commonwealth Club January 25, 2019 Forecast Event" » ## The Economic Forecast: Commonwealth Club Non-Public Event Opening Statement Because of the shutdown, we are flying much more blind than we would like to be. We are not getting the normal data flow. Thus there is more than the usual level of uncertainty. Given that: • I believe there is something like an 80 percent probability that Europe is now in a small recession. • The Chinese government continues to say that all is well. • But somehow six percent fewer cars were bought in China in late 2018 than in late 2017. • Over the past half century the reliable recession signal has been yield-curve inversion—since 1965 eight inversion signals: one false (1998), one near-recession (1966), and six recessions. • There have been no recessions not signaled by a yield-curve inversion. • The Federal Reserve currently plans are to invert the yield curve in June. • Neither Steve Moore nor I understand why the Fed thinks that this is a good thing to do. Continue reading "The Economic Forecast: Commonwealth Club Non-Public Event Opening Statement" » Note to Self: The Heritage Foundation, the Club for Growth, and Stephen Moore Have No Principles Whatsoever. Why Do You Ask?: Now that Stephen Moore has signed up with Donald Trump, he is opposed to the Trans Pacific Partnership.... On Trish Regan's show with him, he made four points about TPP: 1. The agreement is long, and has lots of pages in it. 2. The agreement does not commit the Asians to stop copying our intellectual property. 3. The agreement does allow the U.S. to impose retaliatory penalties on other signatories if they do copy our intellectual property, but they will copy anyway. 4. The agreement is unlike NAFTA, which is a good thing. But... short months ago... Continue reading " " » Hoisted from the Archives: The Kansas Republican Governance Experiment. Or Is That "Governance 'Experiment'"? Or Is That "'Governance' Experiment"?: Nothing like this was seen before.... It is only under Brownback that it has been down, down, down, down. You can argue how much of it is hostility to immigrants and strangers. How much of it is the profoundly un-Christian cast of a "Christian" government, and how much of it is the collapse of public services. But it has been effective. My friend Dan Davies says that the best proof that there is a skill and art of management comes from the fact that nobody doubts that there is such a thing as gross mismanagement. Similarly, the best proof that there is such a thing as good technocratic government leading to shared prosperity and equitable growth is... Brownback, and his acolytes and supporters, in Kansas: Continue reading " " » ## Commonwealth Club Talking Points (January 25, 2019): Forecasting and Steve Moore Edition The Shutdown: Let's review the bidding: Pelosi, Ryan, McCarthy, Schumer, McConnell, Trump reached a deal. Deal passes Senate unanimously. Trump watches "Fox and Friends". Trump announces he won't sign the deal. Paul Ryan—desperate not to embarrass Trump more—won't let the House vote on the deal. Ryan goes out and Pelosi gets in on January 4, and Pelosi passes the deal through the House. But because it is a new congressional session, the Senate's approval has expired. And McConnell—desperate not to embarrass Trump more—is now holding things up in the Senate. From Pelosi and Schumer's standpoint, the big problem is this: they reach a new deal with Trump, Fox and Friends finds some reason to slag it, Trump backs out again. The right, rational response to this situation is for Pelosi, McCarthy, Schumer, and McConnell to strike deals and then pass them with veto-proof majorities. But McCarthy and McConnell are too scared of Trump and not concerned enough about the well-being of the country to do that. 2.5 million people aren't getting their paychecks and 800,000 are getting very little work done. That's about a 0.5%—10 billion over the past month—hit to the economy. We won't see that because of oddities in the how the public sector is folded into official statistics, but it is there. Will there be a multiplier applied to it? In a year I will have the data so that then I will be able to look back and tell you. I cannot tell you now... Continue reading "Commonwealth Club Talking Points (January 25, 2019): Forecasting and Steve Moore Edition" » ## Commonwealth Club: Annual Economic Forecast Commonwealth Club: Brad DeLong and Stephen Moore: Bank of America/Merrill Lynch Walter E. Hoadley Annual Economic Forecast | Commonwealth Club: "FRI, JAN 25 / 12:00 PM :: The Commonwealth Club :: 110 The Embarcadero :: Taube Family Auditorium :: San Francisco, 94105: With changes to taxes, trade wars with China and other countries, health care in flux, housing prices continuing to rise, continued governmental gridlock as well as international challenges to the United States, what does all of this mean for your business, your investments and the overall economy for 2019?... Continue reading "Commonwealth Club: Annual Economic Forecast" » ## U.S. Recession No Longer Improbable: No Longer Fresh at Project Syndicate Project Syndicate: U.S. Recession No Longer Improbable: Over the past 40 years, the U.S. economy has spent six years in four recessions: in a downturn 15% of the time, with the odds that a current expansion will turn into a downturn within a year being one-in-eight. Of these four downturns, one—the extended downturn of 1979-82—had a conventional cause: the Federal Reserve thought inflation was too high, and so hit the economy on the head with the high interest-rate brick to stun it and induce workers to moderate their demands for wage increases and firms to cut back planned price increases. The other three have been caused by derangements in financial markets: the collapse of sunbelt Savings-and-Loans for 1991-92, the collapse of dot-com valuations in 2000-2, and the collapse of mortgage-backed securities in 2008-9. Continue reading "U.S. Recession No Longer Improbable: No Longer Fresh at Project Syndicate" » ## Be the Podcast You Want to See in the World! The very sharp Arindrajit Dube was, as one does, procrastinating on twitter: Arindrajit Dube: Somehow I find the econ podcast space is mostly occupied by ideological right wingers, as opposed to people interested in an open minded, evidence informed economics. Who am I missing? And my instantaneous reaction was: BE THE PODCAST YOU WANT TO SEE IN THE WORLD! Brad DeLong: Let's start a podcast! Arindrajit Dube: Wait Brad, is this a serious offer? :-)... And the public chimed in: Suresh Naidu: Do it! Matthew Yglesias: You guys should do this for real Robert Waldmann: You really do have to do the podcast (or block me). I will tweet complaints until you do it. Aaron Sojourner: It would be incredibly valuable service. Erik: Do it! Dr. A. Duus Pape: I'd subscribe in a heartbeat. Arindrajit Dube: God damn it Brad now Matt Y is on board and I am seriously screwed... So it looks like we may be doing this for real—once a week, half-hour chunks, starting out as amateur hour only. First topic: thinking about what marginal tax rates on the rich should be. What say you all? Continue reading "Be the Podcast You Want to See in the World!" » ## By Popular Demand: What Is “Modern Monetary Theory”? What Is “Modern Monetary Theory”? Ever since the Great Depression it has been settled doctrine in the nations of the North Atlantic that the government has a responsibility to keep the macroeconomy in balance: The circular flow of spending, production, and incomes should be high enough to keep there from being unnecessary unemployment while also being low enough so that prices and inflation are not surprisingly and distressingly high. To accomplish this, governments use fiscal policy—the purchase of goods and services, the imposition of taxes, and the provision of transfer payments—and monetary policy—the provision by the central bank to the system of those liquid assets called “money” and its consequent nudging up and down of interest rates and asset prices—to attempt to keep the circular flow of spending, etc., in balance with the economy‘s sustainable productive potential at the expected rate of inflation . Modern Monetary Theory says (1) that that is all there is to worry about, and (2) that fiscal policy should play the principal role in this balancing process. Continue reading "By Popular Demand: What Is “Modern Monetary Theory”?" » ## Dealing with Global Warming Needs a Carbon Tax Starting Now It would have been smart to do it 26 years ago, when Al Gore was first pushing it—and we got it through the House and fell short by two votes in the Senate: George Akerlof et al.: Economists’ Statement on Carbon Dividends: Bipartisan agreement on how to combat climate change: Global climate change is a serious problem calling for immediate national action. Guided by sound economic principles, we are united in the following policy recommendations... Continue reading "Dealing with Global Warming Needs a Carbon Tax Starting Now" » ## Costs and Benefits of International Capital Mobility: Reply to Bhagwati: Hoisted from 20 Years Ago Needless to say, time has left me a lot wiser: We need to design economies so that they can operate without disaster even when deregulatory clowns like those of the George W. Bush or the Donald J. Trump administrations are in control of the levers of policy at key moments. How to do that is not so clear. What is clear is that only a fool today would think that our political economy would support a clever technocracy so that we might have our cake and eat it too. Indeed, the most likely scenario seems to be that we will be unable to eat our cake, and then the kleptocrats will steal it out from under our noses so that we will not have it either. In short: I should have listened harder to Jagdish 20 years ago... Hoisted from the Archives: Reply to Bhagwati: "I open my May/June [1998] issue of Foreign Affairs to discover myself pilloried in an article by Jagdish Bhagwati between Paul Krugman and Roger C. Altman (excellent company to be in, by the way: much better than I am used to) as a banner-waving proponent of international capital mobility, guilty of "assum[ing] that free capital mobility is enormously beneficial while simultaneously failing to evaluate its crisis-prone downside." I rub my eyes in surprise. I had not thought of myself as a banner-waving proponent of international capital mobility. Continue reading "Costs and Benefits of International Capital Mobility: Reply to Bhagwati: Hoisted from 20 Years Ago" » ## Why Economic History? We economists have gotten too good at making theories. In fact, the set of plausible and admissible economic theories is now dense in the space of possible conclusions: For every desired conclusion X, for every ε, there is a degree of theoretical complexity nδ and a chain of theories of increasing complexity T such that: for all n > nδ -> | T(n) - X | < ε Continue reading "Why Economic History?" » ## What Will Cause the Next US Recession?: Live at Project Syndicate Live at Project Syndicate: U.S. Recession No Longer Improbable: The next recession most likely will not be due to a sudden shift by the Fed from a growth-nurturing to an inflation-fighting policy. Given that visible inflationary pressures probably will not build up by much over the next half-decade, it is more likely that something else will trigger the next downturn.... The culprit will probably be a sudden, sharp “flight to safety” following the revelation of a fundamental weakness in financial markets. That... is the pattern that has been generating downturns since at least 1825, when England’s canal-stock boom collapsed. Needless to say, the particular nature and form of the next financial shock will be unanticipated. Investors, speculators, and financial institutions are generally hedged against the foreseeable shocks.... The death blow to the global economy in 2008-2009 came not from global imbalances or from the collapse of the mid-2000s housing bubble, but from the concentration of ownership of mortgage-backed securities... Read MOAR at Project Syndicat Continue reading "What Will Cause the Next US Recession?: Live at Project Syndicate" » ## Betting That Nobody Will Check the References as an Intellectual Style: Monday Smackdown Monday Smackdown: Apropos of David Brooks's ill-sourced imaginings that "cultural Marxism... is now the lingua franca in the elite academy..." and his use of Alexander Zubatov and Russell Blackford to back him up... I am not sure whether Brooks is simply confident that people will not check Zubatov's references or did not check them himself—he does have to write a full 1200 words a week in his job. But I have long thought that betting nobody will check the references is an intellectual style much more common on the right than on the center or the left. For example: On Niall Ferguson: Why Did Keynes Write "In the Long Run We Are All Dead"?: In [Keynes's] extended discussion of how to use the quantity theory of money, the sentence 'In the long run we are all dead' performs an important rhetorical role. It wakes up the reader. It gets him or her to reset an attention that may well be flagging. But it has nothing to do with attitudes toward the future, or with rates of time discount, or with a heedless pursuit of present pleasure. So why do people think it does? Note that we are speaking not just of Ferguson here, but of Mankiw and Hayek and Schumpeter and Himmelfarb and Peter Drucker and McCraw and even Heilbroner—along with many others. Continue reading "Betting That Nobody Will Check the References as an Intellectual Style: Monday Smackdown" » The most remarkable thing about this piece from 2011 is that Robert Barro does not seem to feel under any pressure at all to provide an account of why it was that real GDP per capita was 52,049 dollars in the fourth quarter of 2007 and yet only 49,318 dollars in the second quarter of 2009—and did not surpass its 2007Q4 level again until 2013Q3. Other adherents than Barro to what Barro calls "normal economics" have put forward three theories: • that there was a huge sudden change in American workers' utility functions that made them much less eager to work, • that there was a huge sudden forgetting of a great deal of knowledge about how to manipulate nature and organize production, and • that there was a great and well-founded fear that Obama was about to impose taxes to turn America into a Venezuela or that Bernanke was about to follow a monetary policy that would turn the U.S. into a Zimbabwe. They were laughed at. So Barro prefers to have no explanation at all for why production per capita was lower than it had been in 2007Q4, and yet maintains unshaken confidence that he has a deep and correct understanding of what determines the level of production. You can't do that—hold that you have the correct theory, and yet not explain how it applies to the world in which you live: Robert Barro (2011): Keynesian Economics vs. Regular Economics: "The overall prediction from regular economics is that an expansion of transfers, such as food stamps, decreases employment and, hence, gross domestic product (GDP). In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working. In addition, the financing of a transfer program requires more taxes—today or in the future in the case of deficit financing. These added levies likely further reduce work effort—in this instance by taxpayers expected to finance the transfer—and also lower investment because the return after taxes is diminished... Continue reading " " » ## We May Well Not Be at Full Employment Yet... In the context of overall labor-market utilization trends, the rise in the household-survey estimate of the unemployment rate in December relative to November is worth a note: • First, the rise in the unemployment rate is due predominately to yet another increase in labor force participation. It's not that people found it harder to find and keep jobs—it's that people who had thought it would be hard concluding that it will be easier, and so starting to look. Continue reading "We May Well Not Be at Full Employment Yet..." » ## Rand Paul: Protecting Property Holders’ Rights to Discriminate on the Basis of Race: "Is the Hard Part About Believing in Freedom..." Rand Paul: Protecting Property Holders’ Rights to Discriminate on the Basis of Race: "Is the Hard Part About Believing in Freedom...": I had thought that my brilliant-but-at-times-highly-annoying coauthor @Econ_Marshall was making a more sophisticated point: that here in America "libertarianism" is a Frankenstein's monster that got its lightning-bolt juice from massive resistance to the Civil Rights Movement. Dismantling the New Deal and rolling back the social insurance state were not ideas that had much potential political-economy juice back in the 1950s and 1960s. But if the economic libertarian cause of dismantling the New Deal could be harnessed to the cause of white supremacy—if one of the key liberties that libertarians were fighting to defend was the liberty to discriminate against and oppress the Negroes—than all of a sudden you could have a political movement that might get somewhere. And so James Buchanan and the other libertarians to the right of Milton Friedman made the freedom to discriminate—or perhaps the power to discriminate?—a key one of the liberties that they were fighting for in their fight against BIG GOVERNMENT. And this has poisoned American libertarianism ever since. This—Marshall thinks, and I am more than half agree, is the right way to look at it. For example, consider when Rand Paul came out of the libertarian fever swamps to Washington https://www.google.com/amp/s/thehill.com/blogs/blog-briefing-room/news/161217-paul-says-he-would-have-opposed-civil-rights-act and began saying that he would have voted against the 1964 Civil Rights Act because it infringed On property holders’ rights to discriminate: Continue reading "Rand Paul: Protecting Property Holders’ Rights to Discriminate on the Basis of Race: "Is the Hard Part About Believing in Freedom..."" » ## Trade and Distribution: A Multisector Stolper-Samuelson Finger Exercise: Hoisted from 2008 Hoisted from 2008: Trade and Distribution: A Multisector Stolper-Samuelson Finger Exercise: This argument of an inconsistency between free trade and the well-being of the majority of potential voters rests substantially on the two-factor example of the Stolper-Samuelson result. It does not fare too well when we generalize to a situation in which there are a number of different factors—even if the ownership of the abundant factors of production is very concentrated indeed... https://delong.typepad.com/stolper-samuelson_finger_exercise-1.pdf Continue reading "Trade and Distribution: A Multisector Stolper-Samuelson Finger Exercise: Hoisted from 2008" » ## Would Small Minimum Wage Increases Raise or Have No Effect on Employment? That is the current question—would (small) minimum wage increases have no effect on employment because labor-supply curves are steep, or would they boost employment by curbing employers with monopsony power from pushing both wages and employment below their competitive equilibirum values? Yet you would not know it from the very sharp and good-hearted ex-New York Times labor beat reporter Steven Greenhouse. What is he doing? He is, I think, reflexively saying "both sides!": Steven Greenhouse: "Some argue that it's foolish to support a higher minimum because it could reduce employment. But there's a huge debate among economists on this. One school—see David Neumark—finds that a higher minimum reduces employment. The other—see Arin Dube—finds little effect on employment... Now this is simply wrong. The majority of economists believe that raising the minimum wage from its current level would significantly boost the incomes of the working poor and have little adverse effect on employment. A large minority of economists believe that raising the minimum wage would actually increase employment—that employers currently use their monopsony power to push wages and employment below their competitive equilibrium values, and that a higher minimum wage would reduce their ability to do this and so boost both. The majority and the large minority all, however, agree that there is uncertainty here. It is only a small minority of economists who follow David Neumark on this—who are confident that a higher minimum wage now would have a noticeable negative effect on employment. Thus Steve gets it wrong. Continue reading "Would Small Minimum Wage Increases Raise or Have No Effect on Employment?" » ## The Federal Reserve Is Raising Interest Rates Again for Probably All The Wrong Reasons: Last Month Over at Equitable Growth Last Month Over at Equitable Growth: The Federal Reserve Is Set to Raise Interest Rates Again for Probably All The Wrong Reasons: The meeting [last month] of the Federal Open Market Committee—the principal policymaking body of the U.S. Federal Reserve system—[was] overwhelmingly likely to raise the benchmark interest rate it controls, the Federal Funds rate. The rate, which governs short-term safe nominal bonds, is likely to go up by one-quarter of a percentage point, from the range of 1.75 percent to 2 percent per year to the range of 2 percent to 2.25 percent per year. That would make it a little more expensive to borrow and spend and a little more attractive to cut spending and save. Thus, there would be a little less spending in the economy, and so a few fewer jobs. Economic growth would be a little slower. The U.S. economy would be a little less resilient in the face of adverse shocks to resources or confidence that might generate a recession. These are all minuses—small minuses from a 25-basis-point increase in the Federal Funds rate, but minuses nonetheless. Continue reading "The Federal Reserve Is Raising Interest Rates Again for Probably All The Wrong Reasons: Last Month Over at Equitable Growth" » ## Development and Security Not what I said at the Blum Center Development Lunch today: more what I wish I had said—albeit it is still incoherent and disorganized: Let me begin with three direct responses to points Michael Nacht made. Let me then try to—briefly—propose a framework, perhaps a framework for analysis, perhaps merely a framework for convincing people in the national security community that they should take issues of economic development seriously, and so give large grants so that the Berkeley development community can do more things—things closely related to what we would be doing anyway. Continue reading "Development and Security" » ## Blum Hall B100: Plaza Level: 2 PM: Bill Janeway: The Digital Revolution and the State: The Great Reversal http://delong.typepad.com/the-digital-revolution-and-the-state--book-talk.pdf Bill Janeway: Doing Capitalism in the Innovation Economy 2.0 https://books.google.com/books?isbn=1108471277: "The innovation economy begins with discovery and culminates in speculation. Over some 250 years, economic growth has been driven by successive processes of trial and error: upstream exercises in research and invention and downstream experiments in exploiting the new economic space opened by innovation... ...Drawing on his professional experiences, William H. Janeway provides an accessible pathway for readers to appreciate the dynamics of the innovation economy. He combines personal reflections from a career spanning forty years in venture capital, with the development of an original theory of the role of asset bubbles in financing technological innovation and of the role of the state in playing an enabling role in the innovation process. Today, with the state frozen as an economic actor and access to the public equity markets only open to a minority, the innovation economy is stalled; learning the lessons from this book will contribute to its renewal... Continue reading "Blum Hall B100: Plaza Level: 2 PM: Bill Janeway: The Digital Revolution and the State: The Great Reversal" » ## The Appalachian and Other Trails https://www.icloud.com/keynote/0HORQ6Ql3Ejvf5PSeGJkEXOyQ Let's consider the United States in the time of major westward expansion and "Amerindian removal": the century 1760 to 1860 before the Civil War. We have U.S. output-per-worker growth then at about 1.0% per year, in contrast to British output-per-worker growth at about 0.5% per year. We have the U.S. population and labor force growing at 2.5% per year, from 2.5 to 30 million. Our conclusion: An America penned behind the Appalachians would probably have seen its living standards and productivity levels not growing at 1% per year from 1760 to 1860 but shrinking. For the$ \gamma = 3.0 \$ benchmark case, living standards and productivity levels would have shrunk at a pace of -0.325% per year had population growth been the historical 3% per year.

Continue reading " The Appalachian and Other Trails" »

Over on EconSpark, I think this is wrong: Ben Bernanke: How Important Was The Financial Panic As A Cause Of The Great Recession?: "The collapse of the housing bubble was certainly a primary cause of the Great Recession.  The unwinding of the bubble (1) depressed aggregate demand through its adverse effects on consumer wealth and residential construction, and (2) triggered a financial panic...

The unwinding of the bubble set the table for the financial panic, but it did not trigger it. The bubble had already been unwound before the panic. The triggers of the panic lay elsewhere: in the events in financial markets that produced a sudden, discontinuous boost in the demand for safe assets. One picture I have always found very illuminating is this one:

## Is There Any Reason to Fear Low Interest Rates?

Paul Krugman tells us: Paul Krugman: @paulkrugman: "The American Economic Association has a new discussion forum set up by Olivier Blanchard. First up is the question of whether low interest rates are leading to excessive risk-taking https://www.aeaweb.org/forum/311/have-low-interest-rates-led-to-excessive-risk-taking..." So I mossed on over and left three comments: one on the forum, one on secular stagnation, and one on whether there is any reason to fear low interest rates:

Is There Any Reason to Fear Low Interest Rates?: Have low interest rates led to excessive risk taking?: I suspect that the right way to make the accurate point that this line of discussion is hunting for is to focus not on the amount of risk but on, rather, who is bearing the risk...

Continue reading "Is There Any Reason to Fear Low Interest Rates?" »

## Brett Kavanaugh: A Multiple Train Wreck in Many Dimensions: Monday Smackdown

I confess that I have been procrastinating on various things. Why? Because I have been unable to tear my eyes away from the multiple train crash that is the confirmation process... the career... the life of Brett Kavanaugh. My view of this is a third- or fourth-hand view. It is the view of Georgetown Prep from Sidwell Friends. And it may well be wrong. But I think that it is right. So, with that warning, here goes:

The first... oddity... is Brett Kavanaugh‘s reaction to Christine Blasey Ford. It really ought to have been something like this:

Continue reading "Brett Kavanaugh: A Multiple Train Wreck in Many Dimensions: Monday Smackdown" »

## Ask Not For Whom the Global Warming Bell Tolls...: Live at Project Syndicate

Project Syndicate: Ask Not For Whom the Global Warming Bell Tolls...: Scarcely had I begun my first lecture of the fall semester here at the University of California, Berkeley, when I realized that I was too hot. I desperately wanted to take off my professorial tweed jacket. A tweed jacket is a wonderful but peculiar costume. If all you have for raw material is a sheep, it is the closest thing you can get to Gore-Tex.... Over the past 20 years, professorial garb has become increasingly uncomfortable, even here on the east side of the Bay. The climate now feels more like that of Santa Barbara.... The problems associated with global warming will be neither mere inconveniences, nor as far off as we would like to think. There are currently two billion near-subsistence farmers living in the six great river valleys of Asia, from the Yellow all the way around to the Indus. These farmers have limited means and few non-agricultural skills. It would not be easy for them to pick up and relocate.... The snow melt from the region’s high plateaus has always arrived at precisely the right moment, and in precisely the right volume.... Another billion people depend on the monsoon arriving at the right time, and in the right place.... Cyclones in the Bay of Bengal.... 250 million people living at or near sea level in the greater Ganges Delta, the world will face a long train of catastrophe. The international community is in no way prepared....

“No man”—nor nation, region, or country–“is an island entire of itself.… And therefore never send to know for whom the bell tolls; it tolls for thee.” Read MOAR at Project Syndicate

Continue reading "Ask Not For Whom the Global Warming Bell Tolls...: Live at Project Syndicate" »