Month: February 2015

I Understand Where Martin Feldstein Starts: I Do Not Understand Where He Ends Up: Focus

Posted on by Brad DeLong

Vir illustris Martin Feldstein starts by saying: downward nominal price stickiness is such a thing that we do not have to worry about deflationary spirals in consumer prices. I agree. But I do not understand where his argument ends up:

Martin Feldstein: The Deflation Bogeyman: “The world’s major central banks are currently obsessed with… raising their national inflation rates to… 2% per year….

…But is this a real problem?… Fortunately, we have relatively little experience with deflation to test the downward-spiral theory…. [Perhaps] they are concerned about the loss of credibility implied by setting an inflation target of 2% and then failing to come close to it…. [Perhaps] are actually more concerned about real growth and employment, and are using low inflation rates as an excuse…. [Perhaps they] want to keep interest rates low in order to reduce the budget cost of large government debts. None of this might matter were it not for the fact that extremely low interest rates have fueled increased risk-taking by borrowers and yield-hungry lenders. The result has been a massive mispricing of financial assets. And that has created a growing risk of serious adverse effects on the real economy when monetary policy normalizes and asset prices correct.

I certainly agree that deflation in consumer prices is not a thing, in our modern age at least–that what we have to worry about is deflation in asset prices. I said so back in 1999: http://www.brookings.edu/~/media/projects/bpea/spring-1999/1999a_bpea_delong.pdf.

But the rest of Feldstein’s argument–that it is important to raise interest rates now because their is a “massive misplacing of financial assets” with “increased risk-taking by borrowers and yield-hungry lenders” simply does not seem to compute at all. People like the estimable Gabriel Chodorow-Reich who have looked for that increased risk-taking have found little of it: http://www.brookings.edu/~/media/projects/bpea/spring-2014/2014a_chodorowreich.pdf. Real companies with real earnings and real businesses are not selling out outsized valuations. Equity earnings yields are–still–not notably high. The Standard and Poor’s yield is above its average over the past twenty years:

S P 500 Earnings Yield

The assets that seem to be overpriced are those that offer nominal safety in reserve currencies issued by independent central banks with low inflation targets–and those are, overwhelmingly, the liabilities of governments and not of private sector entities. Goldman Sachs and its clients simply cannot issue a AAA bond these days.

Restoring the configuration of asset prices to anything like normal would, therefore, seem to me to not call for an increase in safe short-term interest rates above their current values, which correspond to a reasonable interest-rate feedback rule. Restoring the configuration of asset prices to anything like normal seems to me to call for:

  • Raising the inflation target to 4%/year to greatly diminish the risk of again running into the zero lower bound.
  • Having governments create more of the safe nominal reserve-currency assets for which financial markets have such huge demand–which means for the governments to issue debt and spend on infrastructure.

And maintaining fiscal policy at its present configuration while raising short-term safe interest rates seems to me definitely not the way to get there…

Lunchtime Must-Read: Boris Nemtsov: A Final Interview

Posted on by Brad DeLong

Boris Nemtsov: A Final Interview: “I have no doubt that the struggle for the revival of Russians will be tough…

…People see what this crazy politics led to, they see widespread corruption, they have firsthand experience with the inadequacy of the state. But they still believe in the leader because for the past several years, the leader was doing one thing very well: He was brainwashing the Russians. He implanted them with a virus of inferiority complex towards the West, the belief that the only thing we can do to amaze the world is use force, violence and aggression. [Putin] programmed my countrymen to hate strangers. He persuaded them that we need to rebuild the former Soviet order, and that the position of Russia in the world depends entirely on how much the world is afraid of us. He managed to do all these things with Goebbels-style propaganda…. The responsibility for spilling both Russian and Ukrainian blood… lies not only with Putin, but also with such gentlemen as Konstantin Ernst [director general of Channel One] or Dmitry Kiselyov [head of the new, Russian-government-owned news agency Rossiya Segodnya]. They operate in accordance with the simple principles of Joseph Goebbels: Play on the emotions; the bigger the lie, the better; lies should be repeated many times. This propaganda is directed to the simple men; there is no room for any questions, nuances. Unfortunately, it works…. We need to work as quickly as possible to show the Russians that there is an alternative, that Putin’s policy leads to degradation and a suicide of the state. There is less and less time to wake up…

Morning Must-Read: Paul Krugman: The Regrettable Man

Posted on by Brad DeLong

The continued willingness of right-wing economists to declare their allegiance to the inflation cult continues to amaze:

Paul Krugman: The Regrettable Man: “CNN: ‘Lonegan also said Friday…

…that in conjunction with the Fed’s annual Jackson Hole symposium in Wyoming this year, a group of conservative economists are planning to hold a meeting of their own ‘directly across the street’ featuring former Federal Reserve Chair Alan Greenspan as the keynote speaker.

I guess we wait for confirmation before adding this to the file of examples establishing Maestrodamus as the worst ex-Fed chairman in history. But consider the notion that this group regards AG as an authority figure. Never mind the bubble denial; almost five years have passed since Greenspan declared that we were on the verge of becoming Greece, Greece I tell you, and wrote one of the most awesomely terrible passages in the history of economic policy:

Despite the surge in federal debt to the public during the past 18 months–to $8.6 trillion from $5.5 trillion–inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

Yep: he was annoyed at the markets for failing to deliver the crisis he was expecting, and considered it ‘regrettable’ that the crisis had not arrived. Actually, though, this isn’t too different from the sentiment expressed by Paul Ryan and John Taylor, denouncing the Fed’s actions because they were preventing a fiscal crisis. Anyway, the saga of the inflation cult continues.

Things to Read on the Evening of February 27, 2015

Posted on by Brad DeLong

Must- and Shall-Reads:

 

  1. Paul Krugman: The Closed Minds Problem: “When I was a young economist… I lived… in a world in which ideas… met in relatively open intellectual combat… [and] better ideas tended to prevail: if your model of trade flows or exchange rate fluctuations tracked the data better… you could expect it to be taken up by many if not most researchers…. This is still true in much of economics…. But people who declared back in 2009 that Keynesianism was nonsense and that monetary expansion would inevitably cause runaway inflation are still saying exactly the same thing after six years of quiescent inflation and overwhelming evidence that austerity affects economies exactly the way Keynesians said it would… founders of the Shadow Open Market Committee and Nobel laureates…. This isn’t just a story about economics; it covers everything from climate science and evolution to Bill O’Reilly…. So what should those of us who really wanted to be part of what we thought this enterprise was about do?… I see three choices: 1. Continue to write and speak as if we were still having a genuine intellectual dialogue…. That’s one way to understand Olivier Blanchard’s now somewhat infamous 2008 paper on the state of macro; he was… trying to appeal to the better angels of freshwater nature. The trouble… [this] end[s] up legitimizing work that doesn’t deserve respect…. 2. Point out the wrongness, but quietly and politely. This… [is] useful to anyone who reads it. But nobody will. 3. Point out the wrongness in ways designed to grab readers’ attention… ridicule… snark… names attached. This will get read; it will get you some devoted followers, and a lot of bitter enemies. One thing it won’t do, however, is change any of those closed minds. So is there a reason I go for door #3…. Yes–because the point is not to convince Rick Santelli or Allan Meltzer that they are wrong…. It is, instead, to deter other parties from false equivalence. Inflation cultists can’t be moved; but reporters and editors who tend to put out views-differ-on-shape-of-planet stories because they think it’s safe can be, sometimes, deterred if you show that they are lending credence to charlatans…. The inflation-cult story is, I think, a prime example…. It really would be nice not having to do things this way. But that’s the world we live in…”

    <–ridicule as the ultima ratio intelletualum against the closed-minded

  2. James D. Hamilton, Ethan S. Harris, Jan Hatzius, and Kenneth D. West: The Equilibrium Real Funds Rate: Past, Present and Future: “The uncertainty around the equilibrium rate is large, and its relationship with trend GDP growth much more tenuous than widely believed… a wide range of plausible central estimates for the current level of the equilibrium rate, from a little over 0% to the pre-crisis consensus of 2%…. Dhis uncertainty, we are skeptical of the ‘secular stagnation’ view that the equilibrium rate will remain near zero for many years to come…. The disappointing post-2008 recovery is better explained by protracted but ultimately temporary headwinds from the housing supply overhang, household and bank deleveraging, and fiscal retrenchment…. The uncertainty around the equilibrium rate argues for more ‘inertial’ monetary policy than implied by standard versions of the Taylor rule… a later but steeper normalization path for the funds rate compared with the median ‘dot’ in the FOMC’s Summary of Economic Projections.”

    <–uncertainty calls for highly “inertial” policy followed by rapid response…

  3. Barry Eichengreen: Greece in Light of the Past and Future of the Euro: “I’m strongly of the view that 1929-1931 and 2008-2010 were cut from the same cloth, broadly speaking, whereas 1920-1922 was a fundamentally different animal… caused by monetary tightening by the Federal Reserve designed to wring inflation out of the economy, not by deeper economic and financial imbalances like those that set the stage for 1929-1931 and 2008-2010. The economy recovered quickly from the 1920-1921 downturn, despite an absence of monetary and fiscal stimulus, because of the delayed resumption of ocean shipping after World War I and resulting availability of cheap imported inputs… inferring from 1920-1921 that the economy can recover spontaneously from a serious downturn would be erroneous…”

    <–political economy and societal welfare require that macroeconomic policy deliver full employment…

  4. Morning Must-Read: Carter Price: Is a Line of Code More Like a Factory or a Painting?: “Benzell… Kotlikoff… LaGarda…and… Sachs [claim]… in most cases rapid technological advancement decreases wages and raises inequality…. If we believe that once code is written, it is good forever (maybe with a few tweaks or upgrades over time), then the stock of code would grow rapidly. If that stock of code is a substitute for future code, then demand for high-tech workers would decrease over time… push down wages not just for high-tech workers but also for other workers…. But… what if it is more like art?… We have more than a hundred years of movies, but new movies are still produced and make lots of money. Coders are still producing new video games despite no one needing to rewrite Tetris…. Technology has not led to mass unemployment and immiseration of labor in the past, yet the very nature of technological development means each invention and advancement is new… [and so] the this-time-is-different argument is generally pertinent, but cannot easily be verified a priori…”

    <–we don’t know, and can’t know, because innovation is by definition new…

  5. Paul Krugman: Quantitative Easing and Monetary Aggregates: “I get especially annoyed when economists who have been wrongly predicting inflation say that it’s not their fault–who could have known that banks would just sit on all those reserves? The answer is, anyone who had paid attention…. Let me quote myself, from… 1998…. Data from the 1930s… seemed to confirm…. Japan gave us another experiment, when it tried quantitative easing…. Theory and experience both predicted exactly the sterility of monetary base expansion that we saw in practice. And, you know, that’s the kind of successful prediction that is supposed to change peoples’ minds: if you’re that wrong about how an experiment turned out, and someone else made a prediction you considered foolish but turned out completely right, you’re supposed to concede that just maybe, possibly, they were on to something. The fact that essentially nobody on that side of the debate has budged in the slightest tells us that whatever it is they’ve been doing, it’s not scientific research.”

    <–the failure of inflation to emerge over the past half-decade is on surprise to anyone who understood Hicks (1937)…

  6. Evening Must-Read: Lemin Wu: If Not Malthusian, Then Why?: “The pre-industrial stagnation of living standards. Technological improvement in luxury production… faster than improvement in subsistence production, would have kept living standards growing…. [There is] a puzzle of balanced growth between the luxury sector and the subsistence sector…. [The hypothesis is of] group selection in the form of biased migration. A tiny bit of bias in migration can suppress a strong tendency of growth. The theory reexplains the Malthusian trap and the prosperity of ancient market economies such as Rome and Song…”

    <–implications of technological change in making “luxuries”…

  7. Christian Dippel, Avner Greif, and Daniel Trefler: Rents from Trade and Coercive Institutions: Removing the Sugar Coating: “The 19th century collapse of world sugar prices should have depressed wages in the British West Indies sugar colonies. It did not. We explain this by showing how lower prices weakened the power of the white planter elite and thus led to an easing of the coercive institutions that depressed wages e.g., institutions that kept land out of the hands of peasants. Using unique data for 14 British West Indies sugar colonies from 1838 to 1913, we examine the impact of the collapse of sugar prices on wages and incarceration rates. We find that in colonies that were poorly suited for sugar cane cultivation (an exogenous colony characteristic), the planter elite declined in power and the institutions they created and supported became less coercive. As a result, wages rose by 20% and incarceration rates per capita were cut in half. In contrast, in colonies that were highly suited for sugar cane there was little change in the power of the planter elite — as a result, institutions did not change, the market-based mechanisms of standard trade theory were salient, and wages fell by 24%. In short, movements in the terms of trade induced changes in coercive institutions, changes that are central for understanding how the terms of trade affects wages.”

    <–how apparently competitive labor markets can stay very far indeed from having wages equal marginal products…

Should Be Aware of:

 

  1. Cory Doctorow: I have journeyed to the soul of chocolate and I bring you good tidings: “It started when one of my local coffee shops announced that it would be serving cold-brewed chocolate…. I schemed to do it on my own…. Nibs… about four ounces… with eight cups of water. The next 24 hours were delicious torture, as the office filled with the incredible, rich aroma of chocolate liquor being leached from the precious nibs with aching, tender slowness…. The resulting drink was…amazing Every one of the flavors of raw, bitter chocolate, teased out in aromatic glory, delicate and individuated in a golden, translucent drink that was not sweet, but also far less bitter than unsweetened chocolate on its own…. The equipment–a plastic jug, $6 nut-milk bag, and $20 grinder, are unlikely to break your bank, and are good for lots of stuff besides this weird chocolate beverage that’s done my head in.”

    <–cold-pressed chocolate drinks are now a thing…

Weekend reading

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles we think anyone interested in equitable growth should be reading. We won’t be the first to share these articles, but we hope by taking a look back at the whole week we can put them in context.

Links

Matthew Klein shows why the Federal Open Markets Committee isn’t so concerned about a popular metric showing declining inflation. [ft alphaville]

Lydia DePillis on a new research paper arguing that public companies are rewarding shareholders instead of investing. [wonkblog]

Five reasons from the Center for Retirement Research on why a stable wealth-to-income ratio for workers is bad news. [bc crr]

Larry Mishel argues that tax cuts alone won’t solve our wage stagnation problem. [nyt]

Andrew McAfee: no one knows what’s going on with the economy. [ft]

Matt O’Brien points out the potential downside of wages rising right now: it could be a sign the labor market is permanently smaller. [wonkblog]

Friday Figure

112514-GDP

Morning Must-Read: Paul Krugman: The Closed-Minds Problem

Posted on by Brad DeLong

Paul Krugman: The Closed Minds Problem: “When I was a young economist…

…I lived… in a world in which ideas… met in relatively open intellectual combat… [and] better ideas tended to prevail: if your model of trade flows or exchange rate fluctuations tracked the data better… you could expect it to be taken up by many if not most researchers…. This is still true in much of economics….

But people who declared back in 2009 that Keynesianism was nonsense and that monetary expansion would inevitably cause runaway inflation are still saying exactly the same thing after six years of quiescent inflation and overwhelming evidence that austerity affects economies exactly the way Keynesians said it would… founders of the Shadow Open Market Committee [Allan Meltzer] and Nobel laureates [Robert Lucas, Eugene Fama, Ed Prescott]….

This isn’t just a story about economics; it covers everything from climate science and evolution to Bill O’Reilly…. So what should those of us who really wanted to be part of what we thought this enterprise was about do?… I see three choices: (1) Continue to write and speak as if we were still having a genuine intellectual dialogue…. That’s one way to understand Olivier Blanchard’s now somewhat infamous 2008 paper on the state of macro; he was… trying to appeal to the better angels of freshwater nature. The trouble… [this] end[s] up legitimizing work that doesn’t deserve respect…. (2) Point out the wrongness, but quietly and politely. This… [is] useful to anyone who reads it. But nobody will.

(3) Point out the wrongness in ways designed to grab readers’ attention… ridicule… snark… names attached. This will get read; it will get you some devoted followers, and a lot of bitter enemies. One thing it won’t do, however, is change any of those closed minds. So is there a reason I go for door #3…. Yes–because the point is not to convince Rick Santelli or Allan Meltzer that they are wrong…. It is, instead, to deter other parties from false equivalence. Inflation cultists can’t be moved; but reporters and editors who tend to put out views-differ-on-shape-of-planet stories because they think it’s safe can be, sometimes, deterred if you show that they are lending credence to charlatans…. The inflation-cult story is, I think, a prime example…. It really would be nice not having to do things this way. But that’s the world we live in…

Morning Must-Read: James D. Hamilton, Ethan S. Harris, Jan Hatzius, and Kenneth D. West: The Equilibrium Real Funds Rate: Past, Present and Future

Posted on by Brad DeLong

James D. Hamilton, Ethan S. Harris, Jan Hatzius, and Kenneth D. West: The Equilibrium Real Funds Rate: Past, Present and Future: “The uncertainty around the equilibrium rate is large…

…and its relationship with trend GDP growth much more tenuous than widely believed… a wide range of plausible central estimates for the current level of the equilibrium rate, from a little over 0% to the pre-crisis consensus of 2%…. Dhis uncertainty, we are skeptical of the ‘secular stagnation’ view that the equilibrium rate will remain near zero for many years to come…. The disappointing post-2008 recovery is better explained by protracted but ultimately temporary headwinds from the housing supply overhang, household and bank deleveraging, and fiscal retrenchment…. The uncertainty around the equilibrium rate argues for more ‘inertial’ monetary policy than implied by standard versions of the Taylor rule… a later but steeper normalization path for the funds rate compared with the median ‘dot’ in the FOMC’s Summary of Economic Projections.

Morning Must-Read: Barry Eichengreen: Greece in Light of the Past and Future of the Euro

Posted on by Brad DeLong

Barry Eichengreen: Greece in Light of the Past and Future of the Euro: “I’m strongly of the view that 1929-1931 and 2008-2010 were cut from the same cloth…

…broadly speaking, whereas 1920-1922 was a fundamentally different animal… caused by monetary tightening by the Federal Reserve designed to wring inflation out of the economy, not by deeper economic and financial imbalances like those that set the stage for 1929-1931 and 2008-2010. The economy recovered quickly from the 1920-1921 downturn, despite an absence of monetary and fiscal stimulus, because of the delayed resumption of ocean shipping after World War I and resulting availability of cheap imported inputs… inferring from 1920-1921 that the economy can recover spontaneously from a serious downturn would be erroneous…

Morning Must-Read: Carter Price: Is a Line of Code More Like a Factory or a Painting?

Posted on by Brad DeLong

The smart young dude Carter Price nails one to the wall and to the floor at the same time! Something very pertinent–and important:

Morning Must-Read: Carter Price: Is a Line of Code More Like a Factory or a Painting?: “Benzell… Kotlikoff… LaGarda…and… Sachs [claim]…

…in most cases rapid technological advancement decreases wages and raises inequality…. If we believe that once code is written, it is good forever (maybe with a few tweaks or upgrades over time), then the stock of code would grow rapidly. If that stock of code is a substitute for future code, then demand for high-tech workers would decrease over time… push down wages not just for high-tech workers but also for other workers…. But… what if it is more like art?… We have more than a hundred years of movies, but new movies are still produced and make lots of money. Coders are still producing new video games despite no one needing to rewrite Tetris…. Technology has not led to mass unemployment and immiseration of labor in the past, yet the very nature of technological development means each invention and advancement is new… [and so] the this-time-is-different argument is generally pertinent, but cannot easily be verified a priori…

Is a line of code more like a factory or a painting?

Posted on by Nick Bunker

In an interesting new working paper, economists Seth Benzell, Laurence Kotlikoff, and Guillermo LaGarda at Boston University and Jeffrey Sachs of Columbia University present a model of technology’s impact on workers’ incomes differentiated by their skills. In the authors’ model, high-tech workers write code and develop technologies that build upon the already accumulated code and technology base. The big finding—in most cases rapid technological advancement decreases wages and raises inequality.

This is an important topic that has led to some hysteria—a couple of the headlines covering the paper were “the robots are coming for your paycheck” and “how the robots will take your job and kill the economy.” But there are several ways to think about this research.

If we believe that once code is written, it is good forever (maybe with a few tweaks or upgrades over time), then the stock of code would grow rapidly. If that stock of code is a substitute for future code, then demand for high-tech workers would decrease over time. Reduced demand would push down wages not just for high-tech workers but also for other workers because high-tech workers look for work outside of the technology industry.

Think about Tetris. The video game was released in 1984 and now people can play it forever without ever having to hire someone to code it again (except maybe to port it to another platform). In some sense, this is could be an economics 101 story of declining marginal utility—as you get more of something, each additional piece gets less valuable.

But is that the right way to think about code? If instead of thinking about code as a capital good akin to a factory except that code never depreciates, what if it is more like art. Artists have contributed to the stock of art for thousands of years, but we still have people producing more art. We have more than a hundred years of movies, but new movies are still produced and make lots of money. Coders are still producing new video games despite no one needing to rewrite Tetris.

A lot of people are skeptical about the robots-are-coming-to-taking-your-jobs narrative. My colleague, Marshall Steinbaum, wrote a telling response to this narrative earlier this week. Technology has not led to mass unemployment and immiseration of labor in the past, yet the very nature of technological development means each invention and advancement is new and some technologies may replace people instead of make them more efficient. Because each innovation is by definition new, the this-time-is-different argument is generally pertinent but cannot easily be verified a priori. The bottom line is that the implications for workers of the evolving technological landscape will likely be a fruitful topic of debate for many years.