Month: November 2013

Antonio Fatas on the Global Economy: Bubbles, interest rates and full employment:

Global [safe] real interest rates during the last expansion (2001-2007) were very low by historical standards. The main candidate to explain low real interest rates is the saving glut that Ben Bernanke referred to in his 2005 speech…. But if what we saw in these years was an increase in the pool of saving that drove down interest rates we should expect investment to increase…. And if investment increases we should expect an increase in growth rates. But none of this happened….

Continue reading “Fear the Global Investment Shortfall, and What It Means for Long-Run Growth” →

OK. We are going to get deep into the history-of-thought, the intellectual-autobiographical, and the methodology-of-economics weeds here, so perhaps this should be called not “Wednesday Focus” but rather “Wednesday Unfocus”. Go and talk among yourselves rather than reading this if you wish…

I find that Simon Wren-Lewis wants to stick his head in the lion’s mouth by defending “rational expectations” as a working hypothesis:

Continue reading “The Utility and Disutility of Rational Expectations: Wednesday Focus” →

Must-Reads:

1. Ezra Klein: Elizabeth Warren wants to spend more on Social Security. But she’s not thinking big enough! “She joins a growing movement of Senate Democrats, including Tom Harkin, Mark Begich and Bernie Sanders. ‘Social Security is incredibly effective, it is incredibly popular, and the calls for strengthening it are growing louder every day’, Warren said…. Washington frets endlessly over the problems that Social Security, which is projected to exhaust its trust funds in the coming decades, might cause the budget. It frets about it so much, in fact, that it completely misses the problems Social Security is uniquely poised to solve for the country. For years, pension experts have spoken of the ‘three-legged stool’ of retirement savings: Social Security, employer pensions and private savings…. [But] today, Social Security is basically the only leg holding it up…”
2. Barry Eichengreen: Does the Federal Reserve Care about the Rest of the World?: ” Many economists are accustomed to thinking about Federal Reserve policy in terms of the institution’s “dual mandate,” which refers to price stability and high employment, and in which the exchange rate and other international variables matter only insofar as they influence inflation and the output gap–which is to say, not very much. In fact, this conventional view is heavily shaped by the distinctive and peculiar circumstances of the last three decades…. The Federal Reserve paid significant attention to international considerations in its first two decades, followed by relative inattention… then back to renewed attention to international aspects… in the 1960s, before the recent period of benign neglect…. I argue that in the next few decades, international aspects are likely to play a larger role in Federal Reserve policymaking…”

Should-Reads:

1. Noam Levey: Healthcare plan enrollment surges in some states after rocky rollout: “A number of states that use their own systems, including California, are on track to hit enrollment targets for 2014 because of a sharp increase in November, according to state officials. ‘What we are seeing is incredible momentum’, said Peter Lee, director of Covered California…. California–which enrolled about 31,000 people in health plans last month–nearly doubled that in the first two weeks of this month. Several other states, including Connecticut and Kentucky, are outpacing their enrollment estimates, even as states that depend on the federal website lag far behind. In Minnesota, enrollment in the second half of October ran at triple the rate of the first half, officials said. Washington state is also on track to easily exceed its October enrollment figure, officials said…”
2. Burkhard Bilger: Inside Google’92s Driverless Car
3. ProGrowthLiberal: EconoSpeak: John Taylor on Monetary Policy and Inflation: “If you were expecting John Taylor to address… Barry Ritholtz… stop holding your breath… Taylor of late has been saying that our current mess was created by a deviation from the Taylor rule. Here’92s his evidence: ‘Inflation was not steady or falling during the easy money period from 2003-2005… [the] Fed’92s interest rate was too low… inflation… doubled from 1.7% to 3.4% per year… extraordinary inflation and boom in the housing market…. Finally, the unemployment rate got as low as 4.4% well below the natural rate.’… No one… was saying back then that the employment to population ratio had become dangerously high. The 4.4% unemployment rate… was not reached until late 2006… [after] two years of rising short-term interest rates. Now had Taylor and his fellow Bush economic advisors were very concerned about excessive aggregate demand–why did we not seen calls for fiscal restraint back then? If Taylor thinks this is a serious rebuttal to what Summers said, it is no surprise he has yet to acknowledge that 2010 forecast of inflation from QE.”

Should Be Aware of:

Matt Schiavenza: A Chinese President Consolidates His Power | Mark Thoma sends us to Paul Krugman: The Geezers Are Not Alright | Menzie Chinn: An opinion piece by Sean Fieler in USAToday…. I found the reference to growing inflation of interest. Here are some data of relevance. They indicate low and declining inflation using various measures, CPI, PCE, PPI, core, headline | Marco Nappolini: Secular stagnation and post-scarcity | Joshua Angrist et al: Semiparametric Estimates of Monetary Policy Effects: String Theory Revisited | Mike Konczal: Given the Myth of Ownership, is the Idea of Redistribution Coherent? |

Olivier Blanchard writes:

Olivier Blanchard: Monetary Policy Will Never Be the Same:

Finally, turning to capital flows. In emerging markets (and, more generally, in small advanced economies, although these were not explicitly covered at the conference), the evidence suggests the best way to deal with volatile capital flows is by letting the exchange rate absorb most but not necessarily all the adjustment.

The standard argument in favor of letting the exchange rate adjust was stated by Paul Krugman at the conference. If investors want to take their funds out, let them: the exchange rate will depreciate, and this will lead, if anything, to an increase in exports and an increase in output.

Continue reading “Olivier Blanchard Speaks Delphicly on Managing International Capital Flows” →

I interpret this as IMF chief economist Olivier Blanchard saying, as clearly and straightforwardly as his office allows him to, that in his judgment the 2% per year inflation target is past its sell-by date and rotted, and that the North Atlantic economies need to move to a 4% per year inflation target in order to reduce the risk of another 1932, or another 2010.

What do you think?

Continue reading “IMF Chief Economist Olivier Blanchard Speaks Delphicly on the Appropriate Inflation Target” →

About one evening in three I spent with him as an adult–and after he had had his third Bombay Sapphire martini–my late grandfather Earl H. DeLong would start to rant about how the study of public policy as an academic discipline had gone way downhill over his lifetime as people who saw themselves as studying “public administration” were replaced by people who saw themselves as studying “political science”. Oh, there were exceptions–Grandfather Earl had a lot of respect for Aaron Wildavsky and James Q. Wilson–but, he said, rather than building up the mass of case studies and analyses from which one might actually be able to generalize and begin to draw useful and durable lessons about public management, people with chairs in graduate schools of public policy increasingly wanted to build orrerys and explain how their policies would bring about utopia.

As he used to say: “everyone wants to fantasize about Rommel, and nobody wants to be a real quartermaster, even though real quartermasters won a lot more battles than real Rommels have”.

But James Q. Wilson was an exception. And Buce has a very nice catch from his Bureaucracy::

Continue reading “Public Administration vs. Political Science” →

WCEG: Things to Read at Dinnertime on November 19, 2013##

Must Reads:

1. Simon Johnson: It’s Fed Versus Moody’s for ‘Most Wrong’ Crown: “Who was more wrong in the run-up to the financial crisis of 2008: the Federal Reserve or Moody’s Investors Service? This isn’t an academic question; both organizations are still hugely relevant to shaping the way we see our financial system and the risks it contains. And both are now apparently underestimating the dangers again. To be fair, the thinking at both places has shifted, but not anywhere close to enough. The reason for this is simple: The incentives that encouraged their misperceptions before 2008 remain in place today…”
2. Joshua Angrist et al: Semiparametric Estimates of Monetary Policy Effects: String Theory Revisited: “House Committee on Banking and Currency, March 18, 1935: Goldsborough: ‘You mean you cannot push a string…’ Eccles: ‘That is a good way to put it: one cannot push on a strong…. Beyond creating an easy-money situation through reduction of discount rates and through the creation of excess reserves, there is very little if anything the reserve organization can do toward bringing about recovery. I believe that in a condition of great business activity that is developing to a point of credit inflation, monetary action can very effectively curb undue market expansion…'”

Should-Reads:

1. cingraham: Ideology and party unity in the House, 1857-2011
2. Wolfgang Munchau: Why Europe needs to try unconventional policy: “Last week’s dreadful data for the eurozone tell us that a long period of low economic growth and excessively low inflation lies ahead…. What should the European Central Bank do now?… If Mario Draghi, the ECB president, wants to make a real difference, he should contemplate quantitative easing…. QE has the advantage that it is legally beyond reproach… a pure monetary policy operation… cannot be mistaken for an illegal monetisation of sovereign debt…. Would QE work? Once you hit the zero limit on interest rates, QE is the most effective policy instrument…. And if you are worried about the impact of QE on financial stability, you might want to consider the impact of a long depression…”
3. Daniel Altman: Predicting the Economic Future Through Convergence: China: “So economists re-examined the theory of convergence… countries’ living standards could converge in the long term, but only if they had similar economic foundations… deep factors whose importance was easily perceptible yet hard to quantify…. There are still vast differences between China and these wealthier economies that are likely to hold China back…. Two factors… particularly important… are openness to trade and the ease of starting a business (Aghion and Howitt 2009). China has done much to open its markets since Mao’s death, but it still has a long way to go…. When it comes to opening a business, China ranks even further behind…”
4. Paul Krugman: The New Keynesian Case for Fiscal Policy: “Much of the academic profession decided more than 30 years ago that… what we needed was an equilibrium model of the business cycle. By the time the utter failure of the equilibrium project became apparent, you had a whole generation of economists who knew that Keynesianism of any form was nonsense based on what they had heard somewhere, so they didn’t read any of the stuff… and were flabbergasted to learn that there was in fact an extensive New Keynesian literature…. So some props to John Cochrane for at least trying to catch up. Unfortunately, he’s still working from the baseline assumption that people like me (and Mike Woodford, whom he really should be reading) must be kind of stupid, and so he can’t be bothered to actually figure out how the models work. At least I think that’s what’s happening…. Cochrane’s latest seems to be driven by a confusion between the effect of fiscal expansion on GDP… and… on consumption…. I won’t try to figure out the roots of this failure of reading comprehension…. This isn’t hard–at least it shouldn’t be for anyone with a graduate training in economics. Just try actually reading what New Keynesians write.”
5. Joe Gagnon (2009): Low Interest Rates May Be Here To Stay: “One of the most striking features of today’s economy is that interest rates… are at 50-year lows…. ‘Normal’ interest rates are likely to be lower than most people expect…. Investment demand has declined in the advanced economies… slower population growth… the winding down of the productivity ‘catch-up’… lower marginal tax rates and declining rates of inflation… the governments of many Asian economies have funneled unprecedented amounts of capital into advanced-country financial markets in an effort to hold their currencies down and maintain export-led growth… commodity exporters, especially oil exporters, saved a high fraction of their revenues…. What are the prospects going forward?… We need to craft a regulatory framework that enables our financial system to operate safely in an environment of low interest rates…”
6. Mark Thoma: How Economists Can Tame Irrational Exuberance: “Is Shiller correct? Should economists drop the assumption of rational expectations, at least in some instances?… The rationality assumption is reasonable in some cases…. For monetary policy, where the Fed goes out of its way to make its policy rule known, and in financial markets where the participants study the markets as part of their jobs and there are considerable amounts of money on the line, perhaps those conditions are approximated. But does anyone understand what policy rule can be used to anticipate fiscal policy actions (who expected Congress to cut spending in a recession?), and does the typical household sufficiently understand how policy shocks affect the economy?”

Things You Should Be Aware of:

Jared Bernstein: Inequality’s Roots: Beyond Technology | Max Chafkin: Udacity’s Sebastian Thrun, Godfather Of Free Online Education, Changes Course | Joseph E. Gagnon: Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis | James Surowiecki: Valuing the Free Digital Economy | Paul Krugman: Bubbles, Regulation, and Secular Stagnation | Jay Inslee, Steve Beshear and Dannel P. Malloy: How we got Obamacare to work | Lincoln’s Gettysburg Addresses |

The thoughtful, estimable, and underpaid Aaron Bady gets one mostly wrong, I think:

Aaron Bady: Public universities should be free:

This should not be a controversial assertion. This should be common sense. But Americans have forgotten what the “public” in “public education” actually means…. Where there once was a public mission to educate the republic’s citizens, there is now the goal of satisfying the educational needs of the market, aided by PR departments that brand degrees as commodities and build consumer interest, always with an eye to the bottom line. And while public universities once sought to advance the industry of the state, as a whole, with an eye to the common good, shortfalls in public funding have led to universities treating their research capacity as a source of primary fund-raising, developing new technologies and products for the private sector, explicitly to raise the money they need to operate. Conflicts of interest are now commonplace….

Continue reading “Should Public Education Be Free? Or, Perhaps, What Should the Phrase “Free Public Education” Mean?” →