Month: April 2015

I See I Have Annoyed the Very Sharp David Glasner: Milton Friedman and the History of Economic Thought Edition

Posted on by Brad DeLong

Over at Equitable Growth: Apropos of my The Monetarist Mistake over at Project Syndicate, the very sharp David Glasner is annoyed, and attempts to administer a smackdown. I think he misses:

David Glasner: Milton Friedman, Monetarism, and the Great and Little Depressions | Uneasy Money: “I find this criticism of Friedman and his followers just a bit annoying…

…Why? Well, there are a number of reasons, but I will focus on one: it perpetuates the myth that a purely monetary explanation of the Great Depression originated with Friedman.

And David then goes on to write a great deal of accurate, true, and insightful things about the history of economic thought, about the Great Depression, plus some insightful but I am not sure accurate and complete thoughts about the past decade:

It wasn’t Friedman who first propounded a purely monetary theory of the Great Depression. Nor did the few precursors, like Clark Warburton, that Friedman ever acknowledged. Ralph Hawtrey and Gustav Cassel did–10 years before the start of the Great Depression in 1919…. The Genoa Monetary Conference of 1922, inspired by the work of Hawtrey and Cassel…. The Genoa system worked moderately well until 1928 when the Bank of France, totally defying the Genoa Agreement, launched its insane policy of converting its monetary reserves into physical gold…. In late 1928 and 1929, the Fed, responding to domestic fears about a possible stock-market bubble, kept raising interest rates to levels not seen since the deflationary disaster of 1920-21. And sure enough, a 6.5% discount rate (just shy of the calamitous 7% rate set in 1920) reversed the flow of gold out of the US, and soon the US was accumulating gold almost as rapidly as the insane Bank of France was. This was exactly the scenario against which Hawtrey and Cassel had been warning since 1919…. For reasons I don’t really understand, Keynes was intent on explaining the downturn in terms of his own evolving theoretical vision of how the economy works, even though just about everything that was happening had already been foreseen by Hawtrey and Cassel.

More than a quarter of a century after the fact… along came Friedman, woefully ignorant of pre-Keynesian monetary theory, but determined to show that the Keynesian explanation for the Great Depression was wrong and unnecessary. So Friedman came up with his own explanation of the Great Depression that did not even begin until December 1930…. Rather than see the Great Depression as a global phenomenon caused by a massive increase in the world’s monetary demand for gold, Friedman portrayed it as a largely domestic phenomenon, though somehow linked to contemporaneous downturns elsewhere, for which the primary explanation was the Fed’s passivity in the face of contagious bank failures. Friedman… ignorantly disregarded the monetary theory of the Great Depression that had already been worked out by Hawtrey and Cassel and substituted in its place a simplistic, dumbed-down version of the quantity theory. So Friedman reinvented the wheel, but did a really miserable job of it….

The problem with Friedman is not, as Delong suggests, that he distracted us from the superior insights of Keynes and Minsky into the causes of the Great Depression. The problem is that Friedman botched the monetary theory, even though the monetary theory had already been worked out for him if only he had bothered to read it…. We do know that the key factor explaining recovery from the Great Depression was leaving the gold standard. And the most important example of the importance of leaving the gold standard is the remarkable explosion of output in the US beginning in April 1933…. Between April and July 1933, industrial production in the US increased by 70%, stock prices nearly doubled, employment rose by 25%, while wholesale prices rose by 14%. All that is directly attributable to FDR’s decision to take the US off gold, and devalue the dollar (see here). Unfortunately, in July 1933, FDR snatched defeat from the jaws of victory (or depression from the jaws of recovery) by starting the National Recovery Administration, whose stated goal was (OMG!) to raise prices by cartelizing industries and restricting output, while imposing a 30% increase in nominal wages. That was enough to bring the recovery to a virtual standstill….

You can’t prove that monetary policy is useless just by reminding us that Friedman liked to assume (as if it were a fact) that the demand for money is highly insensitive to changes in the rate of interest. The difference between the rapid recovery from the Great Depression when countries left the gold standard and the weak recovery from the Little Depression is that leaving the gold standard had an immediate effect on price-level expectations, while monetary expansion during the Little Depression was undertaken with explicit assurances by the monetary authorities that the 2% inflation target–in the upper direction, at any rate–was, and would forever more remain, sacred and inviolable.

Whew. A long quote. But I don’t have time today to cut it down to its essentials–and David is well worth reading.

But in response I say:

  1. David is, I think, correct in saying that Milton Friedman had the wrong monetary explanation of the Great Depression, and Hawtrey had the right one. But it doesn’t matter. Milton Friedman’s was the only explanation North Atlantic macroeconomics heard from 1970 to 2008. And it was the version North Atlantic macroeconomics believed, and so neglected Keynes and Minsky–and Hawtrey. Thus here, I say, is thus annoyed at me not for getting anything wrong but, rather, for reminding him of an unpleasant reality.

  2. David is, I think, also annoyed at me for failing to recognize that the Lesser Depression would have come to a quick end had the Federal Reserve and the ECB committed themselves at the end of 2008 to a permanent 5%/year inflation target, and for instead dinking around with Keynesian fiscal policy and Minskyite credit policy ideas. But the failure of Abenomics to make more of a difference keeps me from being as certain as David is. I certainly believe that Neville Chamberlain’s policy of returning the British price level to its pre-1930 level and Franklin Roosevelt’s abandonment of the gold standard were monetary régime changes that worked wonders. But I do not think that justifies ignoring Keynesian and Minskyite ideas of alternative ways of restoring macroeconomic balance–especially given the illegality of a 5%/year inflation target in both the United States and in the European Union.

Morning Must-Read: Bill Gurley: Investors Beware: Today’s $100M+ Late-stage Private Rounds Are Very Different from an IPO

Posted on by Brad DeLong

Morning Must-Read: Bill Gurley: Investors Beware: Today’s $100M+ Late-stage Private Rounds Are Very Different from an IPO: “The first critical difference is that these late-stage private companies have not endured the immense scrutiny that is a part of every IPO process….

…Companies and their board of directors agonize over whether or not they are “ready” to go public. Auditors, bankers, three different sets of lawyers, and let us not forget the S.E.C., spend months and months making sure that every single number is correct, important risks are identified, the accounting is all buttoned up, and the proper controls are in place…. Late-stage private rounds have no such pageantry or process. There is typically just a single PowerPoint deck presentation…. Investors are assuming that the numbers they see in the fund-raising deck are the same as those they might see in an S-1. However, many of these private companies will wait up to twelve months after the end of a fiscal year to complete their audit…. Startups commonly highlight “gross revenue”…. A good banker in a normal IPO process would get this straightened out…. [And] the very act of dumping hundreds of millions of dollars into an immature private company can also have perverse effects on a company’s operating discipline…

How does job turnover affect U.S. workers’ wellbeing?

Posted on by Nick Bunker

Climbing the income ladder by moving from job to job is incredibly important for workers’ success because job-hopping is the main source of wage and income growth for the broad workforce. But do people actually enjoy the experience of working in such a dynamic labor market? A new working paper from the National Bureau of Economic Research looks at how job turnover affects people’s self-reported wellbeing.

The research by Philippe Aghion of Harvard University, Ufuk Akcigit of the University of Pennsylvania, Angus Deaton of Princeton University, and Alexandra Roulet at Harvard, looks at how the destruction and creation of jobs (job churn, in economic parlance) affects how people report in the area their wellbeing. To measure wellbeing, the authors use survey data about people’s self-reported wellbeing. Specifically, they focus on questions about satisfaction in the present from the Behavioral Risk Factor Surveillance System, and in the future from the Gallup Healthways Wellbeing Index. The two data sets combined cover 2005 to 2011.

Theoretically, job churn could affect wellbeing in two different ways. Perhaps most intuitively, job destruction can be, well, destructive. When a worker loses a job or sees enough neighbors lose jobs then that’s a sign of risk and that will reduce reported wellbeing. But at the same time, job churn may also mean a higher rate of job creation. More job creation means more unemployed people are likely to get a job. Once employed, these individuals are more likely to enjoy the fruits of stronger economic growth, and consequently, higher wages, boosting a worker’s present overall wellbeing as well as expectations of future wellbeing.

Aghion, Akcigit, Deaton, and Roulet estimate the effects of job churn by looking at data from the 381 metropolitan statistical areas across the United States. The authors’ results broadly mesh with what you’d expect. If you control for the level of unemployment in particular metropolitan regions, the relationship between job churn and wellbeing is “unambiguously positive.” At any given rate of unemployment, more churn is associated with more wellbeing.

That being said, it is important to break the turnover down into job creation and job destruction to fully understand what is going on. Empirically, more job creation in a metropolitan statistical area is correlated with higher wellbeing and more job destruction is correlated with lower wellbeing. But the size of these effects can be very different depending upon other contexts within particular metropolitan regions.

Consider unemployment insurance. Some metro regions are in states where unemployment insurance is more generous than in other states. The authors look at how the effects of turnover might be different depending upon the level of unemployment insurance available within the state. They find that the positive effects of job creation on self-reported wellbeing aren’t affected by the size of an unemployment check. Yet they also find that the negative effects of job destruction are mitigated by the size of the weekly unemployment check. In fact, job destruction has a positive effect on wellbeing in those metropolitan statistical areas where better unemployment insurance compensation is available above the median.

So it appears that some of the downsides of job churn for workers’ wellbeing can be mitigated by policy action that makes job-hopping less daunting and thus ultimately more rewarding in terms of career advancement and income growth. In other words, dynamism and economic security don’t appear to be in tension.

Lunchtime Must-Read: Olivier Blanchard: Contours of Macroeconomic Policy in the Future

Posted on by Brad DeLong

Lunchtime Must-Read: Olivier Blanchard: Contours of Macroeconomic Policy in the Future: ” Raghuram Rajan, Ken Rogoff, Larry Summers and I are organizing a third conference, ‘Rethinking Macro Policy III: Progress or Confusion?’…

…April 15-16 at the IMF. Much of the discussion… has centered (rightly) on… what measures to take during a financial or sovereign crisis, what to do at the zero lower bound, how to design quantitative easing, at what rate should fiscal consolidation take place?The focus of our conference will be instead on the architecture of policy when (hopefully) policy rates have become positive again, and most countries are growing and have stabilized debt-to-GDP ratios. In other words, how will/should macro policy look once the crisis is finally over?…

Much effort has gone toward improving our understanding and assessment of systemic risk. Questions:  Where do we stand?…. And have we made enough progress in reducing systemic risk?… State-dependent regulations are the new policy kids on the block…. We are still grappling with which macroprudential tools to develop, how to use them, and the reliability of their effects….

Even before the crisis started, there were sharply different views on whether central banks should have a single mandate (price stability) or a dual mandate (price stability and stable economic activity). The crisis has… led to the suggestion that central banks should have a triple mandate, with financial stability added to the first two…. The zero (or as we are now discovering, the slightly negative) lower bound on the interest rate set by central banks was thought to be a theoretical curiosum…. If reached, central banks could, through announcements of future monetary policy, increase expected inflation and achieve large negative interest rates.  We have learned that this was simply wishful thinking….

When the financial system froze, and monetary policy no longer worked, most advanced economies relied on fiscal policy to limit the decrease in demand, and in turn on output… [with] a dramatic increase in the debt- to-GDP ratio. Since then, the focus has been on the rate at which this ratio should be first stabilized and then decreased…. If we have truly entered a period of secular stagnation, with an excess of saving leading to a negative real rate, doesn’t it make sense for governments to run larger deficits and increase public investment? Most observers agree that the fiscal stimulus early in the crisis was instrumental in limiting the decrease in output. Questions:  Doesn’t this suggest that we should take more seriously the role of fiscal policy as a macro policy tool? Most countries allow for automatic stabilizers…. Could they be improved—and why has there been so little thinking about it?…

Morning Must-Read: Ben Bernanke: Should monetary policy take into account risks to financial stability?

Posted on by Brad DeLong

Ben Bernanke: Should monetary policy take into account risks to financial stability?: “In light of our recent experience, threats to financial stability must be taken extremely seriously…

…However, as a means of addressing those threats, monetary policy is far from ideal…. It is a blunt tool… can only do so much… [if] diverted to the task of reducing risks to financial stability… not available to help the Fed attain… full employment and price stability…. It’s better to rely on targeted measures to promote financial stability, such as financial regulation and supervision, rather than on monetary policy…

Today’s Must-Must-Read: Ann Marie Mariciarlle: NIMBYism, the Supreme Court, and Health Care Professional Self-Regulation

Posted on by Brad DeLong

Today’s Must-Must-Read: Ann Marie Marciarille: Teeth Whitening at the Supreme Court: The Antitrust Limits of Professional Sovereignty: “North Carolina’s Dental Board functioned more as a trade association with super powers granted to it by the state…

Like it or not, the dissent argues the delegation was valid and the Sherman Act does not sit to second guess the wisdom or even fairness of the delegation. Whatever you think of the dissent, Justice Alito is spot on when he notes that the majority opinion is potentially quite disruptive for state medical licensing boards.. long… under full sway of the regulated health professions themselves…. Self-licensing, ascendent since the late 19th century, was the outcome of political compromise and not solely the seemingly inevitable result  of deference to professional authority traced in today’s opinions…. We have almost no tradition of genuine state regulation of doctors, dentists, and optometrists other than the North Carolina Dental Board model or something like it. If we aim to take it over it will not be a taking it back, but a taking it on–an invention out of whole cloth.

Where do the beneficiaries of the Affordable Care Act live?

Posted on by David Evans

The three interactive graphics below detail the most salient points about where the beneficiaries of the Affordable Care Act live, by state and county, in terms of access to expanded Medicaid coverage, new subsidies for health insurance, and how a ruling by the Supreme Court in the case of King vs. Burwell against the Obama Administration would affect ACA coverage.

The first map contains estimates for the relative rank of counties by the share of families eligible for Medicaid. Families making less than 138 percent of the Federal Poverty Level—about $33,000 for a family of four—are eligible for Medicaid if their state has elected to expand the program. The states opting out of the Affordable Care Act’s Medicaid expansion (those on the tan spectrum) are among those that would benefit the most. The counties in darker green are greatly benefiting from the expansion of Medicaid. Many of the counties that either are or would be major beneficiaries of Medicaid expansion are rural. (See Figure 1.)

Figure 1

The second map contains estimates for the relative rank of counties by the share of families in the income range that qualifies them for subsidies on the exchange. Families making between 138 percent and 400 percent of the Federal Poverty Level—between $33,000 and $97,000 for a family of four—are eligible for exchange subsidies if they do not have access to employer coverage. The beneficiaries of the subsidies are spread across the country with higher concentrations in suburban and middle-income counties. (See Figure 2.)

Figure 2

The third map contains estimates for the relative rank of counties by the share of families in the income range that qualifies them for subsidies on the exchange. Families making between 138 percent and 400 percent of the Federal Poverty Level are eligible for exchange subsidies if they do not have access to employer coverage. If the Supreme Court rules in the King vs Burwell case that states using a federally run exchange are ineligible for subsidies, then families in those states on the tan spectrum will lose their subsidies while those in gray will be largely unaffected. The counties that would be hurt the most from the loss of subsidies are disproportionately in the South. (See Figure 3.)

Figure 3

Download a PDF of the Technical Appendix.

The risks of large capital inflows

Posted on by Nick Bunker

The “global savings glut” is a hot topic of conversation again among economists and policymakers courtesy of the recent debate between Ben Bernanke and Larry Summers over the sources of secular stagnation. In their debate, the former Federal Reserve chair and the former Clinton and Obama administration economic policy advisor, respectively, are focused in part on the sources of this world savings glut and in part on the roles those savings play in the lack of robust economic in the United States and other developed economies.

But it’s also important to think about what happens to all these global savings once they flow into other countries. A new working paper released last week highlights the costs and risks of large capital inflows on 69 middle- and high-income countries between 1975 and 2010,. That paper, released by the Board of Governors of the Federal Reserve System, digs into the effects of large inflows of capital on the performance of these economies. The authors of the paper, Gianluca Benigno of the London School of Economics, Nathan Converse of the Federal Reserve Board, and Luca Fornaro of Centre de Recerca en Economia Internacional, examine the high capital flows into these countries and find that their economic performances suffered suboptimal, to say the least.

The authors look at the trends in economic output and employment and find that while capital inflows for the entire country create a boom, the trends in output, employment, and productivity after the end of the inflows are lower than before the boom started. And, when they look just at high-income countries, they find that large capital inflows are often followed by “sudden stops,” when capital actually starts flowing out of the country and a recession is sparked.

Spain in the mid-2000s is emblematic of the effects of capital flows on economic output. Beginning with the creation of the Euro, massive capital inflows appear to have inflated a large housing and construction bubble in the country. When the inflows ended during the most recent financial crisis, the Spanish economy experienced quite a sudden drop.

Furthermore, Benigno, Converse, and Fornaro look at how capital inflows affect the allocation of resources in these economies between sectors. What they find is that capital inflows lead to a change in where capital goes within the economy. Specifically, the reallocation of capital is out of manufacturing and toward services that aren’t tradable, such as the construction industry in the case of Spain. Yet the reallocation of labor away from manufacturing toward services resulting from these capital flows only happens sometimes. When central banks increased capital reserves during periods of high capital inflows, their countries didn’t see labor moved out of manufacturing.

This shift could be responsible in part for the decline in productivity in economies that did not buffer their financial systems from high capital inflows. Manufacturing, especially in middle-income countries, has a higher level of productivity. The tradable sector, whose output is tradable internationally, tends to have higher productivity than the non-tradable sector, or domestic products and services.

Again, Spain is an obvious example. These capital inflows appear to have inflated a large housing and construction bubble in the country, which reduced total productivity growth, especially given the low productivity of the construction industry. This research is particularly relevant and important for policymakers moving forward as many of these episodes have happened over the past decade or so in developed countries in particular. As capital markets have been liberalized, large capital inflows into countries have become more common. Given the damage these large inflows can create, policymakers might want to think about the trade-offs from past liberalizations.

Bond Bubbles and Modern Monetary Theory: Extra Monday DeLong Smackdown by Noah Smith

Posted on by Brad DeLong

So I believe that Noah Smith has changed my mind about something…

I was thinking out loud to him about the key conundrum of Modern Monetary Theory…

Modern Monetary Theory, or perhaps we had better call it old Abba Lernerian fiscal theory, holds that the government’s fiscal-balance condition is not independent of the economy’s macroeconomic price-stability condition. Anything that pushes the government out of fiscal balance and requires raising taxes to avoid default will also produce higher inflation and so require macroeconomic austerity. And part of such austerity is, yes, raising taxes.

Why? Suppose people start to fear that the government will not raise enough in taxes to pay off its debts. They will then try to dump government liabilities for real goods and services. That will, the MMTers say, push aggregate demand about potential output and generate inflation.

I was saying to Noah that this seemed to me to rely very heavily on the efficient market hypothesis.

What if investors mistakenly thought that the debt was sustainable? Then there would be no dumping of bonds and no inflation. And suppose that one day, suddenly, expectations shifted discontinuously, so that the government was required to pay much higher interest payments in order to rollover the debt? And what if amortizing those high interest payments required raising taxes too far, and pushed the economy over onto the unsustainable part of the Laffer curve?

It thus seemed to me, I said, that MMT required the EMH. Deviations from the EMH, I said, allowed the possibility of a government debt-crisis baking itself into the cake without any advance warning via inflation.

And Noah looked at me and said: this is what the people who say we are in a bond bubble–the people you find incomprehensible–mean.

I said: They should not call it a bubble. That should be reserved for situations in which asset holders know that they are paying more than fundamental value.

He said: So? You are objecting to the word “bubble”. But, still, that is what they mean.

And I thought: Hmmm…

Noah is right…

I can no longer say that those who fear a bond bubble are incoherent.

I can (and will) say that their use of the word “bubble” in “bond bubble” is misleading: The people holding bonds are not doing because they expect the capital gains from selling them to a bigger fool. They are, rather, holding them because they have overestimated fundamental values.

And I can and will say that their fears are misplaced: There is no chance of an upward jump in interest rates large enough to require enough of a tax increase to push the economy over the top of the Laffer curve and into unsustainability, whether politicalor economic sustainability. Remember: the government can force the banking sector to hold as many bonds as it needs it to hold. Remember: the government can tax the interest on those bonds at whatever rate it needs to tax.

But score one for Noah Smith, with a very well-executed DeLong smackdown…

Things to Read at Lunchtime on April 6, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

  • Matthew David Surridge: A Detailed Explanation: “I declined a Hugo nomination for this year’s Best Fan Writer award. I think it’s only fair to the people who voted for me to say why. Be warned, this is going to take a while…. My discomfort with being put forward on the Puppy slates come from… the way Torgersen described the thinking and goals of the Sad Puppy project[:]… ‘SAD PUPPIES simply holds its collective hand out — standing athwart “fandom” history–and yells, “Stop!”…. SF/F literature seems almost permanently stuck on the subversive switcheroo. If we’re going to do a Tolkien-type fantasy, this time we’ll make the Orcs the heroes, and Gondor will be the bad guys. Space opera? Our plucky underdogs will be transgender socialists…. Planetary colonization? The humans are the invaders and the native aliens are the righteous victims…. Why did we think it was a good idea to put these things so much on permanent display, that the stuff which originally made the field attractive in the first place–To Boldly Go Where No One Has Gone Before!–is pushed to the side?…”
  • Jack Jenkins: How Conservatives Tried (And Failed) To Make Christianity About Being Anti-LGBT