Month: June 2015

Must-Read: 1931 was the once-in-a-century time for a monetary régime change in the twentieth century (and, if we are allowed one every half-century, 1978 was the time for the second). And it looks to me very much like 2009 was the time for a monetary régime change in the first half of the twenty-first century:

David Glasner: Repeat after Me: Inflation’s the Cure not the Disease: “The question… depends not on an abstract argument about the shape of the LM curve…

…but about the evolution of inflation expectations over time. I’m not sure that I’m persuaded by DeLong’s backward induction argument–an argument that I like enough to have used myself on occasion while conceding that the logic may not hold in the real word–but there is no logical inconsistency… different conjectures about the evolution of inflation expectations in a world in which there is uncertainty about what the future monetary policy of the central bank is going to be (in other words, a world like the one we inhabit)…. The problem with monetary policy since 2008 has been that the Fed has credibly adopted a 2% inflation target… [which it] prefers to undershoot…. Monetary policy is impotent at the zero lower bound, but that impotence is… self-imposed by the credibility of the Fed’s own inflation target…. Changing the inflation target is not a decision… the Fed [should] take lightly… [but] in a crisis, you… take a chance… hope… credibility can be restored by future responsible behavior…. HAWTREY:

Orthodox Central Banking… is like conventions at bridge; you have to break them when the circumstances call for it…. A gold reserve exists to be used… once in a century… for the governing purpose, provided you have the courage to use practically all of it…

U.S. Employers Add 280,000 Workers in May: “Is Jobs Data Truly Good News About U.S. Economy?

39:21 – UC Berkeley Professor of Economics Brad Delong and former republican Congressman Tom Davis examine the state of the U.S. economy following the May jobs report and discuss what the U.S. government needs to do to spark growth. They speak on ‘Bloomberg Markets.’ (Source: Bloomberg)

http://www.bloomberg.com/news/videos/2015-06-05/is-jobs-data-truly-good-news-about-u-s-economy-

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• The past three months’ job market reports do not lead us to change our minds about anything. What did you think three months ago? You should think the same thing now.

• What should you have thought three months ago? Four things:

• First, for the past 50 years the unemployment rate and other indicators of the health of the labor market–ease of getting a job, business willingness to build more to fill vacancies, employment the population adjusted for demographics and sociology–have all pointed in the same direction.

  • Not anymore.
  • Today the unemployment rate suggest that we have had a full recovery, while other labor market indicators suggest a very partial and very incomplete recovery.
  • The Federal Reserve is still mostly looking at the unemployment rate.
  • They are smart, and they know all the arguments, but when I look at all the evidence I cannot agree

• Thus, second, it looks to me like we are still far short of anything that might be called a normal or neutral business-cycle level of employment.

  • So it is not time to start cooling off the economy.

• Third, it will not be time to start cooling off the economy until either we get different signals:

  • Either from the employment share numbers.
  • Or from the wage growth numbers.

• Fourth we never recovered to the pre-2007 trend.

  • It was not that the pre-2007 trend was unsustainable.
  • In 2007 we were buying the wrong things: too many imports and too much housing.
  • But the economy as a whole was not overheated.
  • Why haven’t we had a full recovery to the pre-2007 trend? Two reasons:
    • First, Republican economists have failed to properly brief Republican members of Congress that what is needed now are the policies that Milton Friedman’s teachers, people like Jacob Viner, recommended for the 1930s–not austerity and not shrinking the Federal Reserve balance sheet shrinkage, but rather coordinated monetary and fiscal policy expansion.
    • Second, because in late 2009 Ben Bernanke overestimated the economy’s self-generated recuperative powers, and so failed to understand the seriousness of the situation.
    • Third, to be fair, because Tim Geithner thought the same as Bernanke–that the economy was going to recover on its own–and Obama believed him.

• Fifth, it is still not too late to turn the macroeconomic policy ship around:

  • Global investors are willing to lend the US government money at unbelievably low terms.
  • Every reasonable calculation I have seen tell us the benefits of borrowing up to $1 trillion a year more and spending it on infrastructure and education are huge.
  • It is definitely worth doing, unless and until interest rates return to normal levels.

• Sixth, there are also important structural issues:

  • Growing inequality.
  • The rise of the robots.
  • Globalization, etc.
  • But these are roughly in the same state today that they were in 2007 or indeed 2000.
  • Changes since then or overwhelmingly due to short-run macroeconomic events and problems:
    • The housing bubble.
    • The Wall Street crash.
    • The deep depression.
    • The anemic half-recovery.

• Seventh, Obama… Taking a broad view, under Obama the American economy has done worse than it has done under any Democratic president since the Civil War

  • Save perhaps Carter.
  • Of course, that also means the economy has done better than under any Republican president since Coolidge
    • Save Eisenhower.
    • But these days the Democrats are claiming Eisenhower as his. Certainly today’s Republicans don’t want that RINO.
    • In fact, these days Democrats are also posthumously baptizing Lincoln as a Democrat, kind of like the Mormons do, when you think about it…

• Eighth, things could have been much better:

  • We would have had to switch out of housing and into exports and investment between 2006 and 2009.
  • We were well on the way–about halfway–through making that switch at full employment.
  • But then Wall Street mashed up and caused the crash.
  • We did not need a depression.
    • Especially not a depression this long.
  • What we needed–and could have had–was an expenditure switch. We still could have one–to education, to business investment, to infrastructure, to exports.

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The conversation:

Matt Miller: Tom, let me start with you. Weren’t you impressed with this month’s job report? We added 280,000 jobs. That is much higher than the average of the past twelve months. We boosted hourly pay.

Tom Davis: Yes. It was a good report.

Matt Miller: And, Brad, do you find it to be a good report as well?

Brad DeLong: Yes. It was a good report. But combine it with the past two reports. We are about where we were three months ago. Whatever you thought about the state of the economy three months ago, you should think it now. The last quarter has not been one in which there has been a great deal of news to lead anyone to change their mind.

Matt Miller: Tom, are you more positive about this report than Brad? He’s got a lot more “buts” and “ifs” in there.

Tom Davis: Well, there are a lot of “buts” and “ifs”. I think lower gas prices have given a tax cut to everybody. I think they have created a lot of optimism. But there is still a lot of uncertainty. And there are still a number of international factors that come into this that nobody can control. I think some times we give the government too much credit for what goes well and too much blame for what goes badly.

Matt Miller: So what should we do, Tom, to make things better here? What is your prescription? Or what is the Republican prescription, I should say?

Tom Davis: Look: Our prescription has always been that higher taxes and needless regulations–and there are a lot hanging around. You need to be looking at them so that businesses can operate more efficiently. One of the biggest problems right now is that we have a political system that is not operating very efficiently on issues from the Export-Import Bank; to getting a long-term transportation bill which has been on life-support for six months–for six years; to just getting the Appropriations bills out on time. We just have a political system that is not functioning very efficiently. And that has, I think, a drag on the economy. We’re not getting out of the government what we ought to be.

Matt Miller: Brad, Democrats and even President Obama would agree with that. They would like to see lower taxes and fewer regulations, but also more spending. Right?

Brad DeLong: Well, I don’t think it is just Democrats who would like to see more spending. Back in the 1970s Milton Friedman looked back at the Great Depression. He talked about what his teachers had recommended as policies and what he would have advocated in the Great Depression. He called for, in situations like that, and, I think, in situations like this, for coordinated monetary and fiscal expansion. With interest rates at their extraordinarily low levels, now, as in the 1930s, is a once-in-a-century opportunity to pull all the infrastructure spending we will be doing over the next generation forward in time and do it over the next five years, when the government can finance it at such extraordinarily good terms.

Matt Miller: We have a national infrastructure crisis, right? Roads and bridges, ports and airports are at levels that are critical and certainly not worthy of a first-world country. Tom, don’t you agree we need to fix that up quickly?

Tom Davis: I agree with that. Look, I think that with the stimulus package that was passed in 2009 they blew an opportunity to do more for infrastructure. We should have had something to show at the end of that. With the money, maybe we got a short-term stimulus, but we should have gotten something long-term.

Brad DeLong: They had to get it through with only Democratic votes. Why weren’t there any Republicans willing to deal? We could have gotten a larger and much better-crafted program.

Matt Miller: There was a lot of money there. There was a lot of money there, Brad.

Brad: Yep.

Tom Davis: Let me interject. I know something about politics. I think the President’s inclination was to deal with Republicans, but Democrat leaders said: “No: We are in charge. You have to go through us.” And I think that hampered his ability. It wasn’t just Republicans. You offer us a bad deal, don’t expect us to take it.

Matt Miller: That doesn’t change the fact that we still have crumbling infrastructure in this country.

Tom Davis: No, I agree.

Matt Miller: It needs to be, somehow, brought up to snuff. How would you do that?

Tom Davis: You need a massive transportation bill at this point. And you need continuity. Right now this thing is on life support. So long-term projects are not moving through. States are taking some initiative in some cases. But this is the time to do it.

Matt Miller: Brad, it sounds like…

Brad DeLong: When Larry Summers was in the White House, he spent two years trying to assemble a centrist bipartisan coalition for a large-scale long-lasting infrastructure bank, and got no Republican bites at all.

Tom Davis: Well, the Democrats controlled both houses. They could have done it. That is all I am saying. We have to look ahead at this point. But I think they blew the opportunity with that bill when they controlled everything. I think bipartisan government right now has just crumbled. We have turned almost into a parliamentary system in our behavior, and unfortunately with our system of government that just does not work very well.

Matt Miller: It sounds like we are all in agreement that something needs to be done. Hopefully that can happen. Maybe the two of you can get together after this program.

Must-Read: Roger E.A. Farmer (2013): Animal Spirits, Financial Crises, and Persistent Unemployment: “This article uses a rational expectations model with multiple equilibrium unemployment rates…

…to explain financial crises. The model has equilibria where asset prices are unbounded above. I argue that this is an important feature of any rational-agent explanation of a financial crisis, since for the expansion phase of the crisis to be rational, investors must credibly believe that asset prices could keep increasing forever with positive probability. I explain the sudden crash in asset prices that precipitates a financial crisis as a large shock to expectations that leads to a permanent increase in the unemployment rate.

Must-Read: If you are going to read only one tech newsletter… I believe this is the one you should read:

Ben Thompson: The Funnel Framework: “The post-Internet Microsoft was the proverbial emperor with no clothes…

…That reality would only manifest itself… as soon as something better came along…. In the case of Apple… winning via the user experience…. iOS owns the best customers, i.e. the customers who are most willing to pay…. The companies who… own the funnel… are the ones who gain… in the long run, outsized profits…. Google[‘s]… search engine was, and is, superior…. And, now that they own access to the most consumers looking to buy something online–now that they own the funnel–they have outsized influence and outsized profits. Facebook… built a superior product that connected an extraordinary number of people, all generating content that made the product even more attractive and able to capture even more attention. And, now… that they own the funnel… have outsized influence and outsized profits.

All three companies succeed with very different product focuses, but all share the ability to capture a specific type of customer and funnel them to someone who is willing to pay…. If you look around you can see the funnel framework everywhere: Taxis… Uber…. Hotels… Airbnb…. Messaging apps… LINE and WeChat…. Newspapers… BuzzFeed…. Broadcast channels… Netflix and HBO…. Failing business models… most… were based on something other than providing a superior product…

Must-Read: The obvious thing. The technocratic thing. The reasonable thing. So why does the Federal Reserve think otherwise?

IMF Warns Fed to Hold Its Fire on Rate Rise: “The International Monetary Fund has urged the Federal Reserve…

…to wait until next year to raise interest rates, cautioning that the central bank’s credibility was at stake and that there was too much uncertainty to justify a much-anticipated lift-off. In its annual review of the state of the US economy released on Thursday, the IMF said it expected the US economy to grow 2.5 per cent this year despite a contraction in the first quarter. ‘The underpinnings for continued growth and job creation remain in place,’ fund economists wrote. But the IMF said conditions were still not right for the Fed to raise rates for the first time in almost a decade. It urged the central bank to wait for ‘greater signs of wage or price inflation than are currently evident’.

Must-Read: Paul Krugman: Multipliers and Reality: “When Bernstein and Romer assumed that [the fiscal multiplier] was 1.5, Robert Lucas accused them of ‘shlock economics‘…

…and smeared Romer’s professional ethics. Since then there has been quite a lot of empirical work, which generally indicates a multiplier of about… 1.5. Now… Simon Wren-Lewis and Robert Waldmann raise… interesting issues. Wren-Lewis argues for a multiplier of around one… [from] a priori reasoning…. Waldmann counters that… real consumption decisions reflect rules of thumb that can easily lead to a multiplier much more than one….

And I would add: don’t forget the investment accelerator as well. Tobin’s q is really not a sufficient statistic for the determination of business investment; capacity utilization measures matter a lot.

Krugman:

The point [Wren-Lewis] makes about the implications even of perfectly well-informed and rational consumers was and as far as I know still is totally misunderstood by freshwater economists…. Lucas’s attack on Romer rested in part on the [false] claim that government spending on a new bridge would lead consumers, anticipating future taxes, to offset it one for one with cuts in their own spending; this is completely wrong if the spending is temporary….

Rigorous intertemporal thinking, even if empirically ungrounded, can be useful to focus one’s thoughts. But as a way to think about the reality of spending decisions, no…. Consider (from Vox) what the public knows about the biggest new government program of recent years[, ObamaCare]…. If people are that uninformed about something that big, imagining that they do anything like the calculations assumed in DSGE models is ludicrous. Surely they rely on rules of thumb that don’t make use of the kind of information that plays such a large role in our models…

Fold: The Omega Point Discussion: On the Adequacy of Hicks-Hansen-Wicksell for Understanding 2008-Present

Is this “Fold” possibly going to be a useful thing?

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