Category: Equitablog

Must-Read: Jon Chait gets one wrong. Scott Horsley, Alan Rappaport, Matt Flegenheimer, Patrick O’Connor, John D. MacKinnon, Tal Kopan, and Ashley Killough were not “suckered” by the JEB! campaign. Rather, they are in the business not of informing their readers but of pleasing their sources, and this leads to a situation in which–as one newspaper honcho once told me about his paper and its competitors–“on an average day, you learn more from reading Ezra Klein than from reading the entire output of the national news staff of the New York Times. Put aside Josh Barro at The Upshot (and Matt O’Brien at Wonkblog), and it is still true:

Jon Chait: How Jeb Bush’s Tax Cuts Suckered the Media: “If you have heard about Jeb Bush’s new tax plan by reading political reporters…

…you have probably heard that it is a ‘proposal to reform the tax code’ that will ‘crack down on hedge fund managers’ (CNN), that it is ‘mainstream and ordinary’ with ‘a populist note’ (NPR), that it ‘challenged some long-held tenets of conservative tax policy’ (the New York Times), and has ‘a nod to the populist anger roiling both parties’ (The Wall Street Journal)… the same sort of coverage George W. Bush received when he unveiled his tax cuts in 1999…. If you have learned about the tax plan from some of the new policy-focused writers, you… [learned] is a ‘large tax cut for the wealthiest’ (the Upshot) and a reprise of the Bush tax cuts, but ‘with more exclamation points’ (Wonkblog). The difference lies between journalists who write narratives drawn from quotes from campaign sources and those who build their coverage on data. George W. Bush was fortunate that data-based journalism barely existed 16 years ago. His brother is counting on the power of narrative to obscure the data…

Must- and Should-Reads:

• Must-Read: Mike Konczal: Student Loan Distress Goes Beyond Defaults
• Jared Bernstein: The Lessons of Lehman, Learned and Unlearned
• Frances Coppola: Rethinking Government Debt
• Must-Read: Ray Fair (2010): Convergence in Macroeconomics: Hoisted from Ray Fair’s Archives
• Joseph E. Gagnon: It is highly unlikely that China would need to spend all of its reserves to defend the renminbi…. Moreover, the reserves are not useful for anything [else]… so China may as well use them…. Indeed… China is better off selling reserves while it can still get a good price for them…
• Matthew Yglesias: Why is the media more interested in Hillary’s email than in Jeb’s profoundly dishonest tax pitch?
• Must-Read: Paul Krugman: Poland Versus Greece
• Michael Woodford: Prospect Theory as Efficient Perceptual Distortion
• Ryan Sweet: Full Employment Hasn’t Always Translated Into Higher Inflation: We believe this time will be different
• Must-Read: Paul Krugman: Labour’s Dead Center
• Must-Read: Martin Sandbu**: The Importance of Corbynomics
• Ta-Nehisi Coates Interviewed by Ezra Klein: Ta-Nehisi Coates: “For African Americans, Unfreedom Is the Historical Norm”
• Must-Read: Tim Duy: Why the Fed Is Likely to Stand Pat This Week

Might Like to Be Aware of:

• Steve Benen: Planned Parenthood… didn’t sell fetal tissue for a profit… didn’t misuse public resources… didn’t violate any laws. The Republican plan was based on a foundation of quicksand…. But… GOP House members are now shifting to their back-up plan: they no longer care whether Planned Parenthood did anything wrong…
• Jon Butterworth: Straws in the LHC Wind: Lepton Universality and an Update on “That Bump”
• Serial Box
• Arkham, Mass.

Must-Read: Tim Duy: Why the Fed Is Likely to Stand Pat This Week: “The Federal Reserve is looking for a time with minimal downside risks…

…to raise interest rates. The wavering global economy is likely creating enough downside risk to defer that first hike to a later meeting. But the Fed still wants to begin normalizing policy, and it will signal that it remains committed to a rate hike this year. Regardless of the global situation and the inflation picture, I suspect it will feel increasingly compelled to do just that as the unemployment rate drifts below 5 percent.

The arguments for raising interest rates right now are of appallingly low-quality.

Consider, for example, Bloomberg View:

Brad Brooks: Why the Fed Should Raise Rates Now: “Although the Fed hasn’t raised interest rates in almost 10 years…

…sympathetic pundits say it’s still too soon to raise them…. How did our financial system weaken to the point where a quarter of a percent increase in rates is more than it can handle?

Stop right there: it is not that “our financial system [is] weaken[ed] to the point where a quarter of a percent increase in rates is more than it can handle”. No interest-rate dove says it is. The reason interest-rate doves oppose rate increases right now is not that the financial system cannot handle them, but that they come with a cost–lower employment and slower growth–and no compensating gain in the form of an appropriate curbing of excess inflationary pressures, since there are no excess inflationary pressures visible either her and now or as far out as the horizon we can see.

The process started… when Alan Greenspan… lower[ed interest] rates to 1 percent… then… tighten[ed] policy… with agonizing slowness… set[ting] the table for the subprime housing debt mess…

Suppose, for the sake of argument, that Greenspan were to have pushed the short-term safe interest rate 200 basis points below its “proper” level–whatever that is–and kept it there for three years. By how much would that have boosted the amount that a subprime borrower could have paid for a house? The answer is simple: 2% x 3 = 6%. Even if you buy that Greenspan made an error in monetary policy in the mid-2000s, it accounts for only one-tenth of the runup in housing prices. And it accounts for a correspondingly-small share of the “subprime housing debt mess”. Greenspan’s policy errors were mighty–but they were all in the arena of lax supervision of lending standards and lending fraud. Bernanke’s policy errors were mighty–but they were all in the area of not cleaning up the supervision-and-fraud mess and not understanding the seriousness of the situation he was handed.

We’re likely to see a serious correction in the U.S. equity market… trigger[ed by]… hundreds of billions of dollars worth of bad debt in the energy sector… made to finance the fracking frenzy…. Perhaps the most disturbing statistic is that American corporations have announced dividends and share buybacks for this year that total more than a trillion dollars… at the expense of long-term capital investment…. Another area for concern is the burgeoning private market for investments, where companies are finding it relatively easy to raise capital…. The Fed has to finally take away the punch bowl. The economy may not be in top shape, but it’s strong enough to handle an equity correction of 20 percent to 25 percent…. Another mild recession would not be the end of the world…. Writedowns can be painful, but they instill a sense of responsibility…. Lift[ing] overnight rates back up to the 2.5 percent range years ago… would generate at least a trillion dollars annually, if not more, for [short-duration] fixed-income investors–and a possible boost of 6 percent to GDP…

Ummm… The purpose of raising interest rates is to shrink the economy, not grow it by “6 percent” or some other imaginary number pulled out of the air without any analysis. The extra trillion a year of income to short-duration fixed-income investors is offset by a ten-trillion loss to the portfolios of long-duration fixed income investors, plus an extra trillion dollars a year of payments by enterprising and consuming borrowers to rentiers.

So when Brooks writes:

So let’s end the era of the “Greenspan put” and Bernanke’s quantitative easing, and return to basics…

I, speaking as a Brad, find myself completely and totally humiliated by the low quality of these arguments.

The “basics” are that the Federal Reserve (i) engages in prudential regulation to curb the growth of systemic risk and reduce fraud, and (ii) sets interest rates so that planned investment is equal to desired savings at full employment and there are neither unanticipated inflationary or deflationary pressures on the economy. Labor-market indicators are confusing: the unemployment rate suggests that deflationary pressures are now gone, while the prime-age labor-force participation rate suggests deflationary pressures are still here. Inflation indicators are not confusing: inflationary pressures aren’t here, and aren’t expected to emerge in the near future. Financial asset prices suggest an overheated economy if the Federal Reserve is about to embark on a full tightening cycle, but are justifiably high if the new normal is one of Summers’s “secular stagnation” or Bernanke’s global savings glut. High financial asset prices do indeed raise the risks from lax macroprudential supervision. But why isn’t the appropriate policy response to make sure that macroprudential supervision is not lax?

**Must-Read: I do not think it is an accident that “student debt activists… put forward people defrauded by the for-profit industry, the media prefers to talk about poetry majors with outrageous debt balances…” The Graham family conglomerate, remember, included both The Washington Post and Stanley Kaplan University–the second-worst for-profit student-loan grifter–before its break-up. I think that mattered…

Mike Konczal: Student Loan Distress Goes Beyond Defaults: “Adam Looney and… Constantine Yannelis… [say] that there is no…

…general student loan default crisis. Instead there is a serious, though limited, problem concentrated in for-profit schools and, to a lesser extent, community colleges… made far worse by the Great Recession…. I agree…. Student loans defaults from for-profit schools are a genuine problem, and the media often fails to recognize this. As Astra Taylor notes, when student debt activists in the wake of Occupy put forward people defrauded by the for-profit industry, the media prefers to talk about poetry majors with outrageous debt balances….

For-profits were allowed to expand rapidly in the 2000s, and they’ve done a remarkable job in maximizing their profits…. The yearly net tuition increase for students attending a community college is up around $950 a year between 2000 and 2010. If the public policy is to shift costs from states to individual students, we shouldn’t be surprised when it goes perfectly to plan…. Poor communities have very large debt balances relative to income, forcing such distress that the results are large default rates. But there’s another issue, and that’s the life effects of student debt. And default rates won’t catch this…

Must-Read: Martin Sandbu**: The Importance of Corbynomics: “A good place to start is by the two competing letters from economists…

…for and against Corbynomics. One, in the Guardian, insisted that Mr Corbyn’s opposition to fiscal austerity was mainstream economics. The other, in the Financial Times, argued that nationalising industries and printing money to fund investment was not. If this is a war of letters, it is a phoney kind of war, since both can be true at the same time (as Simon Wren-Lewis has pointed out.) But together, the two letters make up as good a list as any of the main traits of the economic policy that Mr Corbyn has suggested he wants to pursue.

Must-Read: Paul Krugman: Labour’s Dead Center: “One crucial piece of background to the Corbyn surge…

…the implosion of Labour’s moderates…. Every candidate other than Mr. Corbyn essentially supported the Conservative government’s austerity policies…. accepted the bogus justification… pleading guilty to policy crimes that Labour did not, in fact, commit….

Was the last Labour government fiscally irresponsible?… On the eve of the economic crisis of 2008… debt was lower, as a share of G.D.P., than it had been when Labour took office a decade earlier, and was lower than in any other major advanced economy except Canada…. There has never been any hint that investors, as opposed to politicians, were worried about Britain’s solvency: interest rates on British debt have stayed very low…. There was never any need for a sharp turn to austerity…. The whole narrative about Labour’s culpability for the economic crisis and the urgency of austerity is nonsense… consistently reported by British media as fact.

And all of Mr. Corbyn’s rivals for Labour leadership bought fully into [it]… accepting the Conservative case that their party did a terrible job…. Why Labour’s moderates have been so hapless. Consider the contrast with the United States…. Part of the answer is that the U.S. news media haven’t been as committed to fiscal fantasies, although that just pushes the question back a step. Beyond that, however, Labour’s political establishment seems to lack all conviction…

Must-Read: Bluntly, your macroeconomic model–whatever it is–needs to mimic a Simsian VAR in-sample. If it does not, it has no claim on our attention: it is imposing assumptions that are neither the true structure nor even useful epicycle-like forecasting hypotheses. And if it cannot fit the data we have, it has no ability to claim to provide useful policy multipliers.

The Lucas critique remains true: a model can mimic a VAR and still not be useful for the purpose of providing policy multipliers. But the anti-Lucas critique–that a model that does not mimic a VAR has no claim to our attention for any purpose whatsoever–is much truer:

Ray Fair (2010): Convergence in Macroeconomics: Hoisted from Ray Fair’s Archives: “There have been a number of recent papers arguing…

…that there has been considerable convergence in macro research and to the good. Blanchard (2009, p. 2)… Woodford (2009, pp. 267, 269)… Chari et al. (2009, p. 242) state: “Viewed from a distance, modern macroeconomists… are all alike.”… Galí and Gertler (2007, p. 26)… state: “Overall, the progress has been remarkable. A decade ago it would have been unimaginable that a tightly structured macroeconometric model would have much hope of capturing real-world data, let alone of being of any use in the monetary policy process.”… There has been convergence… [to what] I will call ‘macro 2’, [which] dominates… refereed journals….

My non-macro friends often ask why macroeconomists cannot just compare models in terms of how well they fit the data and choose the model that fits best?… It is not, however, common…. The only case I am away of is in Fair (2007, Table 1), where a DSGE model in Del Negro et al. (2007) is compared to the US model in Fair (2004)…. The four-quarter-ahead RMSE for real GDP for the DSGE model is 2.62%, which compares to 1.33% for the US model in which autoregressive equations are specified for the exogenous variables…. The eight-quarter-ahead RMSE for the DSGE model is 6.05%, which compares to 1.84% for the US model. The DSGE model is thus not accurate. This is, of course, only one example, and in future work more comparisons like this should be done…

I am with Ray fair here: Whenever somebody shows up with a DSGE model that they attempt to use for any purpose, my first question is: how does this fail to mimic a VAR? My second question is: how much do the factors in the model that caused it to fail to mimic a var–the factors that we know are wrong–corrupt your answers to the question of interest right now? My third question is: what validation can you present that this is in fact a useful linear approximation to the emergent properties generated by the true microfoundations–which true microfoundations your model definitely lacks?

More often than not, presenters give little evidence of having thought about any of these three questions before…

Must-Read: There are a lot of instructive comparisons that can be made around the European periphery–Finland, Latvia, Greece, Spain, Portugal, Ireland, Iceland. They pretty much all lead to the conclusion that given the Austere way the euro has been implemented, it has been a huge mistake for everybody except Germany and Holland–for whom the lower currency value and thus greater export competitiveness produced by the eurozone has been an enormous benefit–a benefit that should make them very eager to pay the fiscal union transfers needed in the eurozone’s current situation.

Paul Krugman**: Poland Versus Greece: “Yannis Ioannides and Christopher Pissarides… talk about the ways lack of structural reform…

…hurts Greek productivity and competitiveness…. It’s very, very wrong to point to factors limiting Greek productivity and claim that these factors are the ‘cause’ of the Greek crisis. Low productivity exacts a price from any economy; it does not normally, or need not, create financial crisis and a huge deflationary depression. Consider… Greece and Poland…. Poland has not had a Greek-style crisis, or indeed any crisis at all. Instead, it has powered through the turmoil…. By adopting the euro Greece first brought on massive capital inflows, then found itself in a trap, unable to achieve the needed real devaluation without incredibly costly deflation. Every time someone asserts that the Greek problem is really on the supply side, you should ask… why this should lead to collapse. Greece… should have real wages only about 60 percent as high as Germany’s. It should not have 25 percent unemployment.