Category: Equitablog

There have long been many who fear immigration–or people who look and speak differently–and who fear social change–or social difference–while not loving a market economy that leaves them without security and vulnerable to falling into poverty because of incomprehensible decisions made by bankers thousands of miles away. There has long been an argument about whether this mode of thought is primarily the foundation of the republican virtue tradition (cf. Edmund S. Morgan: American Slavery, American Freedom); primarily a con game run by the rich against the non-rich (cf. Franz Neumann: Behemoth; William Freehling: The Road to Disunion); or primarily simply a somewhat-confused but not insane set of political doctrines that was taken over by Hitler and has thus lost legitimate modes of expression since the end of World War II. Whatever it is, this is Trumpism. And, since 1945, as Matthew Yglesias writes:

thinkers who define ideological space have decreed… nationalist principles… pare… with small government… and cosmopolitan principles… pare… with economic egalitarian[ism]…. But many actual voters see it differently…

Now there is the fact that in a country with native demography near zero population growth and thus with an aging society, hatred of immigrants and love of social insurance really do not go together at all. National Socialism competing for economic and other advantages against other nations trying to hog the world’s global societal surpluses may be a coherent doctrine that adds up. National Medicarism does not. Yglesias:

Matthew Yglesias: To Understand Donald Trump, Look to Europe[‘s] Far-Right: “Populist conservatives… [claim] that if we weren’t wasting so much money on welfare for migrants…

…retirement programs would be easily affordable. This simply isn’t true…. More immigration means at least marginally faster productivity growth, immigrants improve the ratio of working-age to retired people, and foreign-born health care providers help contain the cost of caring for the elderly.

Desire for social insurance, hatred of immigrants, fear that the haves–not so much the billionaires, who are to be admired from their Randite social-darwinist fitness–but, rather,an upper-middle class that knows how to work the system, is stealing your stuff, all adding up to a fear that the system isn’t working for you and people like you. This is not an unexpected thing to see in a world in which rapid economic growth at the top is accompanied by mass stagnation and mass insecurity among those who thought that they were going to make it. And it is all over the place in the North Atlantic:

Matthew Yglesias: To Understand Donald Trump, Look to Europe[‘s] Far-Right: “Newish parties… are gaining support with platforms…

…[of] nationalism… anti-immigrant politics… [plus] a more… [larger] welfare state… the Trump ideological mix…. Their rise has been astoundingly swift, and it tells us a lot about Trump…. As unlikely as Trump’s rise in the polls has been in some ways the rise of the Sweden Democrats is even weirder…. Trumpism, in other words, is much bigger than Donald Trump or the particular pathologies of the US Republican Party. It’s a global phenomenon….

Thinkers who define ideological space have… decreed… nationalis[m]… pair[s]… with small government… and cosmopolitan[ism]… pair[s]… with economic egalitarian[ism]…. But many actual voters see it differently… are both beneficiaries of government programs… while also being skeptical of the kinds of social change brought about by immigration.

And to the extent that the people who think this way are called fascists and Nazis by virtue of these thoughts, they will sooner or later start giving a positive ideological valence to fascism and Naziism.

Yglesias continues:

Sometimes this can express itself in a kind of ‘keep the government’s hands off my Medicare’ ideological confusion. Other times, leaders of mainstream conservative parties can try to square the circle, as when the Republican Party promises to cut Social Security benefits for young people but not for old people…

As my sister points out, it is a very interesting strategy to promise a special set of goodies for a particular group that by agreeing undermine the broader coalition that has created those goodies and also lose the power to block future action to take those goodies away. Thus it seems to me that ideological confusion is the natural strategy of mainstream right-wing parties so far in the twenty-first century. And I believe this is at the root of the current war on science and arithmetic we see in the American Republican Party, and elsewhere.

The replacement of mainstream conservatives by anti-immigration and anti-difference National Medicarists seems to me highly likely, for:

Mainstream conservative[s]… [can’t advocate]… social welfare for retirees because, being parties of the right, they [want]… taxes low…

and, as Sam Brownback’s disastrous rule-by-confidence-game in Kansas shows, ideological confusion can take you only so far when you eventually have to govern.

The problem is that the National Medicarists will be no more friendly toward arithmetic, science, or a reality-based technocratic policy debate about policies that would really work.

Populist conservatives… [claim] that if we weren’t wasting so much money on welfare for migrants, retirement programs would be easily affordable. This simply isn’t true…. More immigration means at least marginally faster productivity growth, immigrants improve the ratio of working-age to retired people, and foreign-born health care providers help contain the cost of caring for the elderly.

The two central planks of National Medicarism–keep out immigrants, and top up Social Security and Medicare–do work against each other given the North Atlantic’s current demography and relative wealth. Someday somebody should write something about how Japan’s lost decades are in large part due to its falling victim to its own version: National Medicarism with Japanese Characteristics…

Must- and Should-Reads:

• Federal Reserve Bank of Kansas City: Economic Policy Symposium Proceedings
• Must-Read: Paul Krugman: Rate Hike FeverMust-
• MustLawrence Summers: The Fed Looks Set to Make a Dangerous Mistake
• Owen Zidar: Amir Sufi on Household Debt, Redistribution, and Monetary Policy During the Economic Slump
• Must-Read: Paul Krugman: Nobody Could Have Predicted, Interest Rates Edition
• Mike Konczal: The Voluntarism Fantasy: “Voluntary social insurance… [in 1900 was] socially fragmented… regionally segregated and isolated… [and only] for working men…”
• Thomas Piketty: New Thoughts on Capital in the Twenty-First Century)
• Must-Read: Stan Collender: Paul Krugman Is Wrong

Might Like to Be Aware of:

• Dean Murphy: Crystal: “An advert & tracking blocker for iOS”
• Jeet Heer (2013): Sex, Economics, and Austerity: “The real meaning of Niall Ferguson’s John Maynard Keynes-was-gay jibe-and why Keynes is so threatening to conservative economists and moralists alike…”
• Jim Henley: “Tobias Buckell looks at… the [SF Hugo] ballot.. with no [puppy] skunks at the picnic. I take the results somewhat personally. Skunkworks kept both ‘The Litany of Earth’ by Ruthanna Emrys and ‘Jackalope Wives’ by Ursula Vernon off the final ballot. I loved both of those stories, and Litany in particular blew my doors off…”
• Jonathan Rees: The ‘flipped classroom’ is professional suicide
• Norm Ornstein**: Why the 2016 Republican Nomination Can’t Be Predicted Through History
• Heebie Jeebie: Reading Group: Ta-Nehisi Coates’s Between the World and Me

Must-Read: What did Alan Greenspan do in 1987 when the stock market suddenly dropped by 25%? He reduced short-term safe nominal interest rates by 200 basis points.

What is the equivalent policy to produce that same amount of monetary easing today, should it become appropriate–as it will, should global stock markets drop by 25%?

Paul Krugman: Rate Hike Fever: “Larry Summers argues that a Fed rate hike would be a big mistake…

…I completely agree. Yet he also suggests that the Fed ‘seems set’ to do this foolish thing. Why?… It’s not like debating monetary policy with the seventeen stooges conservatives whose doctrine tells them that fiat money will turn us into Zimbabwe… and are impervious to evidence. The Fed chair is Janet Yellen; the vice chair is Stan Fischer; both… [of] whose underlying macro worldview is… Larry’s, or mine, not least because we studied under Stan himself. So why the difference on policy?….

Something about being on the inside is making the Fedsters more rate-hike prone… [not] regular contact with Wall Street types… Larry actually has plenty of that too…. [not] extra information: basically the Fed knows no more than anyone [else]… and… Janet and Stan are smart and level-headed enough to get that….

The constant sniping against easy money… may play a role…. I also suspect… the whole culture of central banks… taking away the punch bowl… having the courage to do unpopular things…. The Fed is really, really eager to return to that position–and is, I fear, engaging in wishful thinking, believing much too readily that a return to normalcy is appropriate. It’s not. I’m with Larry here: this attitude has the makings of a big mistake. Think Japan 2000; think ECB 2011; think Sweden. Don’t do it.

NABE@KC :: 11:30 AM CDT FRBKC 1 Memorial Drive, Kansas City, Missouri 64198 :: Conference Room

What the Frack Is Going on in Europe?

NABE@KC August Event Announcement-Delong.pdf

Lawrence Summers: The Fed looks set to make a dangerous mistake: “The Federal Reserve’s September meeting [might] see US interest rates go up… and…

…barring major unforeseen developments… will… be increased by the end of the year…. The Fed has been careful to avoid outright commitments. But… raising rates in the near future would be a serious error…

Summers says, correctly, that raising rates would threaten the Fed’s ability to attain its 2%/year inflation target:

More than half the components of the consumer price index have declined in the past six months…. Market-based measures of expectations suggest… the next 10 years[‘] inflation will be well under 2 per cent. If the currencies of China and other emerging markets depreciate further, US inflation will be even more subdued…

It would threaten the Federal Reserve’s ability to fulfill its mandate to deliver maximum feasible employment:

Tightening policy will adversely affect employment levels because higher interest rates make holding on to cash more attractive than investing it. Higher interest rates will also increase the value of the dollar, making US producers less competitive and pressuring the economies of our trading partners…

And this has an extra bonus drawback–it raises inequality:

Studies of periods of tight labour markets like the late 1990s and 1960s make it clear that the best social programme for disadvantaged workers is an economy where employers are struggling to fill vacancies…

The standard argument for raising rates is that it is a way to guard against financial instability. Summers says, again correctly, that if this was ever true it is not true now:

There may have been a financial stability case for raising rates six or nine months ago, as low interest rates were encouraging investors to take more risks and businesses to borrow money and engage in financial engineering….. That debate is now moot. With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the US stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria or overconfidence…. fragility, raising rates risks tipping some part of the financial system into crisis, with unpredictable and dangerous results.

Let me repeat something I wrote last week:

Remember: the last four times the Federal Reserve has started raising interest rates, it has had no clue where the economic vulnerabilities lie:

• In 2005-2007, neither Greenspan nor Bernanke had any idea how fragile mis- and un-regulation had left housing finance and the New York money-center universal banks.

• In 1993-1994, Alan Greenspan had no clue how much of an impact what he saw as small policy moves would have on long-run financing terms–but fortunately he shifted policy and stopped raising interest rates in midstream (over the protests of many on his committee).

• In 1988-1990, Alan Greenspan had no clue how much of an impact it would have on the balance sheets of southwestern S&Ls. The federal government had to give three months of total Texas state income to Texas S&Ls and their depositors who had been chasing high yields in order to clean that up.

• In 1979-1982, Paul Volcker did not realize that raising interest rates would bankrupt not only Latin America but also leave Citibank and others as zombies–things that were bankrupt, and that ought to have been shut down, but that were allowed, via promises of government rescue if necessary, to earn their way out of bankruptcy over the next five years.

In fact, it’s not four for four over the past forty years, it’s five for five over the past fifty years–if you count the early-1970s episode of which the Penn Central financial-engineering bankruptcy was the most prominent feature, the one that would have bankrupted Goldman Sachs if not for regulatory forbearance, as one.

Economists in general–including me: in 2003-2007 I was looking at the trade deficit, global imbalances, and the dollar as the likely source of the potential next major financial crisis; not at subprime, derivatives, and attempted regulatory arbitrage by large money-center universal banks–and the people in the Eccles and Martin buildings in particular are bad at understanding how and where the financial system is fragile and vulnerable. This should come as no surprise. Economists looking at the financial-monetary system with an eye toward guarding against systemic risk are part of the same intellectual community as those advising bankers and financiers about potential major tail risks. If that community sees a major tail risk, then their principals among the bankers and financiers–people who very much want not to lose all their chips in a month and have to stop playing the game–will take steps to guard against that particular tail risk, and it will cease to be. Thus it is overwhelmingly likely that a major tail risk in finance that hits the economy in a big way will be one that has been grossly understressed and underestimated in the briefings held in the Eccles Building.

Let us take a saying of the justly maligned Donald Rumsfeld–a saying that he ought to have paid attention to, and did not–and twist it to our purposes: there is one thing we know for certain about financial vulnerabilities and risks of financial crisis: there are major unknown unknowns out there. The Federal Reserve does not know what they are. And I see no signs that the Federal Reserve even knows that there are major unknown unknowns about which it does not know.

Thus I cannot see a plausible benefit-cost analysis that leads to any rational decision to raise interest rates absent forecasts that show either significant current or the high likelihood of rapid emergence of unwanted inflationary pressures.

Yet the Federal Reserve is going to move. And it is going to start its move, with high probability, before the end of this year.

Summers asks “why?”:

Why, then, do so many believe that a rate increase is necessary? I doubt that, if rates were now 4 per cent, there would be much pressure to raise them…

His answer is that the dominant current of thought in the Eccles Building is more-or-less thus: capacity utilization is no longer extraordinarily low, unemployment is no longer extraordinarily high, the economy is no longer extraordinarily not-normal, therefore interest rates ought to be not far from normal too. As he puts it:

That pressure comes from a sense that the economy has substantially normalised during six years of recovery, and so the extraordinary stimulus of zero interest rates should be withdrawn. There has been much talk of ‘headwinds’ that require low interest rates now but this will abate before long, allowing for normal growth and normal interest rates…

But I would say that the economy is still extraordinarily not-normal along at least six dimensions:

1. The equity return premium has reverted to its immediate post-Great Depression generation 7%/year or so, reflecting a very not-normal failure on the part of financial markets to mobilize any appreciable part of society’s risk-bearing capacity.

2. Fiscal policy in the U.S. and even more so in the rest of the North Atlantic remains extraordinarily contractionary, in levels of spending if not in rates of change.

3. The future regulatory structure of housing finance in the U.S. remains extraordinarily unsettled, leaving only risk-loving banks with any incentive to extend themselves to finance a return to what we used to see as normal levels of housing construction.

4. Falling population growth and difficulty in finding large-scale private investments have diminished private demand for investment capital.

5. And the rise of both the rich of emerging markets seeking safety for the wealth of their dynasties and of emerging market governments seeking guarantees of policy autonomy has created Ben Bernanke’s global savings glut.

6. The unemployment rate has nearly normalized; the employment-population ratio has not.

With all six of these extraordinary non-normalities still on the table, why should the fact that the unemployment rate and capacity utilization are no longer extraordinarily non-normal lead to any presumption that interest rates ought to be near-normal as well?

As Summers puts it:

Whatever merit this view [that near-normal capacity utilization and unemployment call for near-normal interest rates] had a few years ago, it is much less plausible as we approach the seventh anniversary of the collapse of Lehman Brothers. It is no longer easy to think of economic conditions that can plausibly be seen as temporary headwinds. Fiscal drag is over. Banks are well capitalised. Corporations are flush with cash. Household balance sheets are substantially repaired. Much more plausible is the view that… the global economy has difficulty generating demand… the ‘secular stagnation’ diagnosis, or the very similar… Ben Bernanke[‘s]… ‘savings glut’…. This is why long term bond markets are telling us that real interest rates are expected to be close to zero in the industrialised world over the next decade.

New conditions require new policies… promot[ing] public and private investment so as to raise the level of real interest rates consistent with full employment. Unless these new policies are implemented, inflation sharply accelerates, or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.

Now Janet Yellen and Stanley Fischer at the head of the Federal Reserve see exactly what Larry Summers sees, and think all in all very much as Larry Summers does. Janet would, I think, probably say that she never had a better student in her classes than Larry Summers. (Stan might say that he might be able to think of a very, very few.) So why have they reached a different conclusion than he has?

And here I must stop. This is something that is mysterious to me.

I do note that this is an especially urgent question because of the following. Several years ago there was a very widespread perception–and, as my friend Larry Summers’s chief internet apologist during the public discussion of whether Barack Obama should nominate him or Janet Yellen to chair the Fed, I know how widespread this perception was–that Larry Summers was more conservative than Janet Yellen. Yet now she now appears much less averse to raising interest rates than he.

Must-Read: Let me note, in agreement with Summers, that, all four times in the past forty years that the Federal Reserve has embarked on a significant tightening cycle, the tightening has revealed significant and dangerous previously-underappreciated financial vulnerabilities.

Given the widespread perception several years ago–and as my friend Larry Summers’s chief internet apologist during the public discussion of whether Barack Obama should nominate him or Janet Yellen to chair the Fed, I know how widespread this perception was–that Larry Summers was more conservative than Janet Yellen, why she now appears much less averse to raising interest rates than he is is something that I find very interesting to note…

Lawrence Summers: The Fed Looks Set to Make a Dangerous Mistake: “The Federal Reserve’s September meeting [might] see US interest rates go up…

…[and] barring major unforeseen… will probably be increased by the end of the year…. Raising rates in the near future would be a serious error…. [It would] risk… inflation… lower than [the Fed’s target]. More than half the components of the consumer price index have declined in the past six months…. Market-based measures of expectations suggest… the next 10 years[‘] inflation will be well under 2 per cent…. Tightening policy will adversely affect employment levels…. At a time of rising inequality… tight labour markets… [are] the best social programme for disadvantaged workers…. There may have been a financial stability case for raising rates six or nine months ago…. That debate is now moot. With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the US stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria…. [Instead] raising rates risks tipping some part of the financial system into crisis….

Why, then, do so many believe that a rate increase is necessary?…. If rates were now 4%, there would [not] be much pressure to raise them…. Pressure comes from a sense that the economy has substantially normalised… and so the extraordinary stimulus of zero interest rates should be withdrawn…. Whatever merit this view had a few years ago, it is much less plausible as we approach the seventh anniversary of the collapse of Lehman Brothers. It is no longer easy to think of economic conditions that can plausibly be seen as temporary headwinds. Fiscal drag is over. Banks are well capitalised. Corporations are flush with cash. Household balance sheets are substantially repaired…. More plausible is the view that… the global economy has difficulty generating demand for all that can be produced. This is the ‘secular stagnation’ diagnosis, or the very similar idea that Ben Bernanke, former Fed chairman, has urged of a ‘savings glut’…. New conditions require new policies… steps to promote public and private investment so as to raise the level of real interest rates consistent with full employment. Unless these new policies are implemented, inflation sharply accelerates, or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.

Must-Read: Paul Krugman: Nobody Could Have Predicted, Interest Rates Edition: “I did see… people praising remarks from Charlie Munger…

…declaring himself ‘flabbergasted’ by low interest rates, with a sideswipe at anyone who claims to have had some inkling:

I think everybody’s been surprised by it, including all the people who are in the economics profession who kind of pretend they knew it all along. But I think practically everybody was flabbergasted. I was flabbergasted when they went low; when they went negative in Europe–I’m really flabbergasted.

Well, negative rates were a big shock; I had thought they were ruled out by the possibility of holding cash, and hadn’t thought the mechanics through. But this kind of ‘nobody saw it coming’ remark is, if you ask me, a big dodge…. There were different degrees of wrongness here. Read that WSJ piece, or anything just about everyone on the ‘Eek! Deficits!’ side was saying, and compare it with, say, what I had to say. One reveals a world-view that has been utterly refuted by events; the other looks pretty good in the light of experience. Pretending that everyone was equally flummoxed may make those who really were clueless feel better, but it’s not the truth.

Must-Read: I remember back in 1993 Alan Blinder saying at Clinton administration meetings that it was very important to look at the government’s capital account as a whole–that if we did not work hard to educate people to know that cutting government capital spending was not a net debt-reducing measure in any real sense, we would someday be sorry.

He was right. We didn’t. We are.

Sorry, Alan:

Stan Collender: Paul Krugman Is Wrong: “Krugman doesn’t get to the real problem…

…it’s not that the scolds and naysayers don’t understand the economics of government borrowing, it’s that the facts don’t matter to them. In today’s political environment, channeling Alexander Hamilton by explaining the financial realities of borrowing won’t convince many people that it’s not the Greece-like catastrophe-waiting-to-happen they continually say it soon will be. That’s why it hasn’t made any difference that the promised, right-around-the-corner federal debt-induced economic disaster hasn’t occurred…. It’s also why the scare tactics about leaving future generations with a worse economic situation has only ever dealt with half the balance sheet… [and] ignored the benefits the borrowing makes possible and the better, longer, more productive and safer life created for our children and grandchildren by, for example, advances in medical research, infrastructure, education and defense…

Noted for Your Nighttime Procrastination for August 22, 2015##

Must- and Should-Reads:

• Charlie Munger: “I think everybody’s been surprised by [low interest rates]… flabbergasted. I was flabbergasted…. How can I be an expert in something I never even thought about that seems so unlikely. It’s new territory…. Anybody who is intelligent who is not confused doesn’t understand the situation very well. If you find it puzzling, your brain is working correctly…”
• Greg Ip: Is Government Debt Too Low?
• Must-Read: Paul Krugman: Fairy Tales
• Must-Read: Ezra Klein: A Better Way to Read on the Internet
• • Upton Sinclair (1908): The Moneychangers
• Nolo: Federal Reserve Act of 1913
• Wikipedia: History of the Federal Reserve System
• Wikipedia: Structure of the Federal Reserve System
• Wikipedia: 1933 Banking Act
• Wikipedia: Panic of 1907
• Wikipedia: Pujo Committee
• Federal Reserve: Membership of the Board of Governors
• Federal Reserve: Federal Open Market Committee
• Federal Reserve: History of the Federal Reserve
• Federal Reserve: Federal Reserve Act
• Library of Economics and Liberty: Federal Reserve System
• Rhett Allain: Running Python in a Browser Is More Awesome Than You Think
• Jamie Hall: 3 data science skills that economists can use
• Must-Read: David Roberts: Carly Fiorina Did a 4-Minute Riff on Climate Change. Everything She Said Was Wrong

Might Like to Be Aware of:

• Boo Man: Paul LePage: The Worst Governor in the World
• Amanda Taub: [Pregnancy is painful, difficult, and dangerous. No one should be forced into it(http://www.vox.com/2015/8/21/9183529/pregnancy-risks)
• David Connell: Your Data Deserve Better than a PDF
• Ed Kilgore: “Let’s underline that: 53% of respondents in that Fox News national poll support Trump, Carson, Cruz or Huckabee, which is more than twice the percentage supporting Bush, Walker, Rubio, Kasich or Christie combined…”
• Ezra Klein: There is a better way to read on the internet, and I have found it
• Evernote
• Diana Kimball: A Decent Digital Commonplace Book System
• Clippings.io: Save your Kindle Notes and Highlights
• Instapaper
• Diana Kimball: IFTTT: Export Instapaper Highlights to Evernote
• Jakob Nielsen (2003): PDF: Unfit for Human Consumption
• Jakob Nielsen: Writing for the Web: Articles, Training & Reports
• David Connell: Your Data Deserve Better than a PDF
• Diana Kimball: A Decent Digital Commonplace Book System
• Commonplace book –
• Evernote
• Amazon Kindle
• Clippings.io: Save your Kindle Notes and Highlights
• Google: Notifications
• Instapaper
• IFTTT
• Phil Libin: Charlie Rose Talks to Evernote CEO
• Upgrade to Evernote Premium
• Evernote: Context: Your Work Enriched by the Smartest Minds
• Diana Kimball: Instapaper and the Curiosity Impulse
• Betaworks: Re-introducing Instapaper
• Pocket
• Marius Masalar: Read It Later: Pocket vs. Instapaper
• Diana Kimball: Export Instapaper Highlights to Evernote
• Chrome: Clippings.io for Kindle and Evernote
• Instapaper Premium
• Evernote: How to back up (export) and restore (import) notes and notebooks
• Lisa Pollack: How Project Management Turned into a Scrum

The Strange Story of Robert Lucas’s “Support” for Obama’s 2009 Recovery Act (with tweets): A twitter dialogue with–well, monologue at–smart young whippersnapper Marshall Steinbaum: