Category: Equitablog

Must- and Should-Reads:

• Paul Krugman: Preliminary Notes on Inequality and Urbanism
• Tim Wu: Why Are There So Many Shuttered Storefronts in the West Village?
• Must-Read: Scott Lemieux: David Brooks is not on a Path of Upward Intellectual Mobility
• Must-Read: Julie Nelson: Poisoning the Well, or How Economic Theory Damages Moral Imagination
• Must-Read: Claudia Goldin: The Quiet Revolution
• Must-Read: John Quiggin: The Most Misleading Definition in Economics (Draft Excerpt from Economics in Two Lessons)
• Must-Read: Nathan Pippenger: Democracy Journal: Arguments: Arthur Brooks and the Desperate Search for a Smarter Conservatism
• Must-Read: Ben Thompson: Vox Acquires Recode; Stars, Money, and Reach; The Apple Car and Jony Ive – Stratechery
• Peter Gosselin: Government Austerity Exacts Toll on U.S. Jobs, Wages and Growth

Might Like to Be Aware of:

• Marco Arment: Filling the Green Circle
• The Not-So-Typical Adventures of Lois McMaster Bujold
• Lance Ulanoff: Vox’s acquisition of Re/code is a sign of the tech-blog reckoning to come

Arithmetically, the U.S. economy is depressed because residential construction and government purchases are well below previously-expected trend levels…

Back in 2007 those whose business it was to forecast the American economy were confidently projecting that, come 2015, nominal GDP–the total amount of spending in dollars on currently-produced and marketed goods and services in the United States, plus imputed rent on owner-occupied houses–would be $21.5 trillion. It will be about $18.3 trillion. Back in 2007 they were projecting that real GDP at 2009 prices would, in 2015, be $18 trillion. It will be $16.5 trillion. Back in 2007 they were forecasting that 87% of 25-54 year-old males would have jobs, not 84%. Back in 2007 they were forecasting that 72% of 25-54 year-old females would have jobs, not 70%.

Why? At the arithmetic level, it is because residential construction and government purchases have fallen far below their expected trends by a lot, consumption spending has fallen below its previousy-expected trend by a little, business investment is more-or-less at its previously-expected trend, and only exports have boomed relative to 2007 expectations.

Just because one component of spending falls off in relative terms does not mean that the economy must fall into depression. Take a look at the graph above over 2005-2008. The housing bubble bursts, housing prices collapse, and the pace of residential construction collapses–but exports and businesses pick up the slack. Why? Because money flows that would have gone to funding residential construction were switched to purchasing exports from America and were loaned to businesses that stepped up their pace of expanding their capital stocks instead. When an excess supply of finance emerges because one component of spending declines, the financial market and the Federal Reserve are supposed to guide interest rates down, thus signaling to other potential components of spending that finance is available and can be put to work.

But in 2008 this so-called “credit channel” collapsed as Wall Street in particular and American finance in general broke down. 2008-2009 saw all of business investment, residential construction, and exports–plus consumption spending–collapse, with only Obama’s feeble Recovery Act working in the other direction. And it was only large enough to offset one-eighth of the collapse in the other salient components of aggregate demand. Hence the deeply depressed economy of late 2009.

And since? Short-term safe interest rates have been at zero. Finance is still potentially available, but the Federal Reserve lacks the tools to guide the interest rates it controls below zero. And the private financial market is still too spooked to push risky interest rates down and asset prices up further relative to safe rates. So there is no economic signal available to make financing business equipment investment and consumption spending even cheaper and so inducing businesses and consumers to do enough of it to push the economy to full employment. The same is true of single-family residential construction (multi-family has recovered to normal).

And governments are not responding to market signals: financial markets are telling them that they have a once-in-a-lifetime opportunity to advantageously pull spending forward from the future into the present and push taxes back from the present into the future. But, because of the ideology of austerity, they are not taking advantage of this opportunity.

Must-Read: Joe Romm: 2015 Is Crushing It for Hottest Year on Record:

Over at Grasping Reality:

Over on Twitter:

• @ObsoleteDogma: Niall Ferguson, still a huge hack: http://www.project-syndicate.org/commentary/niall-ferguson-british-austerity-by-robert-skidelsky-2015-05
• @delong: .@ObsoleteDogma will it brighten or darken my day if I read Skidelsky?

• @splinterknight: @delong @ObsoleteDogma Hopefully brighten. And, @delong, it would be great if you jumped into the debate with your next @prosyn piece

• @delong: .@splinterknight What debate? Back in 2007 we thought that austerity was probably a bad idea at the ZLB for economies without foreign-denominated debt, and with their own central banks, that could print reserve-currency assets. Everything since 2007 has strengthened confidence in that view. Nothing has weakened it. For such economies, at current interest rates, it is highly likely that money- and bond-financed infrastructure broadly defined, and likely that general government spending or tax reduction initiatives pay for themselves. Such economies should undertake them. Those that worry about interest-rate risk should borrow long and lock low rates in. Those with confidence in monetary control should do normal debt management. At the level of the ideas, there is nothing to debate. At the level of public discourse, there is nobody on the other side worth debating. Skidelsky has it right. Full stop. @ObsoleteDogma @ProSyn

• @splinterknight: @delong This is exactly the column I’d love to read from you.
• @splinterknight: fair enough

Over at Grasping Reality: Note to Self: Rereading Etienne Mantoux: La Paix Calomniée, ou les Conséquences Économiques de M. Keynes. “The Calumniated Peace” of Versailles. OK. So why is the title of the English translation The Carthaginian Peace? Who decided to replace “Caluminiated” with “Carthaginian”, and why?

Recall that Etienne Mantoux’s review of Keynes’s General Theory is quite bad. At its beginning:

With his fascination Keynes combines another of the serpent’s attributes–his disconcerting ability to molt at more or less frequent intervals, leaving his former conceptions behind him like so many old integuments from which the reader, somewhat disconcerted, must extract himself, having previously been at no little trouble to get in…. We are to witness a revolution. At least so one would gather from some of the more enthusiastic reviews, which go so far as to make Keynes (much to his disgust no doubt) the direct successor of Karl Marx. “My undertaking is one that has no equal, that none will ever equal. I would change the basis of society, shift the axis of civilization…” Is that facetious to place Proudhon’s ironic boasts beside Keynes’ ambitious sureness? Yet their two proposals are not so very unlike, for it is by decline of the rate of interest to zero that the latter would see our economic ills remedied. Curious that the most sharp-tongued economist of our time should come back, by this unexpected route, to the thought of the famous inventor of “credit gratuit”…

And at its end:

Is not this policy likely to beget inflation pure and simple, and present us once more with the excesses that have characterized all great crises, and that were indulged in con molto brio during the last?… Cannot Keynes, who has so much interest in the history of ideas, boast today of having failed not only to predict, but even to persuade? On March 7, 1931, an article appeared that ended, for generations perhaps, an era begun by Adam Smith in 1776. Keynes had always wondered whether he was really a liberal…. For many liberals, attached to free trade as the last symbol of their convictions, his conversion must have been a real tragedy. But then as always, Keynes acted in the best of faith. Today he has come round to an esoteric justification of the preconceptions of the man in the street… [are] sounder than the classical economist’s…. After all this manifestation of candor, Keynes may be yielding to the temptations of his genius for mystification. When… he… pays belated homage to Silvio Gesell… J. A. Hobson… Major Douglas… quotes Mandeville… he certainly hopes to scandalize…. He still belongs… to the antipuritan and anti-Victorian tradition… [of] Wells and Shaw. But behind this foolery, do we not sense some discomfiture, after a long and painful effort of conscience in quest of truth forlorn–à la recherche de la vérité perdue?

In these two paragraphs, Mantoux manages to:

1. Red-bait Keynes.
2. Misrepresent Keynes’s Wicksellian solution to the problem of the business cycle–use monetary policy to match the market to the natural rate of interest so that Say’s Law is true at full employment in practice, if possible, and to use other government policies to more directly boost investment to full-employment levels of not–as if it was Proudhon’s demand for “credit gratuit”.
3. Fail to understand that pretty much everything that had happened to the economies of western European in the decade before he wrote argued strongly against his belief that stimulative monetary and fiscal policies were always “likely to beget inflation pure and simple”, and that he had a good deal of rethinking to do.
4. Misrepresent Keynes’s advocacy in 1931 of an employment-boosting tariff as a third-best given that expansionary fiscal policy was off the table because of worry of the high debt and expansionary monetary policy was off the table because of Britain’s commitment to the gold standard.
5. Misrepresent Keynes’s attitude at the end of the General Theory: there is no discomfiture there to be sensed; rather it is a most triumphal assertion of ego, as Keynes tells all and sundry that he is certain that he has gotten it right and that it really matters.

Making my way through The Carthaginian Peace, I find it not much stronger than Mantoux’s review of the General Theory. Germany could have paid post-WWI reparations to France. Simply force the German government to tax, have it use its tax revenues to buy up shares of German capital, give the ownership shares to the French, have the French sell the shares back to Germans, and then have the French use the reichsmarks thus earned to buy imports from Germany. Allow the value of the franc to rise relative to gold and to the reichsmark so that France’s export industries wither and labor and capital are redirected to government-funded reconstruction work in northern France, and everything can work out. The problems, however are:

• If you require not the franc to appreciate but the reichsmark to depreciate, it is likely that there is no equilibrium: the more goods and services Germany transfers, the deeper in reparations debt it finds itself.
• If you require that France retain its export industries, there is once again no equilibrium.
• If you believe that Stresemann, Rathenau, Ebert, and company are worth backing–that a stable, Democratic Weimar Germany is in everyone’s interest–than the game is simply not worth playing at all.

I do not think Keynes got the analytics and the politics completely correct writing in 1919. But I do think he got both the analytics and the politics much more correct writing in 1919 than Mantoux did writing during World War II.

Did Keynes ever respond to Mantoux? I believe not. Did he even know about it (them)? I cannot tell…

Over at Grasping Reality: Peter T. asks good research questions about the relationship between what people are paying for and what they are getting. Consider that the GDP contribution of Missouri’s payday loan industry is the collective interest payments of the borrowers. Consider that in Portland location premiums are for living in nice convenient places, while in Kansas City they are in large part for largely-illusory insulation from regional sociological and public finance problems:

Comment of the Day: Peter T.: Regional Economics and Living Standards: Portland OR vs. Kansas City MO/KS: “How much of the greater amount of money in Kansas City [relative to Portland]…

…is just money, as opposed to goods and services? How much is money generated by grifts (payday loans, student debt for courses with no prospect of employment, cancer cures peddled by Republican presidential wannabees…). How hard would it be to map the density of payday lenders in the US? Or to take a chunk of credit card data and work out where the desperate suckers are? How does these and similar indicators correlate to health, income, education? Where do the profits come from, and where do they go? Is anyone doing this?

I confess that I think it is time to stop trying to make sense of John Taylor’s views on the Taylor rule. There simply seem to be too many gaps in logic, and too many assertions about the literature that I cannot understand.

In fact, Tony Yates reads John Taylor’s attack on Ben Bernanke, and sounds almost… shrill:

I must confess I am having less and less success in even understanding what intellectual project John Taylor is currently engaged in.

I could understand it if John Taylor were calling for all of:

1. no excess of high powered money above its long-run trend adjusted for the Taylor rule,
2. no positive gap between the Federal Reserve’s short term safe interest rate target and its Taylor rule value, and
3. strict limits on bank leverage to make it very difficult for any overleverage to develop as a result of which a negative financial shop composite chain of bankruptcies and fear bankruptcies that would clog the credit channel.

The problem is the Taylor seems to be on board for (1) and (2) but not for (3). He seems to be for using monetary policy as a tool of prudential regulation, but not for using prudential regulation as a tool of prudential regulation.

And the considerations that he claims drive him to (1) and (2) make no sense to me.

And this is what drives Tony Yates into shrillness. Over on Twitter:

• @Noahpinion: @RebelEconProf His support for the classic Taylor Rule as the perfect monetary policy is not supported by research.
• t0nyyates: @RebelEconProf @Noahpinion @EconomicsOne he gets pretty darned close so close your op ed reader won’t know the difference in our eyes: and it wasn’t just that. I think the surprise is because he seems to be using different intellectual standards for his op eds and his research
• @t0nyyates: @RebelEconProf that doesn’t account for it, though that’s true. He’s good at it. Just communicates the wrong ones. His work is good; but his op ed urgings are not, as Noah said, justified by it. In fact they are directly contradicted. In my blogs on him i explain why i think he contradicts his earlier intellectual self. His disavowall of countercyclical fiscal policy; his ignorance of the zero bound; his misapprehension of QE. Failure to see financial crisis invalidates earlier work; hubristic extrapolation from good simulation results to real life that was pure hot air conjecture. Invalidated because it shows models in which Taylor Rule tested were severely lacking. All the comfort we drew from good TR performance out the window, as we see models lack something profound.
• @t0nyyates: @RebelEconProf The rule is not even operational as stated [Bernanke/McCallum’s points on lags]; and the RE eq’m highly questionable. The truly optimal TR coefficients involved coefficients on inflation that were inexplicably huge anyway, and these were only tamed by ad-hoc penalties on interest rate variability. So TR lover wd really have said ‘wtf is the Fed doing going anywhere near coefficient of 1.5?’ and sensible person says ‘ok, so the model is missing something, because who believes the microfounded loss function?’ But by the same token sensible person doesn’t put any weight on deviating from Taylor’s 1.5-0.5 rule. And what about the other teeny weeny causal factors in the crisis? Like regulation; ratings shopping; uphill savings flow to Western safe assets…
• @t0nyyates: @RebelEconProf If you buy my points about the TR, then John Taylor’s thesis that deviating from it caused the crisis is absurd. I’m saying his op-ed’s are not founded on research. Saying he wrote a book about it doesn’t rebut that. He invokes that literature as anointing his rule in his response to Bernanke. I’m saying; T’s writings do not follow logically from a sound reading of prior literature.
• @t0nyyates: @RebelEconProf Even if the earlier writing was sound, the later op-ed is grossly misleading, because it conceals so much counter to it. Imagine new macro phd who didn’t know this stuff, who goes back after reading his op ed to find out more. they’d be shocked. All you can say is that they summarise prior, false, internally contradictory, and partial writings of his. That doesn’t make it defensible at all.

Suppose you say: “X–with a lot of Y added to it–is optimal in a model with no Z, therefore it is close to optimal in the world, which has Z.” Then you are, I think, committing yourself to both:

• Things that lead to Y are important in the world, and even though we cannot model them we need to allow for a large deviation between what the model says is optimal policy and what we should do.
• Z is not important in the world.

In this case, X=”Taylor Rule with Taylor’s original coefficients”, Y=”lots of interest-rate smoothing by the central bank”, and Z=”the financial sector and the credit channel”. It seems to me that if one is trying to make an argument–as opposed to succumbing to one of the species of the bestiary that Paul Romer calls “Mathiness”–you have to make strong arguments for including Y and for excluding Z from your thinking. And Taylor does not even make the first attempt at a gesture toward doing either of those.

I hereby give up: I hereby classify trying to make sense of any of Taylor’s critiques of Bernanke as a dissipative activity, to be avoided permanently.