Category: Equitablog

People should read Robert Lucas’s unhinged discussion of Ball-Mankiw:

Robert E. Lucas, Jr. (1994), “Comments on Ball and Mankiw,” Carnegie-Rochester Conference Series on Public Policy 41, pp. 153-155….

Why do I have to read this? The paper contributes nothing not even an opinion or belief–on any of the substantive questions of macroeconomics. What fraction of U.S. real output variability in the postwar period can be attributed to monetary instability? Cochrane’s paper addresses this question, as have Barro, Kydland and Prescott, Shapiro and Watson, and many other recent writers. It appears to be a very difficult one. Ball and Mankiw have nothing to offer on this question, beyond saying, trivially, that they believe the answer is a positive number and suggesting, falsely and dishonestly, that others have asserted it is zero. Yet monetary non-neutrality is the intended subject of their paper!

One can speculate about the purposes for which this paper was written–a box in the Economist?–but obviously it is not an attempt to engage other macroeconomic researchers in debate over research strategies. The cost of the ideological approach adopted by Ball and Mankiw is that one loses contact with the progressive, cumulative science aspect of macro-economics. In order to recognize the existence and possibility of research progress, one needs to recognize deficiencies in traditional views, to acknowledge the existence of unresolved questions on which intelligent people can differ. For the ideological traditionalist, this acknowledgement is too risky. Better to deny the possibility of real progress, to treat new ideas as useful only in refuting new heresies, in getting us back where we were before the heretics threatened to spoil everything. There is a tradition that must be defended against heresy, but within that tradition there is no development, only unchanging truth. Research that was in fact directed at difficult questions becomes trivialized, no matter which side it is on. Hume, Friedman, Schwartz, Keynes, Hicks, Modigliani become merely interchangeable spokesmen for a fixed set of ideas.

Why does it matter that Friedman and Schwartz carefully assembled and examined data on U.S. monetary history, if the real effects of changes in money were evident to Hume, who had no systematic data on either money or production? Why does it matter that Hicks and Modigliani showed us how to distill intelligible equation systems out of the confusions of Keynes’s Genera/ Theory? Why does it matter that theorists today are developing new models of pricing? If work like this represents progress, it must be because it contributes to resolving some difficulty or deficiency with earlier theory or evidence or both. If the IS/LM model as passed on to us by Hicks and Modigliani is all we need, why do I need to work through hard papers by Caballero or Caplin and Leahy? If these papers offer nothing more than debating points against heretics, I would rather do something else!…

For Ball and Mankiw there can be no real progress, so real business cycle theory is only a threat: It must be defeated, and then we can go back to where we were “a generation ago” (to quote from the draft given at the conference). The possibility of a synthesis of old and new ideas that might leave us better off cannot be envisioned. A few years ago, one of my sons used the Samuelson-Nordhaus textbook in a college economics course. When I visited him, I looked at the endpaper of the book to see if actual GNP was getting any closer to potential GNP than it had been in the edition I had used many years earlier. But the old chart was gone, and in its place was a kind of genealogy of economic thought, with boxes for Smith and Ricardo at the top, and a complicated picture of boxes connected by lines, descending down to the present day. At the bottom were three boxes: On the left, a box labelled “Communist China”; in the center, and slightly larger than the rest, a box labelled “Mainstream Keynesianism.” The last box, on the right, was labelled “Chicago monetarism.”

Times change. Accordingly, to Ball and Mankiw, Chicago monetarism (or at least Milton Friedman) now shares the middle, mainstream box, and there is a new group for the right-hand box, to be paired with the Chinese communists. But the tradition of argument by innuendo, of caricaturing one’s unnamed opponents, of using them as foils to dramatize one’s own position, continues on. I am sorry to see it perpetuated by Ball and Mankiw, and I hope they will put it behind them and return to the research contributions we know they are capable of making.

The American Prospect: “Join us for a Gala 25th Anniversary Luncheon featuring Senator Elizabeth Warren…

…Wednesday, May 13, 2015 – 11:00am-2:30pm | Hyatt Regency Capitol Hill, Columbia Ballroom | 400 New Jersey Ave NW, Washington, DC 20001. The program will feature keynote Elizabeth Warren—plus a discussion on the role of journalism like ours in progressive politics… celebrating The Prospect’s own work… celebrating and featuring our more than forty past Writing Fellows…. The panel will include some of the brightest stars among the alums of our Writing Fellows program:

• Nick Confessore, New York Times, Fellow ’98-‘99 Follow @nickconfessore
• Matt Yglesias, Vox Media, Fellow, ’03-‘04 Follow @mattyglesias
• Kate Sheppard, Huffington Post, Fellow, ’07-08 Follow @kate_sheppard
• Adam Serwer, BuzzFeed, Fellow ’08-’10 Follow @AdamSerwer
• Nathalie Baptiste, American Prospect current Fellow Follow @nhbaptiste

From its founding in 1990, The American Prospect has been a voice of a practical progressive politics. We are still the same Little Magazine with Big Ideas that the founders intended. The Prospect’s mission for 25 years has been to strengthen the capacity of activists, engaged citizens, and public officials to pursue new policies and strategies for social justice. Through our Writing Fellows program, the Prospect opens a pathway for new, younger, and more diverse voices to join the public debate.

Global Conference 2015 | Technology and Jobs: Should Workers Worry? » Milken Institute:

The Beverly Hilton | 9876 Wilshire Blvd. | Beverly Hills, CA 90210

Tuesday, April 28, 2015 / 3:45 pm – 4:45 pm
     
Moderator: Josh Barro, Correspondent, New York Times

Speakers:

• Brad DeLong, Professor of Economics, U.C. Berkeley
• Jeremy Howard, CEO, Enlitic
• Gerald Huff, Principal Software Engineer, Tesla Motors
• Amy Webb, Digital Media Futurist; Founder, Webbmedia Group

For centuries, people have worried that new technologies will destroy jobs without creating enough new ones, and every time the doomsayers have been proven wrong. But today, with disruptive advances occurring at dizzying speed, some worry that the time may finally have come when more jobs are destroyed by technology than are created. One 2013 report by Oxford University researchers concluded that 47 percent of U.S. jobs are threatened by automation. Should workers be worried, or is the fear overblown? Is technology–from robots to intelligent digital agents–our friend or a threat? If the latter, what do we need to do to ensure employment by the middle class and others? How can we reorganize our business and economic system to avert more economic turmoil?

Martin Sandbu has a truly interesting and excellent comment on my first, inital draft of thoughts for next week’s Blanchard-Rajan-Rogoff-Summers “Rethinking Macroeconomics” conference.

But I do think he oversimplifies one crucial issue: dynamic efficiency.

Elementary neoclassical growth theory tells us that to the extent that patience and tolerance for intergenerational inequality between the past and the future allows, societies should try to push their accumulation of capital toward the point of the Golden Rule: the point at which the marginal product of capital r has fallen to the economy’s labor-force growth rate n plus its labor productivity growth rate g. And it tells us that an economy that has pushed accumulation beyond that point–that has g+n > r–has overdone it. Such an economy is dynamically inefficient, and it should disinvest in its accumulation of capital.

The United States economy today is surely not dynamically inefficient as far as its private capital stock goes. Its accumulated and properly-depreciated capital stock is equal to no more than four times annual net income. The 30% of net output paid as income to capital thus sets an average net product of capital of 7.5% per year. And the marginal product of capital is unlikely to be much lower. As this is a real return, it is to be compared with the sum of the 0.75% per year labor-force growth rate and a current trend labor-productivity growth rate of 1.5% per year. We see a very substantial wedge by which r is greater than n+g, for private capital.

But we as a society and as taxpayers invest not just in private capital wealth but in the wealth of our government as well. Our investments in the wealth of our government produce cash flows through the government’s infrastructure and organization. We invest in the wealth of our government by paying taxes used to build up infrastructure and organization and by buying back the debt that the government has previously issued. And it is here, I think, that the neoclassical growth-model dynamic-efficiency framework becomes relevant. The current ten-year TIPS rate for U.S. government debt is zero. Yes, that is: 0. There is no real resource cost to the U.S. government from selling a TIP today, using the money for a decade, and paying it back in 2025. n+g > r.

And n+g > r for a long, long time. Since the start of the twentieth century, only during the Great Depression has the interest on the debt been more than the smoothed decade-average growth rate of the American economy.

What does this tell us about the value of using our tax money to pay down or even slow the growth rate of the national debt? Nothing good. It tells us that we taxpayers should disinvest our wealth from the government, and keep on doing so until, for claims on the government as well as for claims on the private sector, r > n + g.

But, you may ask, why is there this very wide gap between the marginal return to investments in private capital and the marginal return to investments in government wealth via paying down the government debt? Why a 7.5%/year real return on physical and organizational capital, a 5%/year return on investments in diversified equities, a 2.5%/year real return–4.5%/year nominal–on seasoned Baa corporate bonds, 0%/year real for investments in long-term government securities, and -1%/year at the moment for Treasury bonds purged of duration risk?

That is a great puzzle. It is strongly suggestive of major, major financial market dysfunction. Systematic risk can, we know, account for at most 100 basis points of that 850 basis point spread. But the origins, and the potential cures, of these enormous spreads have no bearing on the Golden Rule lessons–that it strongly looks like we need to invest a lot more in private physical and organizational capital, for the gap between 7.5% and 2.5% is far more than taxes, fees, enterprise, and other middle intermediaries can justify. And it strongly looks like we taxpayers need to invest a lot less in government wealth via being in a hurry to pay down our current debt, for the gap between 2.5% and 0% on that side is wide as well.

Very good points from Ryan Avent, Matt O’Brien, Larry Summers, Paul Krugman, and Ben Bernanke. And rereading all these has convinced me of one additional thing: with the North Atlantic plus Japan as a group clearly in a situation in which the Wicksellian natural rate of short-term safe nominal interest is less than zero, how could it ever be part of an optimal policy for the U.S. to raise its short-term safe nominal interest rates above the zero lower bound?

Highlights:

Brad DeLong: Do You Really Want to Know How Ben Bernanke Thinks? Also Larry Summers and Paul Krugman — Bull Market — Medium: “You may say…

A 10-year nominal Treasury bond rate no higher than inflation is supposed to be the current value of the natural interest-rate? Good God! That is absurd! Something is wrong with our economy, and wrong at a much deeper level than a simple shortage relative to demand of the supply of safe-and-liquid-store-of-value assets that can be hoarded! It makes no sense that real capital assets must be at such a premium valuation in order to induce wealthholders not to hoard but rather to invest in the future! And if you were to say that, you would be Larry Summers.

You may say: In the mid-2000s, it was all because wealthholders in China had this extraordinary and not-entirely-rational demand, and today it is because wealthholders in Germany have an analogous extraordinary and not-entirely-rational demand for the safe-and-liquid-store-of-value assets by the US government. And if you were to say that, you would be Ben Bernanke.

And you may say: Those extraordinary foreign demands for dollar assets as safe-and-liquid-stores-of-value are, today, reflections of insane austerity and secular stagnation in Europe, and were, last decade, reflections of the global imbalances caused by China’s rapid development and potential political instability. And if you were to say that, you would be Paul Krugman.

And, of course, all three are right.

• Ben Bernanke: Why are interest rates so low?
• Why are interest rates so low, part 2: Secular stagnation
• Why are interest rates so low, part 3: The Global Savings Glut
• Ben Bernanke: Germany’s trade surplus is a problem
• Paul Krugman: Liquidity Traps, Local and Global
• Larry Summers**: On Secular Stagnation: A Response to Bernanke

Ben Bernanke: Germany’s Trade Surplus Is a Problem: “In recent years China has been working to reduce its dependence on exports and its trade surplus has declined….

…In 2014, Germany’s trade surplus was about $250 billion (in dollar terms), or almost 7 percent of the country’s GDP…. The euro… is too weak (given German wages and production costs) to be consistent with balanced German trade…. Second, the German trade surplus is further increased by policies (tight fiscal policies, for example) that suppress the country’s domestic spending…. The fact that Germany is selling so much more than it is buying redirects demand from its neighbors (as well as from other countries around the world), reducing output and employment outside Germany at a time at which monetary policy in many countries is reaching its limits.

Persistent imbalances within the euro zone are also unhealthy…. Systems of fixed exchange rates, like the euro union or the gold standard, have historically suffered from the fact that countries with balance of payments deficits come under severe pressure to adjust, while countries with surpluses face no corresponding pressure. The gold standard of the 1920s was brought down by the failure of surplus countries to participate equally in the adjustment process…. Germany has… several policy tools at its disposal to reduce its surplus… [that] would make most Germans better off…. Investment in public infrastructure…. Raising the wages of German workers…. Targeted reforms, including for example increased tax incentives for private domestic investment; the removal of barriers to new housing construction; reforms in the retail and services sectors; and a review of financial regulations…. I hope participants in the Washington meetings this spring will recognize that global imbalances are not only a Chinese and American issue.

Paul Krugman: Liquidity Traps, Local and Global: “Bernanke correctly… criticizes Summers for insufficient attention to international capital flows…

…but then argues that once you do allow for international capital movement it obviates many of the secular stagnation concerns, which I believe is wrong…. Suppose… [in] Europe… the Wicksellian natural rate of interest… [is] below zero. Can this happen if there are positive-return investments outside of Europe?… [Yes,] if the weakness in European demand is perceived as temporary…. The weakness of the euro will also be seen as temporary….

Bernanke… argues that the large current account surplus of the euro area as a whole is a temporary phenomenon driven by cyclical weakness in the euro periphery, and… not… persistent trouble. But look at what bond markets are saying! [The] German… 10-year rate is only 16 basis points…. Markets expect the euro area economy to be depressed, and ECB rates very low, for many years to come… flashing a secular stagnation warning…. Bernanke seems to be saying that if there is a problem, it can be solved by cracking down on currency manipulation…. [But] Europe’s trade and capital imbalances are the result of fundamental weakness of domestic demand, which is then exported to the rest of us, who aren’t that strong either…. We have a problem that must be solved with policies that boost demand…

Lawrence H. Summers: On Secular Stagnation: A Response to Bernanke: “I have argued that the 2003-2007 recovery and quite possibly the late stages of the 1990s recovery were powered in significant part unsustainable financial conditions…

…Ben is skeptical…. I think that it will be hard to escape the conclusion that household debt grew at an unsustainable pace in the decade before the great financial crisis and that this was an important spur to growth.  And I am fairly confident that wealth effects associated with a booming stock market were important in the late 1990s…. Ben accepts the logic of my argument that if reducing rates to equate saving and investment at full employment is infeasible or likely to lead to financial instability, fiscal policy in general and public investment in particular is a natural instrument to promote growth. But he expresses the concern that permanently expansionary fiscal policy may not be possible, given that the government cannot indefinitely expand its debt…. I think Ben greatly understates the scope for feasible fiscal policy for reasons that Brad Delong and I have considered in our 2012 BPEA paper…. [In] a secular stagnation world… government debt service is very cheap. As long as a public investment project yields any positive return it will generate enough revenue to service the associated debt… magnified if there are any Keynesian fiscal stimulus effects of the project or if there are any hysteresis effects… [or] if there are reasons to doubt that the central bank can act on its own to raise inflation expectations…. This is not just a theoretical point. The October 2014 IMF World Economic Outlook suggests that public investments in countries where interest rates are near the zero lower bound are likely to significantly reduce debt-to-gdp ratios….

Ben and I are, I think, in agreement that it is important to think about the saving-investment balance not just for countries individually, but for the global economy. If there are more countries tending to have excess saving than there are tending towards excess investment, there will be a global shortage of demand…. Global mechanisms that concentrate on causing borrowing countries to adjust without seeking to shrink the surplus of surplus countries will tend to push the global economy towards contraction. Successful policy approaches… will involve not only stimulating public and private investment but will also involve encouraging countries with excess saving to reduce their saving or increase their investment….

I would like nothing better than to be wrong…. Those like Ben who judged slow recovery to be a reflection of temporary headwinds and misguided fiscal contractions will be vindicated…. But… revisions in growth forecasts have been downwards for many years…. It is worth taking seriously the possibility that we face a chronic problem of an excess of desired saving relative to investment…

Matt O’Brien: [Larry Summers and Ben Bernanke Are Having the Most Important Blog Fight Ever(http://www.washingtonpost.com/blogs/wonkblog/wp/2015/04/02/larry-summers-and-ben-bernanke-are-having-the-most-important-blog-fight-ever/): “The Fed can[not] keep rates lower than they ‘should’ be without fueling inflation–which there isn’t…

…Rates are so low not because that’s where the Fed wants them to be, but rather because that’s where the economy needs them to be…. Everything the Fed has done has just been trying to… get rates closer to where they would be if they could be negative. Okay, but why does the economy still need such low rates? Good question…. It could be that only way for the economy to get enough investment spending would either be for the government to do it directly or to try to get the private sector to do it by increasing inflation so that real rates come down.

But Bernanke thinks this is overly pessimistic…. It isn’t easy to tell a story about why people would need negative real rates to get them to invest…. So why does Bernanke think the economy needs low rates? Well, he doesn’t really. Or at least he thinks it won’t soon…. In 2005… he tried to explain the puzzle of long-term rates not rising…. The answer, Bernanke said, was that after the East Asian Financial Crisis in 1998, emerging markets like China and Saudi Arabia… started saving much, much more…. Asia’s emerging markets aren’t hoarding dollars like before, but Germany, as Paul Krugman puts it, is the new China when it comes to turning saving into a vice….

Secular stagnation says it’s because there isn’t enough demand for investment, while the global saving glut says, yes, it’s because there’s too much supply of savings…. Secular stagnation means the economy is broken and the government needs to fix it by giving us more inflation and more infrastructure spending. But the global saving glut means the economy wouldn’t need any fixing if governments would stop breaking it by manipulating their currencies….

Europe’s slump… means… there’s… a glut of money leaving the continent looking for better returns abroad…. We used to have a global saving glut caused by other countries’ policy decisions, but now we have a global saving glut caused by other countries’ secular stagnation…. It’s not going to be enough to browbeat countries that aren’t spending a lot into spending more. They can’t. Instead, we’re going to have to fight the global saving glut by pushing the dollar down–maybe by raising the Fed’s inflation target from 2 to 4 percent. The funny thing is that’s also the way to fight secular stagnation here at home…. The real mystery, in other words, is why we’re accepting a world where interest rates are staying so low.

Ryan Avent: Puzzles: The Global Secular Savings Stagnation Glut: “What sort of imbalance between saving and investment do we have here, anyway?…

…[Does] the world has too much saving and too little investment? Or is it that the saving and the investment are stuck in different places?… Much of the world is very poor relative to America… overflowing with profitable investment opportunities…. There is a geographic imbalance between savings and investment. But this imbalance is persistent and structural. It also isn’t new. It is hard to rate this as the cause of secular stagnation…. Mr Bernanke’s solution, to lean on currency manipulators, is probably not going to do the trick…. Another option, which Mr Bernanke does not consider, is for America to do more monetary easing…. The world as a whole is not spending enough money. Large parts of the world economy are short-run incapable of spending more for political and economic reasons. Unless other parts take up the slack, then the too-little-spending problem will grow more serious and ever more of the world will slip into this monetary trap.

What else is there?… Deficit spending in rich countries…. Doing it adequately is almost certainly beyond the capability of the American political system. As Mr Summers repeatedly points out, the government has failed manifestly to tackle even the highest-return infrastructure projects available…. Secular stagnation isn’t much of a puzzle. Rather, it is a dilemma. The ageing societies of the rich world want rapid income growth and low inflation and a decent return on safe investments and limited redistribution and low levels of immigration. Well you can’t have all of that. And what they have decided is that what they’re prepared to sacrifice is the rapid income growth…. Secular stagnation will come to an end when political and demographic shifts allow the losers from this arrangement to say: enough.

Highlights of the discussion so far:

Brad DeLong: Do You Really Want to Know How Ben Bernanke Thinks? Also Larry Summers and Paul Krugman — Bull Market — Medium: “You may say…

A 10-year nominal Treasury bond rate no higher than inflation is supposed to be the current value of the natural interest-rate? Good God! That is absurd! Something is wrong with our economy, and wrong at a much deeper level than a simple shortage relative to demand of the supply of safe-and-liquid-store-of-value assets that can be hoarded! It makes no sense that real capital assets must be at such a premium valuation in order to induce wealthholders not to hoard but rather to invest in the future! And if you were to say that, you would be Larry Summers.

You may say: In the mid-2000s, it was all because wealthholders in China had this extraordinary and not-entirely-rational demand, and today it is because wealthholders in Germany have an analogous extraordinary and not-entirely-rational demand for the safe-and-liquid-store-of-value assets by the US government. And if you were to say that, you would be Ben Bernanke.

And you may say: Those extraordinary foreign demands for dollar assets as safe-and-liquid-stores-of-value are, today, reflections of insane austerity and secular stagnation in Europe, and were, last decade, reflections of the global imbalances caused by China’s rapid development and potential political instability. And if you were to say that, you would be Paul Krugman.

And, of course, all three are right.

• Ben Bernanke: Why are interest rates so low?
• Why are interest rates so low, part 2: Secular stagnation
• Why are interest rates so low, part 3: The Global Savings Glut
• Ben Bernanke: Germany’s trade surplus is a problem
• Paul Krugman: Liquidity Traps, Local and Global
• Larry Summers**: On Secular Stagnation: A Response to Bernanke

Ben Bernanke: Germany’s Trade Surplus Is a Problem: “In recent years China has been working to reduce its dependence on exports and its trade surplus has declined….

…In 2014, Germany’s trade surplus was about $250 billion (in dollar terms), or almost 7 percent of the country’s GDP…. The euro… is too weak (given German wages and production costs) to be consistent with balanced German trade…. Second, the German trade surplus is further increased by policies (tight fiscal policies, for example) that suppress the country’s domestic spending…. The fact that Germany is selling so much more than it is buying redirects demand from its neighbors (as well as from other countries around the world), reducing output and employment outside Germany at a time at which monetary policy in many countries is reaching its limits.

Persistent imbalances within the euro zone are also unhealthy…. Systems of fixed exchange rates, like the euro union or the gold standard, have historically suffered from the fact that countries with balance of payments deficits come under severe pressure to adjust, while countries with surpluses face no corresponding pressure. The gold standard of the 1920s was brought down by the failure of surplus countries to participate equally in the adjustment process…. Germany has… several policy tools at its disposal to reduce its surplus… [that] would make most Germans better off…. Investment in public infrastructure…. Raising the wages of German workers…. Targeted reforms, including for example increased tax incentives for private domestic investment; the removal of barriers to new housing construction; reforms in the retail and services sectors; and a review of financial regulations…. I hope participants in the Washington meetings this spring will recognize that global imbalances are not only a Chinese and American issue.

Paul Krugman: Liquidity Traps, Local and Global: “Bernanke correctly… criticizes Summers for insufficient attention to international capital flows…

…but then argues that once you do allow for international capital movement it obviates many of the secular stagnation concerns, which I believe is wrong…. Suppose… [in] Europe… the Wicksellian natural rate of interest… [is] below zero. Can this happen if there are positive-return investments outside of Europe?… [Yes,] if the weakness in European demand is perceived as temporary…. The weakness of the euro will also be seen as temporary….

Bernanke… argues that the large current account surplus of the euro area as a whole is a temporary phenomenon driven by cyclical weakness in the euro periphery, and… not… persistent trouble. But look at what bond markets are saying! [The] German… 10-year rate is only 16 basis points…. Markets expect the euro area economy to be depressed, and ECB rates very low, for many years to come… flashing a secular stagnation warning…. Bernanke seems to be saying that if there is a problem, it can be solved by cracking down on currency manipulation…. [But] Europe’s trade and capital imbalances are the result of fundamental weakness of domestic demand, which is then exported to the rest of us, who aren’t that strong either…. We have a problem that must be solved with policies that boost demand…

Lawrence H. Summers: On Secular Stagnation: A Response to Bernanke: “I have argued that the 2003-2007 recovery and quite possibly the late stages of the 1990s recovery were powered in significant part unsustainable financial conditions…

…Ben is skeptical…. I think that it will be hard to escape the conclusion that household debt grew at an unsustainable pace in the decade before the great financial crisis and that this was an important spur to growth.  And I am fairly confident that wealth effects associated with a booming stock market were important in the late 1990s…. Ben accepts the logic of my argument that if reducing rates to equate saving and investment at full employment is infeasible or likely to lead to financial instability, fiscal policy in general and public investment in particular is a natural instrument to promote growth. But he expresses the concern that permanently expansionary fiscal policy may not be possible, given that the government cannot indefinitely expand its debt…. I think Ben greatly understates the scope for feasible fiscal policy for reasons that Brad Delong and I have considered in our 2012 BPEA paper…. [In] a secular stagnation world… government debt service is very cheap. As long as a public investment project yields any positive return it will generate enough revenue to service the associated debt… magnified if there are any Keynesian fiscal stimulus effects of the project or if there are any hysteresis effects… [or] if there are reasons to doubt that the central bank can act on its own to raise inflation expectations…. This is not just a theoretical point. The October 2014 IMF World Economic Outlook suggests that public investments in countries where interest rates are near the zero lower bound are likely to significantly reduce debt-to-gdp ratios….

Ben and I are, I think, in agreement that it is important to think about the saving-investment balance not just for countries individually, but for the global economy. If there are more countries tending to have excess saving than there are tending towards excess investment, there will be a global shortage of demand…. Global mechanisms that concentrate on causing borrowing countries to adjust without seeking to shrink the surplus of surplus countries will tend to push the global economy towards contraction. Successful policy approaches… will involve not only stimulating public and private investment but will also involve encouraging countries with excess saving to reduce their saving or increase their investment….

I would like nothing better than to be wrong…. Those like Ben who judged slow recovery to be a reflection of temporary headwinds and misguided fiscal contractions will be vindicated…. But… revisions in growth forecasts have been downwards for many years…. It is worth taking seriously the possibility that we face a chronic problem of an excess of desired saving relative to investment…

Matt O’Brien: [Larry Summers and Ben Bernanke Are Having the Most Important Blog Fight Ever(http://www.washingtonpost.com/blogs/wonkblog/wp/2015/04/02/larry-summers-and-ben-bernanke-are-having-the-most-important-blog-fight-ever/): “The Fed can[not] keep rates lower than they ‘should’ be without fueling inflation–which there isn’t…

…Rates are so low not because that’s where the Fed wants them to be, but rather because that’s where the economy needs them to be…. Everything the Fed has done has just been trying to… get rates closer to where they would be if they could be negative. Okay, but why does the economy still need such low rates? Good question…. It could be that only way for the economy to get enough investment spending would either be for the government to do it directly or to try to get the private sector to do it by increasing inflation so that real rates come down.

But Bernanke thinks this is overly pessimistic…. It isn’t easy to tell a story about why people would need negative real rates to get them to invest…. So why does Bernanke think the economy needs low rates? Well, he doesn’t really. Or at least he thinks it won’t soon…. In 2005… he tried to explain the puzzle of long-term rates not rising…. The answer, Bernanke said, was that after the East Asian Financial Crisis in 1998, emerging markets like China and Saudi Arabia… started saving much, much more…. Asia’s emerging markets aren’t hoarding dollars like before, but Germany, as Paul Krugman puts it, is the new China when it comes to turning saving into a vice….

Secular stagnation says it’s because there isn’t enough demand for investment, while the global saving glut says, yes, it’s because there’s too much supply of savings…. Secular stagnation means the economy is broken and the government needs to fix it by giving us more inflation and more infrastructure spending. But the global saving glut means the economy wouldn’t need any fixing if governments would stop breaking it by manipulating their currencies….

Europe’s slump… means… there’s… a glut of money leaving the continent looking for better returns abroad…. We used to have a global saving glut caused by other countries’ policy decisions, but now we have a global saving glut caused by other countries’ secular stagnation…. It’s not going to be enough to browbeat countries that aren’t spending a lot into spending more. They can’t. Instead, we’re going to have to fight the global saving glut by pushing the dollar down–maybe by raising the Fed’s inflation target from 2 to 4 percent. The funny thing is that’s also the way to fight secular stagnation here at home…. The real mystery, in other words, is why we’re accepting a world where interest rates are staying so low.

Ryan Avent: Puzzles: The Global Secular Savings Stagnation Glut: “What sort of imbalance between saving and investment do we have here, anyway?…

…[Does] the world has too much saving and too little investment? Or is it that the saving and the investment are stuck in different places?… Much of the world is very poor relative to America… overflowing with profitable investment opportunities…. There is a geographic imbalance between savings and investment. But this imbalance is persistent and structural. It also isn’t new. It is hard to rate this as the cause of secular stagnation…. Mr Bernanke’s solution, to lean on currency manipulators, is probably not going to do the trick…. Another option, which Mr Bernanke does not consider, is for America to do more monetary easing…. The world as a whole is not spending enough money. Large parts of the world economy are short-run incapable of spending more for political and economic reasons. Unless other parts take up the slack, then the too-little-spending problem will grow more serious and ever more of the world will slip into this monetary trap.

What else is there?… Deficit spending in rich countries…. Doing it adequately is almost certainly beyond the capability of the American political system. As Mr Summers repeatedly points out, the government has failed manifestly to tackle even the highest-return infrastructure projects available…. Secular stagnation isn’t much of a puzzle. Rather, it is a dilemma. The ageing societies of the rich world want rapid income growth and low inflation and a decent return on safe investments and limited redistribution and low levels of immigration. Well you can’t have all of that. And what they have decided is that what they’re prepared to sacrifice is the rapid income growth…. Secular stagnation will come to an end when political and demographic shifts allow the losers from this arrangement to say: enough.

Picking up on In Lieu of a Focus Post: March 2, 2015: I also found on the internet a fine rant by the engaged and thoughtful femina spectabilis Frances Coppola attacking another one of my teachers, the vir illustris Olivier Blanchard, saying that his:

call for policymakers to set policy in such a way that linear models will still work should be seen for what it is–the desperate cry of an aging economist who discovers that the foundations upon which he has built his career are made of sand. He is far from alone…

It’s not quite that bad.

A more charitable reading of Olivier is that he wants to make this point:

1. Heart attacks have little in common with the common cold.
2. You treat heart attacks with by shocking the heart to restart it.
3. Heart attacks and the common cold are both diseases that debilitate.
4. Nevertheless, to get out the defibrillator pads when the patient shows up with the sniffles will probably not end well.

However, I did always think that the MIT Economics Department made a hideous mistake back in the day. It decided not to replace Charlie Kindleberger with another financial-macro institutional historian. It then doubled down on that when it refused to pay what people–cough, cough, Anne McCants for example–were worth in order to get them to teach its students the institutionalist and Minskyite history they needed to know.

If it had, it would have kept so many of its ex-students from being deaf and blind as 2008 approached. It did not.

That being said, I think that Olivier’s intuition is in large part sound. It should not be beyond the government to make sure that there is enough debt outstanding in the economy that even high-quality short-term debt sells for less than par. And if high-quality short-term debt sells for less than par then there is a powerful and predictable incentive to spend and not hoard cash. And if your banking system allows the central bank to control the stock of cash–then, voila!, the problem of demand management is well on the way to being solved.

To put it another way: as long as you can keep the economy on the upward-sloping rather than the flat part of the LM curve, linear models should be good enough for practical purposes. And the government has mighty fiscal policy and credit policy tools at its disposal that it can use to keep high-quality bonds, even short-term bonds, from going to par.

The key questions of macroeconomic political economy then are not the questions of the construction of nonlinear multiple-equilibrium models that Frances Coppola wants us to study. They are, instead, the questions of why ideological and rent-seeking capture were so complete that North Atlantic governments have not deployed their fiscal and credit policy tools properly since 2008.

• Frances Coppola: The Failure of Macroeconomics http://coppolacomment.blogspot.co.uk/2015/02/the-failure-of-macroeconomics.html
• Olivier Blanchard: Where Danger Lurks http://www.imf.org/external/pubs/ft/fandd/2014/09/blanchard.htm
• Olivier Blanchard (2008): The State of Macro http://www.nber.org/papers/w14259
• Hyman Minsky (1992): The Financial Instability Hypothesis http://www.levyinstitute.org/pubs/wp74.pdf
• Frances Coppola: When the Nile Floods Fail http://coppolacomment.blogspot.co.uk/2014/10/when-floods-fail.html