Category: Equitablog

Must- and Shall-Reads:

• Paul Krugman: “The thing is, we’ve been here before. “In the early-to-mid 1990s… unemployment had already fallen to [the estimated NAIRU]. But inflation wasn’t actually rising. So Fed officials made what turned out to be a very good choice: They held their fire, waiting for clear signs of inflationary pressure. And it turned out that the United States’ economy was capable of generating millions more jobs, without inflation…. Are we in a similar situation now? Actually, I don’t know–but neither does the Fed. The question… is what to do in the face of that uncertainty…. To me… the answer seems painfully obvious: Don’t… pull that rate-hike trigger, until you see the whites of inflation’s eyes…”
• Ben Zipperer: Labor Market Slack and the Affordable Care Act
• Noah Smith: The Pincer Attack on Macro Models

1. Paul Krugman: TPP at the NAB: “As with many ‘trade’ deals in recent years, the intellectual property aspects are more important than the trade aspects… the US is trying to get radically enhanced protection for patents and copyrights… Hollywood and pharma rather than conventional exporters…. Well, we should never forget that in a direct sense, protecting intellectual property means creating a monopoly–letting the holders of a patent or copyright charge a price for something (the use of knowledge) that has a zero social marginal cost… a distortion that makes the world a bit poorer. There is, of course, an offset in the form of an increased incentive to create knowledge…. But do we really think that inadequate incentive to create new drugs or new movies is a major problem right now? You might try to argue that there is a US interest in enhancing IP protection even if it’s not good for the world, because in many cases it’s US corporations with the property rights. But are they really US firms in any meaningful sense? If pharma gets to charge more for drugs in developing countries, do the benefits flow back to US workers? Probably not so much…. Why, exactly, should the Obama administration spend any political capital–alienating labor, disillusioning progressive activists–over such a deal?”

2. Mark Thoma: Weblogging: “I began blogging… due to dissatisfaction with how economic issues were being presented in the mainstream media…. Blogs have changed this. The reporting today on economic issues is so much better than it was then, and that is due in no small part to the interaction between reporters, the public, and academics willing to blog and put complicated, technical matters into terms that the general public can understand. Reporters have access to a much broader array of informed voices than ever before…. A few people who wrote about economics in the blogosphere, mostly non-economists, have moved on and I wish them the best of luck. But economics blogging isn’t dead, far from it…”

3. Cardiff Garcia: Jobs, Automation, Engels’ Pause and the Limits of History: “Median wages and living standards are stagnant… having decoupled from productivity growth for several decades. Income inequality has climbed…. High profits have not been redeployed as significantly more investment. Anecdotal evidence of remarkable new technologies suggests that the effects on the economy will be profound, but it’s not clear how…. Sound familiar?… I’m talking about the UK in the first four decades of the nineteenth century, a period that economic historian Robert C Allen has labeled “Engels’ Pause”…. The lazy-but-common retort to the idea that technological advancement would massively displace workers has long been to accuse the fear-monger of having perpetuated the lump of labour fallacy. Luddites!…”

4. Barry Eichengreen: The Fed Under Fire: “Fed officials… while they would prefer not to re-litigate… 2008… their decisions are still not well understood and that officials must do more to explain them…. Fed officials should avoid weighing in on issues that are only obliquely related to monetary policy…. Fed officials should acknowledge that at least some of the critics’ suggestions have merit. For example, eliminating commercial banks’ right to select a majority of each Reserve Bank’s board would be a useful step in the direction of greater openness and diversity.
   The Federal Reserve System has always been a work in progress. What the US needs now is progress in the right direction.”

Should Be Aware of:

• Looking for Hungry Grizzlies—on Purpose
• Scott Lemieux: ACA Troofers Uncover Another Conspiracy
• Elizabeth Stoker Bruenig: “People who use… ‘food stamps’ tend to make healthier food choices than those who don’t use SNAP…. To impose the easy virtue of the well-to-do on the poor is to request the most stressed and vulnerable members of society to display impossible moral heroism…. If the problems plaguing poor communities persist after poverty is drastically reduced, that would seem an appropriate time to pursue the matter of a better ‘moral vocabulary’…. But before that conversation can happen, the obvious solution to the ‘chaos’ Brooks observes among poor communities is to reduce poverty, and let its moral quandaries resolve on their own.”
• Andrew Gelman: “Why do I keep harping on this?, I’ve said this before and I’ll say it again: Journalism is important. Eternal vigilance is the price of liberty. The press is the fourth branch of government. So, yeah, it’s worth banging on this. As a statistician, I see no embarrassment at being irritated when a prominent journalist [like David Brooks] throws around fake-o numbers that just happen to advance his political agenda. It’s tacky tacky tacky, and if he’s going to have the bad taste to go on about morality like this, then, yeah, damn straight I’ll call him on it.”

1. Graham Katz: Anaphoric definiteness in the ACA: “In the phrase ‘an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act’ the definite expression ‘the State’ is used anaphorically. Its antecedent is the phrase ‘a State’ in ‘health plans offered in the individual market within a State.’ The anaphoric relation enforces a legal requirement that the state that the health plans plans are offered in be the same state as that which set up the enrolling Exchange…. If an indefinite had been used instead (or, as some have suggested, the disjunct ‘…or the federal government’), the required relationship between the health-plan offering State and constraints on its Exchange would be broken. A plan could be offered in one state and (theoretically) enrolled in by an exchange set up by another. In fact, each of the eight uses of the phrase ‘an Exchange established by the State…’ in the ACA involves such an anphoric use… the idiom favored by Congress to set up this kind of linked requirement…. This required anaphoric relation — specifying, for example, that the state establishing procedures for ensuring childhood coverage is the state whose exchange is providing coverage – makes a crucial contribution to the meaning of the statute, and provides a rationale for the inclusion of the phrase ‘…established by the State…’ in these eight passages in the statute…. The participle ‘established’ came along for the ride. But the crucial thing was that a relation should be set up between an Exchange and a (previously mentioned) State.”

2. Dan Drezner: Why Is the GOP-led Congress Making Such a Hash of Foreign Policy?: “Armed with a pretty strong midterm election performance, the GOP-controlled Congress came to power with legitimate policy disagreements with the president and some legitimate gripes about the process…. It wasn’t just Republicans, either…. And yet, over the past two months, the Republican-controlled Congress has managed to go from one blunder to another…. It takes real effort for people, such as Les Gelb, David Ignatius, Fred Kaplan, Richard Haass, Phil Zelikow et al, to get off their bipartisan fence and blast one party for acting recklessly on foreign policy–and yet Sen. Tom Cotton’s letter has managed to pull it off. And how has the GOP reacted to all of this?… Some doubling down… [but also] reports that many GOP members of Congress are surprised and a bit chagrined by the blowback…. If the GOP response ranges from sheer denial of a problem to ‘¯_(ツ)_/¯’, that’s a sign that they’re not serious at all about foreign policy…. Let me suggest three drivers: 1) The executive branch has a structural advantage on foreign policy…. 2) Congress ain’t what it used to be. These kinds of stunts would have been vetoed by party leaders in Congress even a decade ago…. But an awful lot of the GOP Senate caucus is new… and you have the old bulls, such as Sen. John McCain saying things like, ‘I saw the letter, I saw that it looked reasonable to me and I signed it, that’s all. I sign lots of letters.’ Which is code for, ‘what was in that letter again?’ 3) To get ahead in the GOP, you need to be a disruptor…. The effect such stunts have on foreign policy are secondary…. Two months into the new Congress, the GOP has squandered what was supposed to be a political and policy advantage for them. And they’ve squandered it badly.”

Things I would have written about or at least noted at greater length, if I did not have a cold:

• Job Opportunities: Development Manager
• Ben Zipperer: Labor market slack and the Affordable Care Act – Washington Center for Equitable Growth* Nick Bunker: How to get high-achieving, low-income students into selective schools – Washington Center for Equitable Growth
• Nick Bunker: The U.S. job skills mismatch and up-skilling – Washington Center for Equitable Growth
• Heather Boushey: taxes and fairness in an era of high inequality
• Carter Price: Bringing data to retirement discussions – Washington Center for Equitable Growth

• Jonnelle Marte: The racial wealth gap we hardly talk about: What happens in retirement
• Mark Thoma: On Deval Kurtis: ‘Publicly Funded Inequality’
• Noam Scheiber: Job Growth for Hispanics Is Outpacing Other Groups

Next task: to administer “correction” to my laptop until it no longer tries to autocorrect “Boushey” to “Bushy” and “Zipperer” to “Zippered”…

It is foolish to debate whether a trade agreement that has not yet been negotiated is a good idea and should be ratified.

Such a debate should properly begin only once there is something to analyze.

But here we are, so…

A few words about benefits from the Trans-Pacific Partnership, should it be successfully negotiated, in response to Paul Krugman:

1. Paul Krugman says that the potential net gains from freer trade in services and (secondarily) agriculture as estimated by Petri, Plummer and Zhai of 0.5% of GDP “seem high to him”. Suppose that they are half that. In a Pacific region whose GDP is now approaching $30 trillion/year, that is $75 billion/year. Capitalize that at 4%/year and we get a net addition to world wealth of $3 trillion. That is indeed a very small number relative to the wealth of the world both now and discounted into the future. But that is a rather large number compared to other things the U.S. government might do this year. So why not grab for it?

2. Improvements in international monetary arrangements with respect to keeping exchange rates where they ought to be would also be valuable–if they could be successfully negotiated.

3. I do not think anybody is arguing quantitatively that TPP would put downward pressure on real wages in the United States of a large enough magnitude to offset the value of the $3 trillion wealth machine. If they are making such an argument, I would like to see it.

4. Paul Krugman claims that the other major effect–besides the $3 trillion wealth machine–is that the intellectual property protections make the world poorer and transfer a significant amount of wealth from the sick and the entertainment consumers of emerging markets to first-world plutocrats. But is this in fact true? And what are the numbers?

5. However, the big reason that Paul is not in support of the TPP that may be comes at the end: “Why, exactly, should the Obama administration spend any political capital–alienating labor, disillusioning progressive activists–over such a deal?” The argument here is that in the long run America will be better off if there is a more unified liberal base more enthusiastically behind the Democratic Party, and that that outweighs whatever the small and uncertain net benefits of TPP might be.
    
   I would agree that it would have been good from the perspective of Obama’s political and policy goals for him to have framed the TPP debate differently. It should be the business of McConnell and Boehner to pass the enabling legislation through the House and the Senate. It should be a requirement from Obama that they also come up with sufficient additional legislative sweeteners to make it worth his while to sign it–given labor and anti-globalizer opposition. The question should be not: “Can Obama round up the votes for ratification?”
    
   The question, rather, should be: “can Boehner and McConnell come up with sufficient legislative sweeteners for labor and progressives to elicit a signature?” That kind of forward-looking legislative-procedural chess, however–attaching all kinds of sweeteners to the enabling legislation and threatening a veto if they do not stick–has never been the Obama administration’s long suit.

Paul Krugman: TPP at the NABE: “As with many ‘trade’ deals in recent years, the intellectual property aspects are more important than the trade aspects…

…the US is trying to get radically enhanced protection for patents and copyrights… Hollywood and pharma rather than conventional exporters…. Well, we should never forget that in a direct sense, protecting intellectual property means creating a monopoly–letting the holders of a patent or copyright charge a price for something (the use of knowledge) that has a zero social marginal cost… a distortion that makes the world a bit poorer. There is, of course, an offset in the form of an increased incentive to create knowledge…. But do we really think that inadequate incentive to create new drugs or new movies is a major problem right now? You might try to argue that there is a US interest in enhancing IP protection even if it’s not good for the world, because in many cases it’s US corporations with the property rights. But are they really US firms in any meaningful sense? If pharma gets to charge more for drugs in developing countries, do the benefits flow back to US workers? Probably not so much…. Why, exactly, should the Obama administration spend any political capital–alienating labor, disillusioning progressive activists–over such a deal?

Paul Krugman: TPP at the NABE: “As with many ‘trade’ deals in recent years, the intellectual property aspects are more important than the trade aspects…

…the US is trying to get radically enhanced protection for patents and copyrights… Hollywood and pharma rather than conventional exporters…. Well, we should never forget that in a direct sense, protecting intellectual property means creating a monopoly–letting the holders of a patent or copyright charge a price for something (the use of knowledge) that has a zero social marginal cost… a distortion that makes the world a bit poorer. There is, of course, an offset in the form of an increased incentive to create knowledge…. But do we really think that inadequate incentive to create new drugs or new movies is a major problem right now? You might try to argue that there is a US interest in enhancing IP protection even if it’s not good for the world, because in many cases it’s US corporations with the property rights. But are they really US firms in any meaningful sense? If pharma gets to charge more for drugs in developing countries, do the benefits flow back to US workers? Probably not so much…. Why, exactly, should the Obama administration spend any political capital–alienating labor, disillusioning progressive activists–over such a deal?

Ramblings picking up on: In Lieu of a Focus Post: March 2, 2015:

The kha-khan Cosma Shalizi smacks me down for seeing the Federal Reserve as afflicted by intellectual errors, rather than as a prisoner of Gramscian top 0.1% hegemony and the revolving door.

He has a point, a definite point.

In a good world the Janet Yellens and the Charles Evanses would be the vital center of the Federal Reserve, not its left wing. And they would be acting as its left wing, pointing out the manifold benefits of labor-force upgrading in a high-pressure economy, the extraordinary quiescence of core inflation, and the continued overoptimism of the Fed model.

In a closely-related piece, Paul Krugman tries to untangle why so many center-right and right-wing economists are so resistant to the elementary logic of Hicks (1937) and the IS-LM model—even those who, like Marty Feldstein, teach the IS-LM model to their students, and teach it very well (after all: he taught it to me).

Back in 2009 the sharp and thoughtful Mark Thoma wrote a good piece giving what seemed to me to be the correct answer to the inflationistas: He wrote that there was some reason to fear an outburst of inflation when and if the long run came in which the government budget constraint bound and yet congress was continuing to refuse to either:

• curb the growth of public health care costs, or
• raise taxes to pay for them.

But, he went on, the IS-LM logic meant that that was not a risk in the short run. And the cost of the stimulus program and how much debt was “monetized” by QE had at best a second decimal-place effect on the vulnerability of the U.S. to long-run inflation driven by the fiscal theory of the price level. The big enchilada was health-care costs:

That seemed and seems to me to be right, and that is driven by a coherent theoretical view: (i) an unemployment short-run until production returns to potential output, (ii) a medium run in which confidence and interest rates and full-employment growth rates depend on market assessments of how the long-run fiscal gap will be closed, and (iii) a long run in which, perhaps suddenly and unexpectedly, the fiscal theory of the price level binds.

The only thing wrong with Mark’s analysis back in 2009 that I saw then and that I see now–other than the short run being a very long time indeed, the bending of the health care costs curve occurring much more sharply than I had imagined possible, and a configuration of interest rates which raises the strong possibility that the long-run in which the fiscal theory of the price level binds has been put off to infinity–was that it missed the easiest way of shrinking the velocity of money in a recovery: raising reserve requirements. So I always had a very hard time figuring out what Feldstein and company were fearing at all…

Indeed, it seemed to me not to be coherent:

Martin Feldstein: “The unprecedented explosion of the US fiscal deficit raises the spectre of high future inflation….

There is ample historic evidence of the link between fiscal profligacy and subsequent inflation. But historic evidence and economic analysis also show that the inflationary effects can be avoided if the fiscal deficits are not accompanied by a sustained increase in the money supply and, more generally, by an easing of monetary conditions…. The potential inflationary danger is that the large US fiscal deficit will lead to an increase in the supply of money….

The link between fiscal deficits and money growth is about to be exacerbated by ‘quantitative easing’, in which the Fed will buy long-dated government bonds…. When the economy begins to recover, the Fed will have to reduce the excessive stock of money…. This will not be an easy task since the commercial banks may not want to exchange their reserves for the mountain of private debt that the Fed is holding and the Fed lacks enough Treasury bonds with which to conduct ordinary open market operations. It is surprising that the long-term interest rates do not yet reflect the resulting risk of future inflation…

Feldstein–and Greenspan, and Taylor, and Asness, and all the rest–clearly thought in 2009 and 2010 that U.S. Treasuries were trading way high, in an enormous bubble, and there was an enormous market opportunity to profit with relatively little risk by shorting long-term Treasuries and buying secondarily equities and primarily gold as inflation hedges. I often wonder to how many people they gave this advice, how many of the people they gave it to took it, and what has happened to their portfolios since. But I digress…

As I looked back on the situation in 2009 and 2010–with a dead housing credit channel, and the increasing likelihood of a recovery characterized not as a V or as a U but as an L–I find myself thinking that Marty Feldstein and the others had turned all their smarts to trying to find reasons not to believe the IS-LM models that they (or at least Feldstein and Taylor) had taught, and not to believe that the marginal investor in financial markets was not-stupid. That fiscal and monetary ease would bring back the 1970s in short order was their conclusion. The task was to think of not-implausible reasons and mechanisms that would make this so.

The corollary, of course, is that for them the only good policies are hard-money austerity policies; and the only good portfolios are those that assume a departure from hard-money austerity will produce inflation.

So perhaps there is a deeper problem somewhere…

It made sense for those of my great-great grandfathers who were rich back before World War I to be hard-money guys. The investment vehicles open to them were land that pretty much had to be rented out at fixed nominal rents, bonds that paid fixed nominal yields, and equities where–unless you ran the business–you were quite probably a fool soon to be parted from his money by financial engineering. But it made no sense for my rich grandfather after World War II to be a hard-money guy. He had a much bigger portfolio of assets to invest in: equities backed by more-or-less honest accounts, land that the coming of automobiles and superhighways and the move to the sunbelt meant could be developed as suburbs, as well as leveraged resource speculations. He profited immensely from investments in all of these. Yet, in his heart of hearts, he remained a hard-money guy.

And it really makes no sense for my contemporaries to be hard-money believers. Yet an astonishing share of the rich among them are.

A great and enduring puzzle…

So: To the re-education camp! I have a lot of rethinking to do–but not about IS-LM, hysteresis, or the fiscal theory of the price level; rather, about the connecting-belts between asset values, wealth levels, and people’s ideal interests of what proper monetary and fiscal policy should be.

Wish me luck!

• Paul Krugman: The Strange Urge to Raise Rates http://krugman.blogs.nytimes.com/2015/03/01/the-strange-urge-to-raise-rates
• Martin Feldstein: The Deflation Bogeyman http://www.project-syndicate.org/commentary/inflation-rates-central-bank-by-martin-feldstein-2015-02
• Mark Thoma (March 2009): Feldstein: Inflation is Looming http://economistsview.typepad.com/economistsview/2009/04/feldstein-inflation-is-looming.html
• Reza Moghadam et al. (2014): “Deflation” Versus “Lowflation” http://blog-imfdirect.imf.org/2014/03/04/euro-area-deflation-versus-lowflation
• Olivier Blanchard (2008): The State of Macro http://www.nber.org/papers/w14259.pdf
• Cosma Shalizi: Apropos of the Fed: “The Cossacks Work for the Czar!” http://www.bradford-delong.com/2015/03/monday-delong-smackdown-cosma-shalizi-says-apropos-of-the-fed-the-cossacks-work-for-the-czar.html

Adding to a point made in In Lieu of a Focus Post: March 2, 2015 (Brad DeLong’s Grasping Reality…):

Let me note that the estimable Tim Duy continues to watch a failure to communicate:

1. Financial markets think that the Federal Reserve will either delay the interest-rate liftoff for at least another year or two or, if they do lift-off, find themselves reversing course within eighteenth months to try to restart a stalled economy.

2. The Federal Reserve thinks financial markets have lost their moorings with reality, and that it will soon be appropriate to raise interest rates in a strengthening economy in which secular stagnation considerations are at best third-order.

3. Elementary optimal-control considerations strongly militate for waiting to tighten: stimulating the economy at the zero lower bound is difficult; restraining the economy away from the zero lower bound is easy.

4. The decision to adopt a 2% per year rather than a 3% per year or a 4% per year inflation target was driven in large part by belief in the Great Moderation; since we no longer believe in the Great Moderation, that decision should be rethought.

5. The inconsistent behavior of the employment-to-population ratio and the unemployment rate makes for more than the usual amount of uncertainty about what exactly “full employment” is–and that, too, strongly militates for waiting to tighten.

Yet the Federal Reserve in its internal decision-making processes appears to be focusing 100% on (2), and 0% on (1), (3), (4), and (5). And that raises the question of why: Just what are the internal decision-making committee processes within the Federal Reserve that are leading to such an outcome? Ex ante, I would have expected many individual members of the FOMC to be very unhappy with such a possibly-premature tightening–what is the reason that they are not? That the Federal Reserve has failed to make its thinking clear enough to me for me to get where they are coming from seems to me to be a major failure–but whether of their communications policy or of my comprehension I am not sure…

• Tim Duy: Game On http://economistsview.typepad.com/timduy/2015/03/game-on.html
• Janet Yellen: Humphrey-Hawkins Monetary Policy Report to the Congress http://www.federalreserve.gov/newsevents/testimony/yellen20150224a.htm
• Michael S. Derby and Pedro Nicolaci da Costa: Stanley Fischer: Fed Closer to Rate Rises, But Exact Timing Remains Unclear http://blogs.wsj.com/economics/2015/02/27/fischer-says-fed-sees-rate-rise-sometime-this-year
• Michael S. Derby: [Fed’s John Williams Sees Door Open for Interest-Rate Increases Starting in June http://blogs.wsj.com/economics/2015/02/26/feds-williams-sees-door-open-for-interest-rate-increases-starting-in-june
• Michael S. Derby: Fed’s James Bullard: Delaying Interest-Rate Increase Much Longer Creates Risk http://blogs.wsj.com/economics/2015/02/27/feds-bullard-delaying-interest-rate-increase-much-longer-creates-risk
• William Dudley: Remarks at the 2015 U.S. Monetary Policy Forum http://www.newyorkfed.org/newsevents/speeches/2015/dud150227.html