Category: Equitablog

Anne Laurie:
Monday While-We’re-Waiting:
“Matt Yglesias…

…[on] the new Wingnut Wurlitzer meme:

Conservative pundits who didn’t like the bipartisan comprehensive immigration reform bill that passed the US Senate in 2013 also didn’t like Obama’s deportation relief through executive action. They object to both the content… and to the process… as roughly akin to overthrowing the democratic constitutional order through military force in order to establish a brutal Latin American dictator…. There are many things one could say about this comparison, starting with the fact that unlike a proper caudillo such as Augusto Pinochet, Obama hasn’t had thousands of people detained and tortured without trial. Or, indeed, that it was actually Obama’s predecessor who was having people detained and tortured without trial.

But perhaps the strangest thing about it is that when American conservatives analogize Obama to a Hispanophone military dictator, we are meant to understand this a criticism when the historical reality is that American conservatives have generally been quite enthusiastic about caudillos…. Indeed, thanks to the miracle of modern-day traffic recirculation methods, old National Review content singing Pinochet’s praises falls directly adjacent to complaints about Obama’s caudillismo…

Must- and Shall-Reads:

• Lars Svensson: Monetary policy tradeoffs in CESEE
• Grégory Claeys et al.: Measuring Europe’s investment problem
• Izabella Kaminska: Lies, damned lies, and liquidity expectations
• Simon Wren-Lewis: Left, Right and Macroeconomic Competence

1. Nicholas Bagley: Three Words and the Future of the Affordable Care Act:
   “To help people like my kids’ piano teacher, the ACA extends tax credits to anyone earning between one and four times the poverty level who buys a qualified health plan so long as the individual is ineligible for Medicaid and doesn’t have access to employer-sponsored coverage…. As Michael Cannon and Jonathan Adler read the ACA, however, my kids’ piano teacher can’t get tax credits at all. Nor should roughly 9.5 million other people… Yet… the government’s alternative reading makes much better sense of the statute as a whole and avoids assigning a meaning to the ACA that is blatantly at odds with what the statute aims to accomplish…. To make out their case, however, it’s not enough for Adler and Cannon to show that it’s possible to read the ACA to withdraw tax credits from refusal states. If the statute is ambiguous on that point, it’s black-letter law that the courts must defer to the IRS’s authoritative interpretation (Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S. 837 [1984]). Adler and Cannon… have to demonstrate that the statute unambiguously withdraws tax credits…. They haven’t come close to making such a demonstration…”

2. Jonathan Cohn: Obama’s Immigration Order: A Vote for American Exceptionalism: “American exceptionalism, you’ll remember, is something Obama’s critics claim he doesn’t believe in. ‘Our president doesn’t have the same feelings about American exceptionalism that we do,’ Mitt Romney said during the 2012 presidential campaign. In a 2010 cover story in National Review, Rich Lowry and Ramesh Ponnuru declared, ‘At the heart of the debate over Obama’s program is the survival of American exceptionalism.’… One consistent feature of exceptionalist discourse has been the idea that America permits greater upward mobility than does the Old World…. In recent decades, sadly, the reality of American mobility has diverged sharply from the myth…. America, Marco Rubio said a few years back, ‘is the only economy in the world where poor people with a better idea and a strong work ethic can compete and succeed against rich people in the marketplace.’ That’s not actually true. But it’s truer today than it was last week because the president who supposedly wants to make America more like Europe has instead made America more like its best vision of itself.”

3. Lars E.O. Svensson http://larseosvensson.se: Monetary policy’s best contribution to financial stability?: “Inflation on target and resource utilization at long-run sustainable rate. Suppose 2% inflation and 3% real growth, nominal growth 5% of asset prices and disposable income, doubling every 14 years. For any given nominal debt, LTV and DTI ratios halved in 14 years. Pretty good for repair of balance sheets. Monetary policy should only be the very last line of defense of financial stability, normally not to be used…”

4. Barry Eichengreen: The bond market’s dance over European debt will not last forever: “Are the circumstances confronting Europe’s heavily indebted governments today at all similar? To be sure, those governments face strong external pressures from the bond market. But they also face strong internal pressures from voters, who are unlikely to sit patiently for 10 to 15 years while 5 per cent of national income goes to pay off the debt of previous generations. The countries in question clearly lack the strong fiscal institutions needed for this task. The implication is that Europe’s official strategy for resolving its debt crisis will not work. Fortunately, there are feasible alternatives… grow the denominator of the debt/GDP ratio…. But sadly growth cannot be conjured up out of thin air. European policy makers have shown an inability to conjure it up any other way. The other alternative is debt restructuring. European officials continue to dance around the idea of writing down public debt, promising Greece lower interest rates and longer maturities but denying the need for more fundamental restructuring and for applying such measures more widely. The events of recent weeks make clear that they will not be able to dance much longer.”

Should Be Aware of:

• Waldo Heinrichs: Threshold of War: Franklin D. Roosevelt and American Entry into World War II
• George Packer: The Astonishing Rise of Angela Merkel, the Most Powerful Woman in the World
• Jonathan Cohn: Ferguson Grand Jury: No Indictment for Darren Wilson in Brown’s Death
• Dahlia Lithwick: The University of Virginia Finally Confronts Its Rape Problem

1. Alex Parent:
   Come On, Feel the Buzz – The Baffler:
   “Joe Williams, a reporter for the political newspaper and web news site Politico, said… Republican presidential nominee Mitt Romney appeared comfortable only around white people…. Williams was quickly and rather publicly fired…. In August, Politico reporter David Catanese defended GOP Rep. Todd Akin’s bizarre lecture on where babies come from. Akin, running for U.S. Senate from Missouri, revealed that he believed a common conservative myth: that in the event of ‘legitimate rape,’ the female body somehow prevents pregnancy from taking place, thus negating the need for a rape exemption from a prospective abortion ban. Catanese tweeted that the negative response to Akin’s comments was overblown, because ‘we all know what he was trying to say.’ He continued digging, suggesting that Akin might have a point about this legitimate rape thing. After all, Catanese wrote, some unknown number of ‘reported’ rapes are surely fake (though it’s not ‘PC’ to admit as much), and it is certainly possible (not that he had checked out ‘the science’) that actual rapes are unlikely to lead to pregnancy. ‘The left is often 1st to shut down debate as ‘off limits’ when it deems so,’ he finally tweeted. ‘Aren’t these moments supposed to open up a larger debate?’ Catanese was reprimanded and taken off the Akin beat, but he kept his job. The difference between these two episodes speaks volumes about D.C.-based access journalism and the highly toxic, incestuous variant of it that Politico has perfected. Or to put things a bit more baldly: in all likelihood, David Catanese and Joe Williams suffered divergent professional fates because the leaders of Politico are more concerned about losing access to the Romney campaign than they are about losing access to victims of rape. How deep does this craving for access run?…”
   

2. Heather Boushey: On Presidential Medal of Freedom Recipient Robert Solow: “We applaud President Barack Obama’s selection of Robert Solow as a Presidential Medal of Freedom recipient. Solow’s transformative research in the field of economics and ongoing contributions to our understanding of long-term economic growth, productivity and inequality cannot be overstated…. Solow remains a scholar ahead of his time. Few intellectuals can effectively communicate the real-world implications of theoretical economic research, but Professor Solow’s brilliance is his ability to engage with diverse audiences and at the same time influence how generations of emerging scholars participate in empirical debates. Our nation is without a doubt better equipped to deal with tough economic challenges because of Professor Solow’s theoretical contributions to the field, but above all else because of his influence as a teacher to generations of scholars and policymakers.”

3. Alex Parent: Deal Me Out : “The modern finance industry is at a loss when it comes to justifying its own existence. Its finest minds can’t explain why we wouldn’t be better off with a much simpler and more heavily circumscribed model of capital formation. Sorkin likewise can’t make his readers fully grasp why the current system—which turns large amounts of other people’s money and even more people’s debt into huge paper fortunes for a small super-elite, and in such a way as to regularly imperil the entire worldwide economic order—is beneficial or necessary. But the New York Times and Wall Street each need him to try. Like a bloated and overleveraged global financial company, he’s far too crucial to be held to a regular standard of conduct. Our subprime lenders proved, in the final analysis, too big too fail; and now, certain of our name-brand financial writers are too big to practice journalism.”
   

Monetary policy tradeoffs in CESEE###

Lars E.O. Svensson

http://larseosvensson.se
Department of Economics, Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden, www.sse.edu

Conference on European Economic Integration (CEEI) 2014 Vienna, November 24, 2014

Monetary policy’s best contribution to financial stability?
* Inflation on target and resource utilization at long-run sustainable rate
* Suppose 2% inflation and 3% real growth, nominal growth 5% of asset prices and disposable income, doubling every 14 years
* For any given nominal debt, LTV and DTI ratios halved in 14 years. Pretty good for repair of balance sheets.
* Monetary policy should only be the very last line of defense of financial stability, normally not to be used

Outline
* What can monetary policy achieve?
* Do not ask to much from monetary policy
* What is the relation between monetary policy and financial stability?
* Monetary policy and financial-stability policy are very different
* In normal times: Best conducted separately, also when conducted by the same institution
* But each policy should be fully informed about and take into account the conduct of the other policy
* In crisis times: Full cooperation between the relevant authorities
* Monetary policy should be the very last line of defense of financial stability, not to be used in normal times

What can – and cannot – monetary policy achieve?
* MP can stabilize inflation around a given inflation target
* MP can stabilize overall resource utilization around a long-run sustainable rate
* But the latter is determined by nonmonetary, structural factors
* MP cannot affect the long-run sustainable rate of resource utilization
* This requires structural policies
* MP cannot solve structural problems
* This requires structural policies

What can – and cannot – monetary policy achieve?
* MP cannot achieve financial stability
* This requires financial-stability policy (macroprudential policy)
* Leaning against the wind cannot solve debt problems
* See Riksbank bad example (FT Big Read Nov 20)
* In Swedish case, benefits of leaning are just around 0.4% of costs (should have be more than 100% of costs to justify policy)
* Inherent flaw in leaning
* Running inflation below a credible inflation target increases
households’ and other agents’ real debt burden
* It also increases unemployment

What can – and cannot – monetary policy achieve?
* Do not ask too much of monetary policy

What is the relation between monetary policy and financial stability?
* Distinguish economic policies according to:
* (1) objectives,
* (2) suitable instruments, and
* (3) responsible authorities
* MP and financial-stability policy (FSP) are clearly separate policies, with different objectives and different suitable instruments, regardless of whether they have the same or different responsible authorities

Monetary policy
* Objective
* Flexible inflation targeting: Price stability and real stability
* Instruments
* Normal times: Policy rate, communication
* Crisis times: Also unconventional measures, balance sheet policies, FX policy, …
* Responsible authority
* Centralbank

Financial-stability policy
* Objective
* Financial stability: Financial system fulfilling 3 main functions w/ sufficient resilience to disturbances that threaten those functions
* Instruments
* Normaltimes:Regulation,supervision,macroprudentialpolicy, buffers, capital requirements, LTV caps, LCRs, NSFRs, taxes, deposit insurance, …
* Crisis times: Lending of last resort, liquidity support, capital injections, guarantees, banking resolution, …
* Authority(ies)
* Varies across countries
* FSA, CB, banking-resolution authority, MoF, …

What is the relation between monetary policy and financial-stability policy?
* Very different policies
* In normal times: Conduct independently, also when conducted by the same authority
* Each policy should be fully informed about and take into account the conduct of the other’s policy
* Similar to MP and fiscal policy (Nash equilibrium rather than coordinated equilibrium (joint optimization)
* In crisis times: Full cooperation and joint policies by FSA, CB, MoF, banking-resolution authority…

Monetary policy’s best contribution to financial stability?
* Inflation on target and resource utilization at long-run sustainable rate
* Suppose 2% inflation and 3% real growth, nominal growth 5% of asset prices and disposable income, doubling every 14 years
* For any given nominal debt, LTV and DTI ratios halved in 14 years. Pretty good for repair of balance sheets.
* Monetary policy should only be the very last line of defense of financial stability, normally not to be used

Svensson.pdf

Over at Project Syndicate: Last month in this space we reviewed the pulling-apart of America as it has become a vastly more unequal place since 1979: top 1% incomes grew at 3.6%/year, rest of the top fifth grew at 1.6%/year, middle three-fifths grew at 0.9%/year, bottom fifth at 0.5%/year-—with the proviso that improved access to medical care was worth a good deal more than its market cost. But the past generation has seen a third industrial revolution, a worthy information-age successor to the first of steam, iron, cotton, and machines and to the second of internal combustion, electricity, steel, and chemicals. Not everyone, but almost everyone in the North Atlantic and many and soon most in the world, can now if they wish have a smartphone–and so gain cheap access to the universe of human knowledge and entertainment to a degree that was far beyond the reach of all but the richest of a generation ago.

How much does this matter? How much does this mean that conventional measures of real income and real standard of living understate how much we, even the relatively poor of we, have progressed toward utopia?

The conventional economic growth accounting tells us that consumption expenditures on telecommunications, information processing, and audiovisual entertainment are 2% and net investment in information processing equipment and software 3% of output. That means that a price fall of 10%/year in that category of high-tech goods contributes 0.2%+0.3%=0.5%/year to economic growth in standards of living. The problem is that the bulk of that increase is already in the estimates. The share of spending has to signficantly underestimate the marginal salience of information-age goods and services in human well-being in order to make the argument that this third industrial revolution is a boost above rather than an important component of measured modern economic growth.

Now it is plausible that this is the case. Human well-being requires not just the expenditure of money purchasing goods and services but the use of the time that is the stuff of our lives to utilize those goods and services properly, and time is along with money a very scarce resource. And information-age goods and services, because they require our attention, are time-intensive. Suppose—a reasonable guess–the coming of the broadband internet since 1999 has doubled the utility that humans get out of the two hours a day that those of us in the North Atlantic typically spend interacting with our audio-visual technologies. Those two hours are one-fifth of the time we spend awake that is our own, and not our bosses’. That’s an extra 0.6%/year in growth of standards of living since 1990—much bigger than the 0.2%/year that the growth-accounting cost-based literature leads us to.

However, such a calculation requires that we be or become the type of people whose lives are truly enriched by our kindles and our tablets and our computers and our smartphones—that we value Netflix and Youtube and Google’s window into the online library of humanity and Facebook and the rest as massively superior to the ways we previously learned, gossiped, listened, and watched. It is certainly true that we today have information-age capabilities that are literally those of kings in the past: if in the seventeenth century you wanted to watch “MacBeth” in your house, you had better be named James Stuart, have William Shakespeare and his acting company on retainer, and be King of England and Scotland so that you could have a full-sized theater in your palace of Whitehall. And ever since Homer chanted his “Iliad” around the campfire after dark we have been willing to pay through the nose for our culture of stories and information.

Yet not all of us are all that devoted to our FaceBook friends. And much of what many of us desire goods and services for is as indicia of relative status. Perhaps the right way to view the situation is that before the information age began our estimates of economic growth overstated true reality by perhaps 0.5%/year as the extra well-being we got from increased real wealth and income was offset by our noticing that the Jones’s next door had more, better, and newer than we did? Perhaps the right way to view the situation is that those parts of the information age that escape conventional growth-accounting calculations simply neutralize those forces of envy and spite that were never included in the calculations in the first place? That is my tentative judgment–or rather guess–today.

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