Category: Equitablog

Must- and Shall-Reads:

• Jeff Madrick: Inflation targeting–a singularly bad idea
• Peter Temin and David Vines: Why Keynes is Important Today

 

1. Mark Dow: The Second Wave of the Bubble Unwind is Upon Us: “A pre-crisis boom in commodities lifted gold and silver…. Post-crisis monetary policy then turbo-charged it, as people feared rapid inflation, renewed systemic crisis, a dollar crash, and bond vigilantes. Macro tourists lined up to pile in. Big name guys wearing money halos. ETFs and electronic futures trading for the masses poured the gasoline. In short, they built a bubble. A bubble replete with charlatans hawking it on every medium…. The irony of the precious metals bubble is that it was the guys yelling ‘bubble’, bubbles of every stripe—bond, stock, credit—who sought refuge in the only asset class that was truly in a bubble. In other words, the fear of bubbles created its own bubble, trapping the bubblers. Karma really is running over dogma…. When I’m asked how far do I think gold can ultimately fall, my answer is I don’t know…. The statute of limitations on ‘not wrong, just early’ ran out a long time ago. By the time this is over only Peter Schiff, Zerohedge and Jim Grant will be waving their arms…”

2. Cathy O’Neil: “Hand To Mouth” and the rationality of the poor: “I’ve long thought that the ‘marshmallow’ experiment is nearly universally misunderstood: kids wait for the marshmallow for exactly as long as it makes sense to them to wait. If they’ve been brought up in an environment where delayed gratification pays off, and where the rules don’t change in the meantime, and where they trust a complete stranger to tell them the truth, they wait, and otherwise they don’t–why would they? But since the researchers grew up in places where it made sense to go to grad school, and where they respect authority and authority is watching out for them, and where the rules once explained didn’t change, they never think about those assumptions. They just conclude that these kids have no will power. Similarly, this GoodBooksRadio interview with Linda Tirado is excellent in explaining the rational behavior of poor people. Tirado just came out with a book called Hand To Mouth: Living in Bootstrap America and was discussing it with Dr. John Cook, who was a fantastic interviewer. You might have come across Tirado’s writing–her essay on poverty that went viral, or the backlash against that essay. She’s clearly a tough cookie, a great writer, and an articulate speaker. Among the things she explains is why poor people eat McDonalds food (it’s fast, cheap, and filling), why they don’t get much stuff done (their lives are filled with logistics), why they make bad decisions (stress), and, what’s possibly the most important, how much harder work it is to be poor than it is to be rich. She defines someone as ‘rich’ if they don’t lease their furniture…. As the Financial Times review says, ‘Hand to Mouth – written with scorching flair–should be read by every person lucky enough to have a disposable income.’”

3. David Fiderer: A Review of Fragile By Design: “Fragile By Design: The Political Origins of Banking Crises and Scarce Credit is a tour de force, and not in a good way…. The narrative… is highly selective and misleading. Worse, the section that covers U.S. banking over the past 25 years is a set of distortions and falsehoods…. Calomiris… and… Haber[‘s] familiar narrative [is] identified as ‘The Big Lie’ by Joe Nocera, Barry Ritholtz…. Calomiris and Haber embrace The Big Lie, and double down by tracing everything to Bill Clinton’s grand strategy of income redistribution as a response to economic inequality or as a sop to community activists at ACORN…. The lack of response to the critics of The Big Lie…. There is zero evidence that the loans described by Calomiris and Haber ever existed. From 2001 through 2006, GSE originations that had loan-to-value (LTV) ratios of 95 percent or higher and FICO scores of 639 or lower represented between 1 and 2 percent of total originations. According to GSE credit guidelines, those borrowers had characteristics that disallowed any kind of reduced documentation, much less no documentation or employment…. The amount of low-down-payment loans available in the marketplace was never decided by the GSEs. It was decided by private mortgage insurers, which were not regulated by the federal government…. Moreover, the financial meltdown of September 2008 was not triggered by bank failures; it was triggered by the failures of non-banks and by the unforeseen consequences of derivatives. The government had a clear legal path and precedent for dealing with bank failures like Wachovia, Washington Mutual, and IndyMac. But it had no clear path and no precedent for dealing with the imminent collapse of Lehman Brothers and AIG…”

4. Richard Sutch: The Liquidity Trap, the Great Depression, and Unconventional Policy: “John Maynard Keynes in The General Theory offered a rich analysis of the problems that appear at the zero lower bound and advocated the very same unconventional policies that are now being pursued. Keynes’s comments on these issues are rarely mentioned… because the subsequent simplifications and the bowdlerization of his model obliterated this detail…. This essay employs Keynes’s analysis to retell the economic history of the Great Depression in the United States. Keynes’s rationale for unconventional policies and his expectations of their effect remain surprisingly relevant today. I suggest that in both the Depression and the Great Recession the primary impact on interest rates was produced by lowering expectations about the future path of rates rather than by changing the risk premiums that attach to yields of different maturities. The long sustained period when short term rates were at the lower bound convinced investors that rates were likely to remain near zero for several more years. In both cases the treatment proved to be very slow to produce a significant response, requiring a sustained zero-rate policy for four years or longer.”

5. Paul de Grauwe: The ECB should stop fearing the Germans | The Economist: “From 2012 to 2014 the Fed added $1 trillion to its balance sheet…. Exactly the opposite occurred in the euro zone…. There can be little doubt that the decision of the ECB to reduce the money base by 30% at a time when the euro zone had not recovered from the sovereign-debt crisis contributed to pushing the euro zone into a deflationary dynamic, out of which it still tries to extricate itself…. The American monetary authorities, correctly, understood that the crisis had led to a balance-sheet recession…. The ECB, on the other hand, was caught in a narrative that the problem came from… too many rigidities on the supply side. If these were fixed by structural reforms output would increase by itself…. Only by the beginning of 2014, the ECB started to recognise that this narrative did not fit the facts…. However, in the face of the fierce opposition of German economists and media the ECB was caught in a double bind. German opposition made it impossible for the ECB to use the technically easiest way to increase the money base, i.e. buying government bonds…. The question that arises now is what the ECB should do. At a minimum it should take its responsibility of keeping inflation close to 2% seriously…. By not acting forcefully today the ECB risks unleashing the rejection of the monetary union. This is a much higher risk than the risk of German ire against the use of an instrument, the purchase of government bonds that in the rest of the world is considered to be standard practice.”

6. Paul Krugman: Business vs. Economics: “Business leaders often give remarkably bad economic advice, especially in troubled times…. Think of the hugely wealthy money managers who warned Ben Bernanke that the Fed’s efforts to boost the economy risked ‘currency debasement’; think of the many corporate chieftains who solemnly declared that budget deficits were the biggest threat facing America, and that fixing the debt would cause growth to soar…. And on the other side, the past few years have seen repeated vindication for policy makers who have never met a payroll, but do know a lot about economic theory and history. The Federal Reserve and the Bank of England have navigated their way through a once-in-three-generations economic crisis under the leadership of former college professors…. The answer… is that a country is not a company. National economic policy… needs to take into account kinds of feedback that rarely matter in business life…. A successful businessperson… sees the troubled economy as something like a troubled company, which needs to cut costs and become competitive…. And surely gimmicks like deficit spending or printing more money can’t solve what must be a fundamental problem…. In reality, however, cutting wages and spending in a depressed economy just aggravates the real problem, which is inadequate demand…. But how can this kind of logic be sold to business leaders, especially when it comes from pointy-headed academic types? The fate of the world economy may hinge on the answer…”

7. Anne Seith: Monetary Fallacy?: Deep Divisions Emerge over ECB Quantitative Easing Plans: “Bundesbank President Jens Weidmann is opposed to most of these costly programs. They’re the reason he and ECB President Mario Draghi are now completely at odds. Even with the latest approved measures not even implemented in full yet, experts at the ECB headquarters a few kilometers away are already devising the next monetary policy experiment: a large-scale bond buying program known among central bankers as quantitative easing…. It is a fundamental dispute that is becoming increasingly heated…. Is it important that the ECB adhere to tried-and-true principles in the crisis, as Weidmann argues? Or can it resort to unusual measures in an emergency situation, as Draghi is demanding?… ‘Abenomics,’ worked only briefly…. Businesses and private households were simply too far in debt to borrow even more, no matter how cheap the monetary watchdogs had made it…. ‘For decades, the Japanese government did not institute the necessary structural reforms,’ says Michael Heise, chief economist at German insurance giant Allianz…”

8. Paul Krugman: Flattening Flattens: “As I see it, ‘hyperglobalization’–the big increase in trade relative to GDP in the two decades after 1990–was a one-off affair, driven by trade liberalization in developing countries and the rise of containerization, which led to a breakup of the value chain, with labor-intensive segments of production moving to China and other emerging economies. There wasn’t any comparable boom in trade or abolition of distance between economies at similar wage levels; if anything, interregional trade and specialization within the US may have declined. The flattening out of flattening is neither good nor bad, it’s just what happens when a particular trend reaches its limits. What is important to realize, however, is that trends do tend to do that.”

Should Be Aware of:

• Elira Karaja: The Rule of Karlowitz: Fiscal Change and Institutional Persistence
• Juliana Londono Velez: War and Progressive Income Taxation in the 20th Century
• Marvin Suesse: Breaking the Unbreakable Union: Nationalism, Trade Disintegration and the Soviet Economic Collapse
• Taras Kuzio: Muscovy Annexes Donbas but Loses Ukraine

 

1. Josh Marshall: Paulism Captured Perfectly: “In his on-going effort to appeal to DC elites as a different kind of Republican, Sen. Rand Paul (R-KY) says it’s ‘dumb’ of Republicans to emphasize their support for voter ID laws which have been shown repeatedly to cut voting rates for minorities and poorer voters. He still they’re awesome. But it’s ‘dumb’ to make a big deal out of them because black voters can get the wrong impression. Watch.”

2. Walter Scheidel: State revenue and expenditure in the Han and Roman empires: “Comparative analysis of the sources of income of the Han and Roman imperial states and of the ways in which these polities allocated state revenue reveals both similarities and differences. While it seems likely that the governments of both empires managed to capture a similar share of GDP, the Han state may have more heavily relied on direct taxation of agrarian output and people. By contrast, the mature Roman empire derived a large share of its income from domains and levies that concentrated on mining and trade. Collection of taxes on production probably fell far short of nominal rates. Hano fficialdom consistently absorbed more public spending than its Roman counterpart, whereas Roman rulers allocated a larger share of state revenue to agents drawn from the upper ruling class and to the military. This discrepancy was a function of different paths of state formation and may arguably have hadlong-term consequences beyond the fall of both empires.”

Mark Dow: The Second Wave of the Bubble Unwind is Upon Us: “A pre-crisis boom in commodities lifted gold and silver…

…Post-crisis monetary policy then turbo-charged it, as people feared rapid inflation, renewed systemic crisis, a dollar crash, and bond vigilantes. Macro tourists lined up to pile in. Big name guys wearing money halos. ETFs and electronic futures trading for the masses poured the gasoline. In short, they built a bubble. A bubble replete with charlatans hawking it on every medium…. The irony of the precious metals bubble is that it was the guys yelling ‘bubble’, bubbles of every stripe—bond, stock, credit—who sought refuge in the only asset class that was truly in a bubble. In other words, the fear of bubbles created its own bubble, trapping the bubblers. Karma really is running over dogma…. When I’m asked how far do I think gold can ultimately fall, my answer is I don’t know…. The statute of limitations on ‘not wrong, just early’ ran out a long time ago. By the time this is over only Peter Schiff, Zerohedge and Jim Grant will be waving their arms…

Cathy O’Neil: “Hand To Mouth” and the rationality of the poor: “I’ve long thought that the ‘marshmallow’ experiment…

…is nearly universally misunderstood: kids wait for the marshmallow for exactly as long as it makes sense to them to wait. If they’ve been brought up in an environment where delayed gratification pays off, and where the rules don’t change in the meantime, and where they trust a complete stranger to tell them the truth, they wait, and otherwise they don’t–why would they? But since the researchers grew up in places where it made sense to go to grad school, and where they respect authority and authority is watching out for them, and where the rules once explained didn’t change, they never think about those assumptions. They just conclude that these kids have no will power. Similarly, this GoodBooksRadio interview with Linda Tirado is excellent in explaining the rational behavior of poor people. Tirado just came out with a book called Hand To Mouth: Living in Bootstrap America and was discussing it with Dr. John Cook, who was a fantastic interviewer. You might have come across Tirado’s writing–her essay on poverty that went viral, or the backlash against that essay. She’s clearly a tough cookie, a great writer, and an articulate speaker. Among the things she explains is why poor people eat McDonalds food (it’s fast, cheap, and filling), why they don’t get much stuff done (their lives are filled with logistics), why they make bad decisions (stress), and, what’s possibly the most important, how much harder work it is to be poor than it is to be rich. She defines someone as ‘rich’ if they don’t lease their furniture…. As the Financial Times review says, ‘Hand to Mouth – written with scorching flair–should be read by every person lucky enough to have a disposable income.’”

David Fiderer: A Review of Fragile By Design: “Fragile By Design: The Political Origins of Banking Crises and Scarce Credit is a tour de force, and not in a good way….

…The narrative… is highly selective and misleading. Worse, the section that covers U.S. banking over the past 25 years is a set of distortions and falsehoods…. Calomiris… and… Haber[‘s] familiar narrative [is] identified as ‘The Big Lie’ by Joe Nocera, Barry Ritholtz…. Calomiris and Haber embrace The Big Lie, and double down by tracing everything to Bill Clinton’s grand strategy of income redistribution as a response to economic inequality or as a sop to community activists at ACORN…. The lack of response to the critics of The Big Lie…. There is zero evidence that the loans described by Calomiris and Haber ever existed. From 2001 through 2006, GSE originations that had loan-to-value (LTV) ratios of 95 percent or higher and FICO scores of 639 or lower represented between 1 and 2 percent of total originations. According to GSE credit guidelines, those borrowers had characteristics that disallowed any kind of reduced documentation, much less no documentation or employment…. The amount of low-down-payment loans available in the marketplace was never decided by the GSEs. It was decided by private mortgage insurers, which were not regulated by the federal government…. Moreover, the financial meltdown of September 2008 was not triggered by bank failures; it was triggered by the failures of non-banks and by the unforeseen consequences of derivatives. The government had a clear legal path and precedent for dealing with bank failures like Wachovia, Washington Mutual, and IndyMac. But it had no clear path and no precedent for dealing with the imminent collapse of Lehman Brothers and AIG…”

I must confess that I have not yet read Fragile by Design by the always-thoughtful Steve Haber and the very sharp Charlie Calamiris, but I have never understood how this line of argument is supposed to work:

The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations…

Granted that that last part, “consistent with safe and sound operations”, has a tendency to become a dead letter under regulatory pressures, and that the depository institutions covered by the CRA come under pressure to make risky loans that they really should not. But that does not create risks of systemic distress or financial crisis. The depository institutions are insured by the FDIC, after all. You can complain that the CRA gets taxpayers onto the hook as insurers of loans that should not have been made. You cannot complain that the CRA forces overleveraged and undercapitalized systemically-important financial institutions to hold the lousy mortgages of low-income moochers–yet that, by all accounts, is what Haber and Calomiris’s argument is.

I don’t understand it. It just doesn’t seem to add up, arithmetically…

Richard Sutch: The Liquidity Trap, the Great Depression, and Unconventional Policy: “John Maynard Keynes in The General Theory…

…offered a rich analysis of the problems that appear at the zero lower bound and advocated the very same unconventional policies that are now being pursued. Keynes’s comments on these issues are rarely mentioned… because the subsequent simplifications and the bowdlerization of his model obliterated this detail…. This essay employs Keynes’s analysis to retell the economic history of the Great Depression in the United States. Keynes’s rationale for unconventional policies and his expectations of their effect remain surprisingly relevant today. I suggest that in both the Depression and the Great Recession the primary impact on interest rates was produced by lowering expectations about the future path of rates rather than by changing the risk premiums that attach to yields of different maturities. The long sustained period when short term rates were at the lower bound convinced investors that rates were likely to remain near zero for several more years. In both cases the treatment proved to be very slow to produce a significant response, requiring a sustained zero-rate policy for four years or longer.

Blog You Should read: The Growth Economics Blog Thinking About the Loss of Skill in the Industrial Revolution

Remember my six-part classification of things people do to add economic value?:

1. Backs.
2. Fingers.
3. Brains as (white collar and blue collar) cybernetic-control loops.
4. Mouths (and fingers) as information-communication devices.
5. Smiles (to provide personal services and keep us all pulling roughly in the same direction).
6. Minds (to think up genuinely new ideas and things we can do.

And remember my claims that the classic British Industrial Revolution greatly decreased (1) while greatly boosting (3) and boosting (2), (4), (5), and (6); that the Second Industrial Revolution further decreased (1) and greatly decreased (2) while further greatly increased (3) and increased (4), (5), and (6); and that the current cybernetic Information-Processing Revolution is going to greatly decrease our ability to make money by providing (3) and (4), reducing us to earning our money by providing (5) and (6) or by somehow figuring out how to own a share of the robots and computers that actually make and control stuff?

Now we have the estimable Dietrich Vollrath sending us to de Pleijt and Weisdorf saying that the classic British Industrial Revolution actually decreased (2) and decreased the amount of skill one needed to successfully perform (3). And the Growth Economics blog has some clever and interesting things to say:

The Growth Economics Blog: The Loss of Skill in the Industrial Revolution: “A recent working paper by Alexandra de Pleijt and Jacob Weisdorf…

…looks at skill composition of the English workforce from 1550 through 1850…. The big upshot to their paper is that there was substantial de-skilling over this period, driven mainly by a shift in the composition of manual laborers. In 1550, only about 25% of all manual laborers are unskilled (think ditch-diggers), while 75% are either low- or medium-skilled (weavers or tailors)… [But] manual laborers [rise], reaching 45% by 1850, while the low- and medium-skilled fall to 55%…. This shift really starts to take place by 1650, while before the traditional start of the Industrial Revolution…. ‘High-quality workmen’–carpenters, joiners, wrights, turners–rose only from 3.9% to 4.9% of the workforce between 1550 and 1850. These are precisely the kinds of workers that Joel Mokyr claims are the crux of the Industrial Revolution in England. They built, improved, adapted, and micro-innovated all the classic inventions…. It’s a really interesting paper, and it’s neat to see how much information you can keep sucking out of these parish records from England…. Does industrialization depend on a concentrated core of skills, rather than a broad distribution of skills? That is, if Mokyr is right about the source of English industrialization, then it’s those extra 650K high-skilled workers that really made all the difference…. Second, should we care about de-skilling?… Could this just mean that the economy was getting more efficient at using the human capital at hand? England didn’t need to waste all that time and effort skilling-up a big mass of workers. They could be used immediately, without much training…. Doesn’t that imply that England was getting more (output) from less (human capital)? That’s a good thing, right?…

You should be reading Dietrich–not just for this piece, but in general…

Discussion: How Mainstream Economic Thinking Imperils America

Ylan Mui: I want to kick it off with a question to you Josh. There have been a lot fingers pointed when it comes to blame for the financial crisis–Wall Street greed, predatory lending, et cetera–but rarely has a finger been pointed at the economists themselves. Do you think your profession deserves blame?

Josh Bivens: The one word answer is yes. Jeff’s book is entirely right: most the ideas covered in his book have indeed been put to damaging use in US policy debates. But we should be careful to also say that a lot of the ideas actually contain useful nuggets. They are bad and dangerous ideas when they are improperly invoked—-when the people who invoke them cannot differentiate when one of the ideas should be taken as a description of how the world works versus a prescription for how we should make it work. That is one big way that they can be put to dangerous use. I can say more about that later. But I think, even more importantly, they are really bad and dangerous when they are mobilized by people… It’s tough to say this nicely… By people with either really weak minds or with old and ideological political motivations.

Let’s get specific: macroeconomics and recession-fighting. Jeff’s second chapter is about the claim that economies have self-correcting properties that keep recessions short and shallow. If it were true, we would not have too much to worry about as far as fighting recessions. This is obviously a dangerous idea. Get really complacent about fighting recessions, and you know what happens: We see the past five years. We see millions of people unemployed and underemployed. We see sluggish wage growth. It is really obvious that the DC policy-making class has been way too complacent about fighting the recession.

I can go off for a long time about the fiscal-policy side as well.

In terms of the question about who deserves the blame: Where are the channels by which bad ideas infect the policy-making process? It is much more than the monetary policy front. The actual monetary policymakers with PhDs have done a much better job than almost anybody else in the US scene in responding to the crisis. mean Ben Bernanke and Janet Yellen have not been excessively complacent. You–we–may have wished they had been more aggressive, that they had seen that the economic world in more of a crisis and had taken stronger action to keep the world economy from being even more engulfed in flame than it has been over the past five years. But they have not been complacent. They have been pushing really hard to do something about the economic crisis.

It is the policymaking backseat drivers–the congressional committees–that summon them and chastise them for setting the stage for hyperinflation. It is the regional Federal Reserve Bank presidents who do the same thing. They are the ones who have been arguing aggressively for more complacence. This divergence between the actions of actual PhD policymakers and others on this front illustrates the channel through which these bad ideas actually infect the policy making process. Have they really hypnotized the minds of professional economists? Have they just become an easy cover for policymakers who do not want to take what professional economists tell them about how to make good policy?

I wish I could say professional economists were totally off the hook–that we are all giving good advice; that it is just Paul Ryan and Rand Paul who are perverting the policy. But we know that is not the case. There are enough economists to keep the water muddy.

I’ll end really quickly here:

I was asked by a reporter, “Can we now take… people who deny that fiscal stimulus at zero interest rates helps an economy recover, can we treat people who deny that like climate change deniers? Can we just say “all experts , and they are completely beyond the pale”? Sadly, no. We cannot. I mean, I think the evidence says we should. There is just not a bigger slam dunk that I have seen in actual evidence as a social scientist. But we can’t. You’ve got people like Greg Mankiw, who defended the Bush tax cuts of 2001 and 2003 on purely stimulative macroeconomic arguments, who then in 2009 when the Obama stimulus is being debated links to every anti-stimulus argument there is. He does not actually endorse each one specifically. But: come on, every day he links to five of crazy ideas why the stimulus is bad.

While I would love to say that Jeff’s bad ideas have not hypnotized economists–that they have just provided a cover for those who want to block the translation from economist wisdom to policy. I cannot. It is just not true that these bad ideas have only provided a useful cover for non-economists going to bat for bad policies.

A last thought: Part of the missing ingredient here–why economists are not useful actors in policy debates–is not just that they hve been suckered by the big big ideas Jeff is talking about. Their is lots of conscious and unconscious class bias among economists that affects how they enter policy debates. I think this is a missing ingredient. I’m sure we can talk more about that later.

Ylan Mui:Brad what do you think? Is the problem the academics or the policy, the description or the prescription?

Brad DeLong: Do you want me to talk about monetary policy, about fiscal policy or about finance? I can do all of them, or one of the three.

Ylan Mui: Why don’t you start with monetary policy? [Laughter]

Brad DeLong: I see four big gaps between where we should be and where we are:

1. The gap between what real economists should be saying about monetary policy, and what I think they do say.

2. The gap between what I think real economists do say and what Jeff thinks real economists do say.

3. The gap between what Jeff thinks real economists do say and what the Washington policymaking and the global policymaking community take real economists to be saying.

4. The enormous gap between what the Washington and the global community thinks real economic wisdom is and the policies that are actually being followed.

All four of those gaps are large. I would say the fourth is the largest. I would say the third is the next to largest. And the first two gaps–well, it seems to me that they are actually not all that huge.

We do not know what Milton Friedman would be saying in this particular conjuncture if he were here with us. He was an unpredictable guy. He was a very smart guy. He was smart both at finding insights into how the world worked and also, unfortunately, finding clever arguments so that he did not have to listen to evidence about how the world worked when it disturbed his beliefs. It is an occupational hazard of people who are a little too book-smart, a little too intellectually-talented. They can get away with plausible rationalizations too easily.

But when Friedman was confronted with a situation like that of the US today, that of Japan in the late 1990s, his policy prescriptions were very clear. Up until then he had counted on the velocity of money to be a relatively stable variable–if not greatly disturbed by extraordinary financial distress. And so he believed that if you simply kept the money stock of the economy on track that would keep total spending on track and would keep the economy stable near its “natural” rate of unemployment.

In Japan in the late 1990s Friedman found himself faced with a situation in which keeping the money stock’s growth path on track did not keep spending in Japan on track. His answer was that in such a case you should throw overboard his constant money stock growth rule. What Japan should do, Friedman said in the 1990s, is print money, Keep printing money. Print more money. Do not care that the short-term interest rates are “too low”. Do not care that long-term interest rates are “too low”. Low interest rates, he said, do not tell you whether money is improperly easy. Only the total level of spending tells you whether money is too easy.

Thus Friedman’s policy advice for Japan in the 1990s was: Massive quantitative easing. If that does not get spending and employment back to where you want it to be, do some more. And if that does not work, do even more. Helicopter drops.

Now it is a fact that there is not one single person on the Board of Governors of the Federal Reserve or in a Federal Reserve Bank President’s job who is right now as far to the “left” as Milton Friedman was in monetary policy [except, perhaps, for the Federal Reserve Bank of Minneapolis’s Narayana Kocherlakota]. They all talk about vague “risks” of excessive quantitative easing. They talk about the importance of the taper and of avoiding excessive growth in the balance sheet. They talk about how their models show convergence to something like full employment over the next three or four years–during which they plan to continue to fail to hit their 2%/year inflation target. They talk about the relatively-rapid soaking-up of excess labor supply through various structural changes in the labor market–which so far have no support anywhere in the wage data.

If Milton Friedman with his opinions of monetary policy in a liquidity trap of 1999–Milton Friedman without his name–were nominated to the Board of Governors of the Federal Reserve right now, I donot think he could get 50 votes. I think he would be regarded as too much of a crazy left-winger. This is an extraordinary situation we find ourselves in. It is one that makes me wake up at night in a cold sweat about one day a week.

Ylan Mui: So, Jeff, do you have any comments or response to their thoughts?

Jeff Madrick: Yeah, sure. I mean I’m sure Brad has a lot of thoughts about other people besides [Inaudible]

Ylan Mui: [Laughter] The other nights of the week he wakes up in cold sweat.

Jeff Madrick: I always remember reading Robert Solow’s criticism of the Friedman and Schwartz Monetary History book, and Solow said: “Well, it’s an odd book that says velocity is one thing during one decade and something totally different in another decade.” It was a little bit hard for him to square this constant-velocity idea with Friedman’s claims about money. I tend to think of money as more endogenously created by business activity than exogenously created. Finally, in terms of Friedman as a left winger, left-wing is not only about stepping on the interest-rate pedal–lowering rates–it’s about regulations. Janet Yellen, I’m very glad to see, as Fed Chairman is talking about how lower interest rates alone might lead to risk but there are other ways to deal with speculative risk that were neglected badly, not just under Greenspan but to some degree under Bernanke, who I have a lot more respect for than for Greenspan. There are regulatory tools, and I doubt if Friedman would be in favor of this kind of capital controls.

Ylan Mui: Well, Jeff, let’s get to a broader question. What exactly are you considering “mainstream”? In your book you cite Stiglitz and Shiller as people who called it right. Certainly they are part of the mainstream economic consensus. So how are you defining this term? There are plenty of people outside the mainstream who I would suggest that you would disagree with too, hardly including these folks of the [Indiscernible] [Cross-talk]

Jeff Madrick: Well, the point of the book is to talk about how the preponderance of economists who teach in major universities–not only on the right but on the left–came to a consensus on these views, and that in effect was my definition of mainstream. By and large it’s the acceptance of neoclassical economics for the most part, with some variation among them. Let me point out that these economists came together in believing in the great moderation. Blanchard was slightly left the center. Bernanke was probably slightly right of center. They both believed in the Great Moderation. They manufacture thed measure of their own success. Economists on the left and the right believed in low and stable inflation as the primary policy objective. That’s what I’m talking about when I talk about “mainstream economics”.

It was a very strong consensus on a lot of issues, I believe. While they did not have their hands literally on the policy levers all the time, very few decisions were made by a president or a Fed Chairman without talking to the economics departments. Economists had a lot of control: their ideas seep through the media and into the general population.

Ylan Mui: We have a question from the audience, which is asking each of the speakers to address the ideal role of government in markets and in national economics. Brad, you want to start with you?

Brad DeLong: Let me start with a parenthesis: In 1992 Larry Summers and I wrote a paper, stood up in front of the assembled Federal Reserve, and said that in our judgement reducing the target inflation rate below 5%/year ran risks that probably should not be run–as shown by the fact that had the inflation rate been significantly lower than the 4%/year or so that it had been in the late 1980s, the Federal Reserve would not have been able to do the expansionary policies it needed to do to fight the 1992 S&L crisis recession. That was a relatively small macroeconomic shock. There were and are large chunks of the mainstream that did not buy into 2%/year as the proper inflation target. Even though you can interpret Olivier Blanchard as not dissenting strongly from that target before 2008, since he has gotten into his post at the IMF has has been dissenting from 2%/year more strongly than anyone else. Olivier Blanchard and his boss Christine Lagarde are now the left-most people on monetary policy in any public-sector organization today. If there is an equivalent of the Sixth Socialist International today, they are it.

On the question of the proper rule of government… There are stringent requirements for market effectiveness for anything like the invisible hand to actually work well.

We need to have the distribution of wealth we start with to correspond to fairness and utility for lots of reasons–straightforward utilitarian reasons, and also that equality of opportunity is a joke without substantial equality of result to support it behind it.

We need to have aggregate demand matched to potential supply.

We need to have competition.

We need to have calculation–that is people need to know what their options are, be able to assess them accurately.

Goods and services need to be rival, in the sense of no public goods or no increase in returns so it actually makes sense to charge prices for them because in consuming a good you are using up some scarce resource.

Goods and services need to be excludable,so that you can actually make price-taking markets function.

There need to be no information asymmetries–no situations in which one side of the market knows a great deal more about what they are buying or selling that the other does.

If those requirements are not all met, then the invisible hand theorem simply fails. Jeff talks about Arrow, Debreu, and Hahn building up the enormous edifice of modern general equilibrium theory. He talks a little less than I would about how the lesson all the three of them drew from it was that these requirements were extraordinary stringent–not to be found very much in the real world.

If we take a look at the world out there, I think we can see decreasing relevance of the Smithian model. As we live longer, we find that more of our economy has to go into pensions and healthcare finance in which problems of miscalculation and myopia on the one hand and of information asymmetry on the other are absolutely enormous. We also are spending a lot more on education. We are spending more on infrastructure as the average lifespan of the goods and services we produce increases, and as interdependencies increase. Research and development and information goods in more general are the heart of where any kind of Smithian invisible hand theorem will fail.

So not only are the requirements for market effectiveness extremely stringent, but they will apply to a smaller share of the economy in the future than they have in the past.

If we are going to right-size the market over the course of the next century, we economists really do need to think very hard. Mostly what we need and what other social scientists need is a grammar of alternative forms of organization. Markets are not the only way to organize things. We have command, we have bureaucracy, we have charity, we have cooperatives, we have Wikipedia, we have regulated monopolies, we have yardstick competition, we have a whole bunch of other things. And if we had a better grammar of where each of these succeeds and where each fails, we would have a much better discussion.

As it is though, we have a bunch of people who yell that government is not competent and fails always. We have some other people who whimper that sources of market failure are relatively strong. Some other people say all you have to do is to cut property rights at the joints in the correct Coasian way. None of those three positions seem to meet to come close to doing the job.

Ylan Mui: Josh, what do you think?

Josh Bivens: Let me focus on just the narrow part of it because I’m narrow minded and to bring it back to Jeff’s…

Ylan Mui: Like a mainstream economist?

Josh Bivens: Yes… Jeff’s second chapter. The proper role of government is huge question. But it seemed like the one that should be pretty much non-ideological and non-partisan. We should at the very least not let the economy founder well below fall employment for a long periods of time. There is no conservative or liberal case for: “Yes, really high rates of unemployment are somehow good”. The minimum government should do macroeconomic management There’s no reason why the response to the big shortfall in demand in 2008 couldn’t have been—were going to zero out payroll taxes for three years. It would’ve worked. It wouldn’t been the most efficient, but it would’ve done something to stimulate the economy. Yet a serious absence of anything like a serious sort of proposal from the right anywhere near the scale of the demand shortfall has led to the five years of just terrible times. I think that’s a little bit of an indication for Jeff’s thesis…

Brad DeLong:& And not just from the right. It was Barack Obama who stood up in his 2010 State of the Union address and said that the time for expansionary fiscal policy is over. That because American households had to tighten their belts so the government needed to tighten its. Christina Romer was out there trying to nail the Obama administration to the position: “No 1937s–no premature withdrawal of expansionary fiscal support from the economy until the recovery is well established.” But right now, if you go over to the White House briefing room, they are talking about how wonderful it is that the deficit has fallen by so much. It has fallen from a level that was appropriate to the state of a macroeconomy to a level that I think is at most a third of what it should be, given the state of the macroeconomy, given the extraordinary shortfall of output below what it ought to be according to any serious measure of the trend of potential, and given the extraordinarily good terms on which the government can borrow right now.

That is: any private organization–any market organization–that could borrow on the terms the US government can borrow right now would be borrowing like mad, and investing and making every single long-term capital investment it was going to make over the next 30 years right now. We ought to do that.

Ylan Mui: I want to get–I want to get Jeff a moment to respond ,but also I want to let you guys know that if you have questions, if you want to challenge Brad or Josh or Jeff you can come up to mic and ask your questions as well. Jeff, what’s your response?

Jeff Madrick: I just think I seriously disagree with Brad on this issue. Not that Obama prematurely withdrew. In my own writings, I was arguing about that all the time. Christina wrote a very good essay, I wrote about it many times about multipliers over one, it was an excellent piece of work but the fact is a large proportion of the economics community battle that idea. Many supported the first Obama stimulus. I haven’t seen evidence about whether they would’ve supported a second Obama stimulus or still bigger one after that which I think we both agree would’ve been desirable.

I think Brad’s talking about an ideal wish list that economists for the most part are not talking about. There’s enormous pressure not to increase healthcare spending but to control Medicare and Medicaid spending and so forth. There’s enormous pressure not to invest in R&D. Let me name names of the major mainstream economists. There’s an extraordinary assumption that government R&D was not the significant or even the most significant factor in technology advance in America even the Post-World War II period. I love Bob Gordon, but he gave a talk about how the stagnation of technology and then somebody asked him questions about future technology. He said, “Well, that’s been through private capital not government. That’s not government.” Well, that ain’t so. It’s been government all the major venture capital has got into areas where government has been the leading investor.

I think Brad gave a beautiful wish list, but it’s a wish list. There’s a lot of decent stuff. I mean in my own defense, regarding Arrow and so forth, I would never say that Arrow defends market optimality. I think he spends his whole career showing how the extreme assumptions may had make it highly unlikely.

Ylan Mui: Any questions from the audience?

While we wait for someone to be brave enough to ask the first question I have another one for you Jeff, which is: You said that part of the reason you wrote the book because you don’t want us to repeat the mistakes of the past. To what extent do you think that mainstream economics has incorporated lessons from the financial crisis and is shifting? When we talk about unemployment now as the problem, not inflation, the IMF has spoken many times about the need for infrastructure investment et cetera. So are you seeing some of these ideas start to shift?

Jeff Madrick: Yeah, I’m seeing some of it start to shift. Brad brought this up also. I mentioned very explicitly that Olivier Blanchard changed his mind. But after you get wounded you begin to believe in God. He got wounded. He now believes in God. Thank goodness. He did and then a guy named Daniel Leigh, I did a little conference on this long before Blanchard sponsored the research with Daniel Leigh on demand and growth. It was hard to get that stuff out there. And who is knocking heads together? Alesina of Harvard, not the Chicago guys but Alesina…

Brad DeLong: He was born in Italy, and has the Italian’s view of the effectiveness of government having watched the Christian Democratic party run Southern Italy like feudalism for forty years.

Jeff Madrick: Well in any case, Alesina was knocking heads together proposing that austerity works and it was…

Brad DeLong: But he was the only one of the 40 people on the Chicago Business School panel of expert economists, right? Nobody else agrees with him, right?

Jeff Madrick: But he had the year of George Osborne. 20 LSE economists wrote in favour of the Osborne budget. They were all–it’s not as if the Germans don’t have the school of thought, it is, we think, a perverse school of thought, but they have an economic school of thought. They don’t represent the mainstream here so much, obviously. My point is there’s has been a lot of economic influence in the wrong direction and I fear I’m not answering your question. [Laughter]

Ylan Mui: Josh, Josh, what are your thoughts here? I mean do you feel like there’s been a shift in mainstream thinking?

Josh Bivens: It’s pretty early to tell. I mean let me step back. I think, again, this discussion is about where does the breakdown happen between in the policymaking process. Why do we get so many bad policy outcomes> Is the problem economist who generated that the front-end of the chain? Or do they somehow get messed up along the way, and it’s the policy makers on the ground who garble the ideas and get it wrong? And I think there’s blame to go around for sure.

In Jeff’s book I think it’s mostly about that top of the food chain where the ideas come from. I will say I think Brad does have some points in that. We’ve got a lot of economists saying some sensible things, and yet we’re doing almost nothing sensible these days in economics. And so I would like as much attention as Jeff has put in his book on how to make sure economists have better ideas–and this is really self-serving because I work in a policy institute–but I think we need a lot more attention and resources aimed at places to figure out how to make that translation so that the good ideas in economics actually make it unscathed through the policymaking process.

I see lots of people who want to throw a lot of money to change how economists think and that’s worthy goal. But there’s also this other really important channel that doesn’t get enough attention: How to make sure that the good ideas that the economists have find good shepherds in the policymaking process. I have to argue EPI is a pretty good shepherd of such things and there’s lots of…

Ylan Mui: So you’re saying the problems aren’t diversity of thought it’s transmission of thought.

Josh Bivens: It’s not the only problem. Transmission is a problem.

Brad DeLong: The Council on Foreign Relations can put on absolutely the worst conference on the macroeconomy back in March 2009. Even at retrospect I can only marvel at the total incompetence and irrelevance of the people chosen to speak. In fact, as long as I live, at the end of March I am going to make it part of April Fool’s Day on my weblog to make fun of them.

Ylan Mui: Questions…

Brad DeLong: EPI has a hard time getting stuff out…

Ylan Mui: A question from the audience.

Audience 1: Yes. May be Josh’s comments were particularly good. I think to set up the question that I had and that is on a question of currency manipulation. Of course I’m operating under the disadvantage for not having read your book. You mentioned that you have a chapter on globalization. My view and I think that the institute is confusing itself with the importance of if there’s one thing that one could try to change to help setup a better international economic system would be counteract currency manipulation but we don’t see this.

Just a few weeks ago yet again the Treasury Department says no currency manipulation. The question I have for our guest, for you Jeff is to what extent–maybe you can help us unpack this, to what extent is that an economic question, let’s say from a point of view of some economists, is it a–to what extent is it a question of that it’s sort of that not getting into that area is something that business people whose business model depends on not dealing with that issue? How do they perpetuate this? What about the politics at this, the hill politics, all of that?

Maybe we could get to Josh’s question in that particular area. How do we move from this stagnation and obviously outdated policies to something better?

Jeff Madrick: It was directed at me and I guess everybody will speak on that. Obviously, currency manipulation is a major political issue. It’s a very old free trade issue. We do one thing and they retaliate with some other policy that under minds what we do. I would like to see a different evaluation for the dollar. I would like to see them stop doing that. Partly they started manipulating the currency when they joined the WTO because they were forbidden from doing some other things that help their exports.

So I think it’s—one of the major problems we face is the fact I did a little piece where I included this, in New York Times, a worldwide agreement on how to set exchange rate policy.

Now we, long time ago in the 1970s, decided we just let the market decide. And here I’m probably—they’re two issues of course. You can manipulate the market but also specially with the dollar, the dollar price is trying to settle two different kinds of markets who reserve currency market and the trade market so it seems implausible to me that one price would solve both problems but I don’t have the easy answer for that but I do think some economist, Peter Tanman for example are talking about having there is a priority in dealing with the balancing of trade deficits and trade surpluses in the world. It can’t be forever that the only grow—reasonable growth model is export growth.

But by and large historically, export growth has been the launching pad for most economists so you raised probably the most difficult question for which there is only not an easy answer.

Ylan Mui: Josh?

Josh Bivens: I really agree with that question. Of all the policy debates, in terms of starting from some kind of consensus among economist, I don’t really think it exists on that issue so much. And then there are all of the barriers to getting anything like a consensus expressed in policy. There are administration officials who will say: we have a lot of things to worry about our relationship with China and a lot of this sort of currency managing countries, and why does this one go to number one? I’m definitely of the mind that if we can convince these countries to stop ploughing tons of money into our economy rather than their own that would be a really good thing for both countries in the long run. But one has a lot of hurdles going from consensus through the policy making. So that one I think is the hardest to generate what exactly the breakdown is.

Other ones are a little easier: like why our congress people who have no say over monetary policy have been hearings for the scream at Federal officials. They think they have a stake in a not-very-good economy for the time being. I mean I think it’s pretty much simply that crude.

Brad DeLong: You don’t think they’ve been listening to the wrong people–having dinner with Cliff Asness and John Cochrane?

Josh Bivens: I don’t think they believe—-I think those people will tell them something entirely different if all of a sudden Republicans were seen as in charge of the economy and responsible for bad economic outcomes.

Brad DeLong: I don’t think Asnes and Cochrane would.

Josh Bivens: Naah, okay. But they would stop talking to them.

Brad DeLong: And they would be having dinner with Greg Mankiw instead?

Josh Bivens: Yeah…

Brad Delong: Right…

Ylan Mui: Larry Mishel

Larry Mishel: Thanks. I think it is interesting to think about the problems at two points of the food chain. One is where the economists are a weakness. The other is then what happens even beyond that.
Just getting to the whole issue of the Great Recession and the inadequate response which shapes this debate, one of the things that surprised me so much–I was a little shocked about the complete rout of Keynesian economics in the academy. There was very little–there’s a group, but outside of Berkeley and some people at Princeton and whatever, it was a pretty thin group to support the idea of an active fiscal policy. We also have to think about, even given that, why was there the bad turn in the Obama administration? The giving-up of the stimulus, and part of it is that the whole idea stimulus was defeated in the public marketplace ,in part because there was this stimulus and the unemployment rate didn’t seem to get to where people wanted it to be.

Jeff Madrick: Or was promised.

Larry Mishel: It was promised–well, that was a mistake, but part of that is that we just had a really, really, really deep recession and has really hard to do almost everything that you could to get the unemployment rate back to full employment within a year or two. It’s just not going to happen.

Brad DeLong: Well, if your problem is a disruption of the housing finance credit channel, actually doing something to fix the housing finance credit channel might help.

Audience 2: I’m very sympathetic to the fact that there has been a major defeat in the academic world for activist fiscal policy. That was pretty clear. It’s not all of our problems. I guess it’d be useful to think about what are the range of problems that we are confronted with, even if you were to get to the point where academia is correct. Part of it is that we are not talking about the incredible power of money in politics and policy, and the role of Wall Street in both the democratic party and in the Republican party.

Maybe we should comment a little bit about that.

Brad DeLong: As I said, I see economists somewhat differently. I see 38 of 40 of the Chicago Business School Panel’s contributors saying: yes, expansionary fiscal policy does produce benefits. Even though we are only, I think, at 32 out of 40 saying the stimulus was a good cots-benefit idea–the other seven plus Alberto Alesina saying that the debt was already too high for the benefits to be worth it.

The rout in the academy was—-if it was there–extremely short-lived. It was tied to a momentary boomlet behind Giavazzi-Alesina ideas of expansionary austerity because it would somehow summon the Confidence Fairy. It was coupled with the very smart Ken Rogoff and Carmen Reinhart’s greatly overselling their evidence about the potential risks run by running up high national debt due to (a) an analytical mistake in terms of choosing the wrong baskets into which to sort their data, and (b) failing to properly distinguished between sovereigns that have exorbitant privilege in that they issue reserve currencies and sovereigns that do not.

It looks to me like it’s recovered to pretty much where it was back in 2007.

Jeff Madrick: You knowm what I was always struck by the Christina Romer essay ,in which she did empirical work or some rise empirical work on whether there’s a multiple, and she said specifically like she’s just defending herself, “I am not a Keynesian. I am simply an empiricist.”

Now that to me suggested something. That to me suggested something’s going on in academia that being labelled a Keynesian made you something: being a Keynesian made you something of a pariah. I think that’s probably still the case of most of the empirical argument. But we’re not talking about a simple yes or no on the Obama stimulus. Most people say yes. Mark Zandi’s model said yes, and he’s by and large a Republican.

We’re talking about do we continue with the stimulus? Do we stop worrying about the deficit, on which there is so much pressure coming from the economics community I believe. It’s not a simple short term issue. I think the economics community thinks of it as so. I do think Larry’s right. I think the Keynesian argument was by enlarged routed. It’s still an embarrassment in some circles still call yourself a Keynesian, and that has to have an impact.

And we should talk a little bit about EPI–one of EPI’s major issues which is what cause inequality. Do we really—and is there really economic—a correct economic consensus about that? I don’t know if he wants to talk about that. Larry doesn’t want to talk about that.

Larry Mishel: That’s actually my question.

Ylan Mui: Josh, do you have a point—a point you want to add? What do you want to say to your boss?

Josh Bivens: We have a whole project on what calls the equality called Raising Americas Pay. You should check it out on our website. I mean I would say yeah, I think it’s an illustration I think of Jeff’s chapter one. For way too long the conventional wisdom was that labor is just like a commodity. There is supply and the demand for it, so if inequality rises something must’ve shifted those supply and demand curves. People go on about the race between education and technology. The work of Larry specially over the years has shown just not a lot of evidence that education or the increase in technology has been the big driver of inequality. Economists need to broaden out and actually look at the policy changes we’ve under taken over the past couple of decades that have intentionally shifted bargaining power from low and moderate wage workers to corporate managers and owners.

I think one thing that keeps economist from looking there is that I don’t think their policy patrons are all that interested in looking too hard there. I also do think there’s a class bias among our economist.

I mean look at the Chicago survey that Brad’s been talking about. They survey 40 economists of the Chicago Business School. They asked them basically a question, “Do you like Uber?” and the idea that they love Uber. They love the idea shaking up monopolies when the people are going to be hurt by that are taxi drivers. They asked them: do you think the US software patent system is doing well? Most of them said–a third well, a third badly, a third I don’t know.

Brad: Somebody thinks software patents are doing well?

Josh Bivens: Because there are some really rich people making money off software patents. They’re a lot harder to kick than taxi drivers. And so I really do think when it comes to applying the simplistic theory of chapter one of Jeff’s book. It matters a lot….

Brad DeLong: And I have an email from a student saying:

I think the evidence is that while there are a lot of good ideas in intellectual scaffolding of economics, the Friedmanite socialization of economist is one that makes them (a) epistemologically blindfolded by naïve positivism which leads them to believe technocrats that believe themselves above the fray of democratic politics, (b) too willing to believe the great glass bead game of model building and finding natural experiments, (c) too inclined to treat the decisions of capitalists as forces of nature rather than sociological constructions, and (d) too slavish to finance in business schools.

Jeff Madrick: Berkeley is a good school.

Ylan Mui: We have our last question.

Audience 3: I would like to follow up the issue of inequality. Jeff, when you opened your remarks you talked about the difference between inequality in opportunity and inequality in outcomes. Josh just talked about how the foundations of inequality and growth have shifted over the years that it’s no longer a strict trade off. The research is showing that inequality can actually lead to lower growth rather than higher growth.

We just had the Boston Fed meeting where inequality of outcome was shown to affact inequality opportunity. Ifs you don’t have equality of outcomes you don’t get to the inequal—you don’t get to the equality of opportunity. This morning, one of your other organizations here in town, the American Enterprise Institute just blasted Janet Yellen for mentioning the fact that inequality of outcome might be important, basically called her a leftist politician. Parti—excuse me, a partisan leftist politician. Do you see any hope here?

Jeff Madrick: Thank you for asking that. This is another area in which from my point of view mainstream economists have by and large failed, with exceptions. By and large they say inequality of outcomes is not our interest. William Buiter now at Citicorp would say that. Bernanke said it–that inequality of distribution is not really our issue. Yellen grabbed so much attention is because it’s not stated by somebody in Yellen’s position and it’s about time it should be stated. It is not—nothing quite peace me as much and it comes from the left and the right.

The answer to all our problems is education. Just get kids, make it cheaper to go to college. We have so much deeper problem than education. It’s not at all obvious that education and skills attainment are identities, but the economics profession does regression analyses as if attainment level of schooling is exactly equal to skills identity. The OECD did a comprehensive study and found that skills are considerably higher in Europe at the same level of education compared to the level of education in the US. That doesn’t stop economists from doing these regression analyses. It’s an area for me of misinformation. There is nothing easy. It’s apple pie and motherhood. What’s wrong with you? I have some apple pie, go home and see your mom.

Educate people. It is so much more difficult a problem–while there are lots of exceptions, Heckman for example, talks a lot about early childhood education. We need interventions, we now realize, at zero. We need serious public investment. Not just public investment that meets a rather tech—narrow technical definition of what public is. We know that there’s neurological damage for kids from zero to three, neurological damage not only from being hit in the head but just from neglect. There are major issues here to face and we’re just not doing it. We are suppressing this, with the help of some economists.

I think many economists are suppressing social spending in America. It’s haunting us already. It’s going to continue to haunt us. People talk about secular stagnation. If this is true, why would you be surprised? Our infrastructure stinks, our education system stinks, we have the highest child poverty rate in the world, 25 to 30 per cent of kids under five or six are by and large lost to the system. That’s a huge chunk of the population. Why should we have a glorious future?

Economists should be asking themselves whether they should devote themselves to that or more—-let me be kinder about this, more fully. [Laughter]

Brad DeLong: The interesting thing is that if you actually will listen Janet Yellen’s speech. It wasn’t the partisan speech. It wasn’t the political speech. It was very much the standard just-the-facts manner that Janet has adopted since the Clinton administration picked her for her first go-round at the Fed in 1994. Here are the important facts about this situation. You analyse them as you like. I think it speaks a great deal about the American Enterprise Institute as an institution that it now thinks that learning about facts and trying to analyse them is itself a leftist partisan political thing.

Is it John Stewart or was it Stephen Colbert who says the problem is that reality has a liberal bias. I think the only way to read the AEI attack on what’s very weak tea is as confirming that that, indeed, seems to be the case in America today. That makes me a lot less certain that if the Republicans were in power that people who still retain some anchor to reality would have positions of influence.

Jeff Madrick: In agreement with Brad, Janet Yellen’s strength is that she does stick to the facts. Now, humans are imperfect beings. Bias will always enter somehow. But by and large she’s going to succeed, and the reason is–to say she does her homework is an understatement. So I always worry about the old boys club. My guess is Obama worried about it when he seemed to be resisting Yellen’s appointment. She fights it by being by and large the best or at least the best informed economist in and among her peers in decision making capacity.

Ylan Mui: And Jeff we’ll let you have the last word here. Thank you so much to you for being here. The book is Seven Bad Ideas. I think it’s going to be for sale outside this room. Thank you to Josh and to Brad for joining us as well…

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