Category: Equitablog

Must- and Shall-Reads:

• Matthew C Klein: Why didn’t QE3 raise inflation expectations?
• Matt Bruenig: What Tax Puzzles Tells Us About Economic Justice

 

1. Simon Wren-Lewis: Fighting the Last War: “Why are helicopter drops taboo in policy circles? Why is it illegal in the Eurozone? The answer is a fear that if you allow governments access to the printing presses, high inflation will surely follow at some point. Many of those who worry about helicopter money are fairly relaxed about Quantitative Easing (QE), which involves much more money creation than would be involved in a helicopter drop…. The key reason they are more relaxed is that central banks are in control of QE, whereas governments would initiate money financing of deficits…. I think it is possible to take two quite different views…. The first is that, in most OECD economies today where macroeconomic understanding is better and information more available, inflation targets are more than sufficient to prevent us experiencing the inflation rates of the 1970s again…. A second view is that we have the story of the 1960s and 1970s all wrong. We did not get high inflation in advanced economies because governments wanted to monetise their own profligacy… [but] because of the combination of a number of specific factors: trade union pressure in the face of shocks that tended to reduce real wages, underestimation of the natural rate (and a poor understanding of how monetary policy should work), and placing too great a priority on achieving full employment. The latter might have been a legacy of the 1930s: policymakers were also fighting the last war…. I think both views are probably correct. As a result, I’m much more relaxed about money financing of deficits in the current situation…. However, irrational fear of rising debt in a recession has similar characteristics to fighting the last war: deficit bias is a problem, but a recession is not the time to worry about it. I think this is why I am not persuaded by this article by Ken Rogoff: yes, in the grand scheme of things we should worry about inflation and debt, but right now we are worrying about them too much and therefore failing to deal with more pressing concerns.”

2. Matthew Yglesias: A Fed insider explains why the central bank is making a big mistake: “Narayana Kocherlakota, President of the Minneapolis Federal Reserve Bank, put out a statement this weekend explaining why he thinks his colleagues made a mistake by bringing an end to Quantitative Easing. He would prefer they emulate Japan by continuing to print money until inflation gets up to 2 percent…. ‘In my assessment, the medium-term outlook for inflation has shown no overall improvement since last December and, indeed, is arguably worse. Failing to act in response to this subdued inflation outlook increases the downside risk to the credibility of our 2 percent inflation target. Market-based measures of longer-term inflation expectations have fallen recently to unusually low levels, a decline that I believe reflects that kind of increased downside risk…. Of course, there are costs and benefits to every monetary policy action and inaction, and assessing those costs and benefits is by no means straightforward. On this occasion, my assessment differed from that of my colleagues. Such occasional differences in perspectives are, I think, hardly surprising given the complicated nature of the decision problem that we face. But those differences should not obscure the collective commitment that my FOMC colleagues and I all share to the dual mandate objectives of price stability and maximum employment that Congress has established for the Committee. I look forward to working with my colleagues in future meetings, under Chair Yellen’s leadership, to achieve those objectives.'”

3. George Dvorsky: How Universal Basic Income Will Save Us From the Robot Uprising: “Looking ahead to the future, we may have little choice but to implement it. Given the ever-increasing concentration of wealth and the frightening prospect of technological unemployment, it will be required to prevent complete social and economic collapse…. The idea has also been supported by the esteemed economists Friedrich Hayek and Milton Friedman, the latter of whom advocated for a minimum guaranteed income via a ‘negative income tax’…. Some thinkers contend that broader social restructuring will have to accompany the problems wrought by technological unemployment…. Gary Marchant, Yvonne Angelica, and James Hennessy present six possible policy options: Protecting Employment…. Sharing Work…. Making New Work…. Redistribution…. Education…. Fostering a New Social Contract…”

4. Duncan Black: Never Mind Then): “Philadelphia is a ‘school reformers’ paradise…. All of the predictable things have come to pass. Much corruption in the charter schools. Money siphoned off from the actual public schools. Constant turmoil for students as schools (both charter and public) close, either by fiat or because they collapse. No evidence that educational performance has improved (the opposite). And the solution will be more of the same until the whole thing collapses and what money is left just goes into the hands of the grifters. Because we love our children.”

5. Lisa J. Dettling and Joanne W. Hsu: Returning to the Nest: Debt and Parental Co-residence Among Young Adults: “We estimate the relationship between current period debt and subsequent decisions to co-reside with a parent. Our results indicate that indebtedness – as measured by average loan balances, declining credit scores and delinquency on accounts – increases flows into parental co-residence. Moreover, after moving in, delinquency and low credit scores increase time spent in co-residence. We find that the changing debt portfolios of young adults over this period – characterized by rising student loan debt and small declines in credit card, auto and mortgage debt – can predict 30 percent of the observed increase in flows into co-residence, and 26 percent of the observed increase in time spent in co-residence.”

Should Be Aware of:

• Chris Hayes: The New Abolitionism
• What To Do If Trolls Have Doxx’d You With A #trollattack (with images, tweets) · adriarichards · Storify
• John Paul Titlow: This Man Uses Twitter To Augment His Damaged Memory ⚙ Co.Labs ⚙ code + community
• Scott Lemieux: The Pernicious Myth of the Moderate Republican
• Owen Zidar: A few useful job market resources

 

1. Norman Ornstein: When Conspiracy Theories Don’t Fit the Media Narrative – The Atlantic: “For those interested enough in the 2014 elections to read stories about them in the premier newspapers of our time, The Washington Post and The New York Times, you would know about the bios of Ernst and Cotton, two prize GOP recruits this election cycle. But you would be likely clueless about the wacky or extreme things they have said…. A Nexis search shows that the Post has had four references to Ernst and Agenda 21—all by Greg Sargent on his blog from the left, The Plum Line, and none on the news pages of the paper. But there have been dozens of references to Braley’s spat over the neighbor’s chickens, including a front-page story. The New York Times had zero references to Ernst and Agenda 21, but seven, including in a Gail Collins column, to Braley and chickens. The Post did have a fact-check column by Glenn Kessler devoted to the Cotton claims on Mexican drug lords and ISIS terrorists—Cotton did not fare well—but no news stories. The Times did not mention it at all…. What it suggests is how deeply the eagerness to pick a narrative and stick with it, and to resist stories that contradict the narrative, is embedded in the culture of campaign journalism. The alternative theory, that the Republican establishment won by surrendering its ground to its more ideologically extreme faction, picking candidates who are folksy and have great resumes but whose issue stances are much the same as their radical Tea Party rivals, goes mostly ignored…. [There are] no stories saying that references to Agenda 21 or talking about terrorists and drug lords out to kill Arkansans were disqualifying…. It’s not a very good way for readers to figure out how the people they vote for might actually behave in the Senate. And that’s not very good news for voters or the political process.”

Simon Wren-Lewis: Fighting the Last War: “Why are helicopter drops taboo in policy circles?…

…Why is it illegal in the Eurozone? The answer is a fear that if you allow governments access to the printing presses, high inflation will surely follow at some point. Many of those who worry about helicopter money are fairly relaxed about Quantitative Easing (QE), which involves much more money creation than would be involved in a helicopter drop…. The key reason they are more relaxed is that central banks are in control of QE, whereas governments would initiate money financing of deficits…. I think it is possible to take two quite different views…. The first is that, in most OECD economies today where macroeconomic understanding is better and information more available, inflation targets are more than sufficient to prevent us experiencing the inflation rates of the 1970s again….

A second view is that we have the story of the 1960s and 1970s all wrong. We did not get high inflation in advanced economies because governments wanted to monetise their own profligacy… [but] because of the combination of a number of specific factors: trade union pressure in the face of shocks that tended to reduce real wages, underestimation of the natural rate (and a poor understanding of how monetary policy should work), and placing too great a priority on achieving full employment. The latter might have been a legacy of the 1930s: policymakers were also fighting the last war…. I think both views are probably correct. As a result, I’m much more relaxed about money financing of deficits in the current situation…. However, irrational fear of rising debt in a recession has similar characteristics to fighting the last war: deficit bias is a problem, but a recession is not the time to worry about it. I think this is why I am not persuaded by this article by Ken Rogoff: yes, in the grand scheme of things we should worry about inflation and debt, but right now we are worrying about them too much and therefore failing to deal with more pressing concerns.

Matthew Yglesias: A Fed insider explains why the central bank is making a big mistake: “Narayana Kocherlakota, President of the Minneapolis Federal Reserve Bank…

…put out a statement this weekend explaining why he thinks his colleagues made a mistake by bringing an end to Quantitative Easing. He would prefer they emulate Japan by continuing to print money until inflation gets up to 2 percent….

In my assessment, the medium-term outlook for inflation has shown no overall improvement since last December and, indeed, is arguably worse. Failing to act in response to this subdued inflation outlook increases the downside risk to the credibility of our 2 percent inflation target. Market-based measures of longer-term inflation expectations have fallen recently to unusually low levels, a decline that I believe reflects that kind of increased downside risk…. Of course, there are costs and benefits to every monetary policy action and inaction, and assessing those costs and benefits is by no means straightforward. On this occasion, my assessment differed from that of my colleagues. Such occasional differences in perspectives are, I think, hardly surprising given the complicated nature of the decision problem that we face. But those differences should not obscure the collective commitment that my FOMC colleagues and I all share to the dual mandate objectives of price stability and maximum employment that Congress has established for the Committee. I look forward to working with my colleagues in future meetings, under Chair Yellen’s leadership, to achieve those objectives.

George Dvorsky: How Universal Basic Income Will Save Us From the Robot Uprising: “Looking ahead to the future…

…we may have little choice but to implement it. Given the ever-increasing concentration of wealth and the frightening prospect of technological unemployment, it will be required to prevent complete social and economic collapse…. The idea has also been supported by the esteemed economists Friedrich Hayek and Milton Friedman, the latter of whom advocated for a minimum guaranteed income via a ‘negative income tax’…. Some thinkers contend that broader social restructuring will have to accompany the problems wrought by technological unemployment…. Gary Marchant, Yvonne Angelica, and James Hennessy present six possible policy options: Protecting Employment…. Sharing Work…. Making New Work…. Redistribution…. Education…. Fostering a New Social Contract…

Me? The fact that we experienced “peak horse”–that all of a sudden there was nothing the marginal horse could do that paid for its maintenance, and that as a result the horse population downsized massively–makes me very skeptical of claims that there will always be productive, profitable, and paid things for the marginal human to do. As I say over and over again, break it down: (1) backs, (2) fingers, (3) brains-as-cybernetic-control mechanisms (both white-collar and blue-collar), (4) smiles, (5) mouths-to-communicate, and (6) minds to think.

In past generations predictions of technological unemployment have been false because the decline in (1) and (2) has been offset by growing demand from a richer society for (4), complementarity between machines and (3), and the failure of communication to become one-to-many fast enough to reduce relative employment in (5). Of these, only (4) looks secure to me for the future. But will it be enough?

Must- and Shall-Reads:

• Mark Thoma: Economist’s View: Links for 11-01-14)
• Asymptotes: Asymptosis » How Do Households Build Wealth? Probably Not the Way You Think. Three Graphs

 

1. Jan Hatzius:: Goldman Disagrees With The Fed On Labor Market Slack: “We disagree with the [FOMC’s] view on labor market slack. While the unemployment rate is now below 6% and the explicit phrase in the FOMC statement that ‘…underutilization of labor resources is gradually diminishing…’ is factually correct, the implicit notion that underutilization is no longer ‘significant’–the term used in the July and September statement–looks inconsistent with the employment and wage data…”

2. Cardiff Garcia: Affordable Housing and the Legit Big-City Whinge: “When city-dwellers moan about their high cost of living, they often elicit the unsympathetic retort that they should shut up and praise the ghost of Jane Jacobs for the cultural vibrancy of their neighborhoods, the lucrative jobs, and the artisanal pizza: ‘Living in a great city is a consumption good, you whinging ninnies — you SHOULD have to pay for it! Why do you think you’re entitled to live wherever you want?’ Hey, fair enough. But there’s a difference between grumblings about $5 cinnamon macchiatos and the more useful outrage about meaningful troubles that can be solved — a difference between #firstworldproblems and the healthier expression of annoyed patriotism towards one’s habitat: ‘I like living here and want to keep living here, which is why the problems I complain about aren’t enough to push me out. I’d rather stick around and see the problems solved. But those problems suck, so let’s start doing something about them.’ To complain that rents, for instance, could and should be lower isn’t always a sign of yuppie entitlement. Nor is it mutually exclusive with appreciating the wonderful aspects of city life. Sometimes the gripe really is legitimate…”

3. Jacob Schlesinger: The Kuroda Bazooka, Round Two: “Faced with fresh evidence that his bold campaign to end deflation was losing steam, Bank of Japan Gov. Haruhiko Kuroda Friday fired off a fresh round of ammunition from his famed money-spewing bazooka, shocking markets with a big increase in the central bank’s stimulus program. The impact was immediate, with the Nikkei Stock Average soaring more than 4% and the yen dropping sharply to a near-seven-year low against the dollar…. In sharp contrast to Mr. Kuroda’s first major easing announcement in April 2013, shortly after he took office, the central bank’s policy board was deeply split. Last year, he managed to get a 9-0 vote in favor of a policy that broke sharply with his more cautious predecessor. This time, the board voted 5 to 4…. Earlier in the day, the government had announced that the most closely watched gauge of inflation had fallen to 1% in September, having decelerated sharply from the 1.5% peak in April. That’s well below Mr. Kuroda’s 2% target, and showed the limited impact of the stimulus program to date…. Behind the surprise may also lie a broader strategy of economic policy coordination with the government. Before the BOJ announcement, Japanese stocks were up sharply in anticipation of an announcement planned for later in the day that the giant government pension fund would reallocate its portfolio…. And, looming for Mr. Abe is a decision on whether or not to go forward with a plan to raise the sales tax next year to 10% from the current 8%. It was the boost earlier this year… that slowed Japan’s economy and seemed to derail Mr. Kuroda’s earlier success in battling deflation. Mr. Kuroda has been a staunch and public advocate that Japan needs to go forward with the tax hike in order to curb its mammoth sovereign debt. Friday’s move, by providing at least a short-term dose of growth, will likely make it easier for Mr. Abe to take that step.”

4. Paul Krugman: Apologizing to Japan: “For almost two decades, Japan has been held up as a cautionary tale, an object lesson on how not to run an advanced economy…. Western economists were scathing in their criticisms…. I was one of those critics; Ben Bernanke… was another. And these days, I often find myself thinking that we ought to apologize…. Our economic analysis… look[s] more relevant than ever now that much of the West has fallen into a prolonged slump very similar to Japan’s experience…. In the 1990s, we assumed that if the United States or Western Europe found themselves facing anything like Japan’s problems, we would respond much more effectively than the Japanese had. But we didn’t, even though we had Japan’s experience to guide us…. Start with government spending. Everyone knows that in the early 1990s Japan tried to boost its economy with a surge in public investment; it’s less well-known that public investment fell rapidly after 1996 even as the government raised taxes, undermining progress toward recovery. This was a big mistake, but it pales by comparison with Europe’s hugely destructive austerity policies, or the collapse in infrastructure spending in the United States after 2010…. Or consider monetary policy. The Bank of Japan, Japan’s equivalent of the Federal Reserve, has received a lot of criticism…. That criticism is fair, but Japan’s central bank never did anything as wrongheaded as the European Central Bank’s decision to raise rates in 2011…. And even that mistake is trivial compared with the awesomely wrongheaded behavior of the Riksbank…. As for why the West has done even worse than Japan, I suspect that it’s about the deep divisions within our societies. In America, conservatives[‘]… general hostility to… a government that does anything to help Those People. In Europe… the German public is intensely hostile to anything that could be called a bailout of southern Europe…. Japan used to be a cautionary tale, but… [now] it almost looks like a role model…”

5. Anatole Kaletsky: The takeaway from six years of economic troubles? Keynes was right: “The policy experiments… since… 2008 crisis. The main lesson is that government decisions on taxes and public spending have turned out to be more important… than the monetary experiments…. Fiscal policies have been very different and the divergence in outcomes… has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks. Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth…. The six years since 2008 have provided strong empirical support for the supposedly outmoded Keynesian view that government borrowing is more powerful than monetary policy in stimulating severely depressed economies and pulling them out of recession…. The underlying reason… is a matter of simple arithmetic… should not be open to debate…. [With] ‘deleveraging’… in the private sector… arithmetic shows that economic balance can only be restored if some other sector of the economy spends more than its income…. Monetarism… assum[ed]… interest rates could always be reduced sufficiently to stimulate private investment, discourage private savings…. In the era of high inflation when monetarism was introduced, the idea… was reasonable enough…. Ironically… the very success of monetarism and central banking in conquering inflation now means that the era of monetary dominance is over…. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening…. Conversely, fiscal expansion now provides an unqualified economic stimulus because there is no risk of interest rates rising significantly… perhaps not until the end of the decade…”

6. Linda Greenhouse: The Roberts Court’s “Greatest Threat to Public Confidence”: “Late on a Friday night earlier this month, the Supreme Court voted in another case from Texas to permit the state’s voter ID law, the strictest in the country, to take effect… prevent as many as 600,000 Texans, 4.5 percent of all those registered, from voting next month. The impact, Judge Nelva Gonzales Ramos found, would fall disproportionately on black and Latino Texans. She ruled that the law violated Section 2 of the Voting Rights Act of 1965…. The six justices who let the stay remain in effect didn’t bother to explain themselves beyond the word ‘denied.’ That left it to Justice Ruth Bader Ginsburg and two others, Justices Sonia Sotomayor and Elena Kagan, to explain in dissent what was wrong with that outcome…. ‘The greatest threat to public confidence in elections in this case,’ Justice Ginsburg said, ‘is the prospect of enforcing a purposefully discriminatory law, one that likely imposes an unconstitutional poll tax and risks denying the right to vote to hundreds of thousands of eligible voters.’ A law, in other words, that in the full glare of publicity and on the verge of a highly polarized election, threatens destruction to the social fabric in the most dangerous way, by shutting thousands of citizens out of the democratic process of choosing their leaders. ‘There is no right more basic in our democracy than the right to participate in electing our political leaders,’ Chief Justice John G. Roberts Jr. wrote for the court in April of this year. His subject then was the right to spend money in politics, not the right to vote. If people conclude that the current Supreme Court majority cares more about the first than the second–surely a logical inference–the court will have entered a dangerous place. And so–as a conservative justice once realized in another context–will the country.”

7. 
   Matt O’Brien: This is why the economy has fallen and it can’t get up: “The chart… shows how much more pessimistic the Congressional Budget Office (CBO) has become about the economy, revising its estimate of potential economic down in each of the last seven years…. This is scary stuff…. If it’s right, it means that the Great Recession has made us permanently poorer…. But why hasn’t this big crash been followed by a big comeback? Well, like everything else in economics, it comes down to two things: supply and demand. Larry Summers, who put this chart together, points out that the economy has needed lower and lower interest rates just to get enough investment to create jobs for everyone who wants one…. Not only that, but this ‘secular stagnation’ could turn deficient demand into deficient supply, too. It’s what economists call hysteresis, and the idea is that a long slump can hurt the economy’s productive capacity…. The economy can’t recover on its own, and if it doesn’t soon it might never be able to. We need more inflation, more infrastructure spending, and less tut-tutting about the deficit that… isn’t an urgent problem….”

8. William Dupor and Peter B. McCrory: Fiscal Policy Spillovers: Points of Employment to Places of Residence: “Using cross-county Census Journey to Work commuting data, we cluster U.S. counties into local labor markets, each of which we further partition into two subregions. We then compare differential labor market outcomes and Recovery Act spending at the regional and subregional levels using instrumental variables. Among pairs of subregions, we find evidence of fiscal policy spillovers. For example, $1 of Recovery Act spending in a large subregion increases its own wage bill by $0.79 and increases the wage bill in its neighboring subregion by $0.59. We find similar spillover effects when we replace the wage bill with employment as our measure of economic activity. Next, we build a dynamic equilibrium trade model with interregional commuting capable of propagating these spillovers across regions.”

Should Be Aware of:

• Arthur Chu: I’m not “that creepy guy from the Internet”: How Gamergate gave the geek community a bad name – Salon.com
• Kash Mansouri: Transfer Pricing Economics | News and analysis from the arcane world of transfer pricing.
• Rex Nutting: As you head to the polls, remember who wrecked the economy
• David Roberts: Is this House Republican about to lose to a climate hawk?

 

1. Nick Rowe: “There’s a Second Macroeconomic Fallacy…. ‘If you want higher interest rates then the central bank should just set a higher interest rate, duh!’… We saw this fallacy at work in Sweden recently. The Riksbank wanted higher interest rates, to reduce the dangers of financial instability, so it set a higher interest rate. But the only result was that the Riksbank needed to set an even lower interest rate a little while later. Lars Svensson understood the Interest Rate Fallacy, but then ordinary people are not Lars Svensson…”

2. Jamelle Bouie: Mississippi, the Affordable Care Act, and racism: The state’s failures are rooted in its violent and racist history: “Driven by its high poverty rate, Mississippi ranks low on health and wellness. It has one the highest rates of obesity, heart disease, and diabetes in the country, as well as the highest mortality rate for infants and adults. These ills are worst among its black residents: 43.2 percent of Mississippi blacks are afflicted by obesity and its associated problems and 44 percent live at or below the poverty line, compared with a—still high—30.2 percent obesity rate and 16 percent poverty rate for whites. Which is to say that, more than anywhere else, the Affordable Care Act is necessary in Mississippi. But, as Sarah Varney describes in a vital piece for Politico Magazine, the state’s Tea Party–tinged Republican leadership—including Gov. Phil Bryant—refuses to budge. Not only did it shutter a state-run private exchange for individuals to purchase health insurance, it refused the Medicaid expansion, which would have extended coverage to those living in desperate poverty. The latter consequence is especially destructive…. Mississippi has poor social outcomes and a threadbare safety net. It also has—and has long had—the largest black population in the country. And it’s where slavery was very lucrative, and Jim Crow most vicious. This is not a coincidence. In Mississippi—as in the rest of the South—white supremacy brought a politics of racist antagonism…. Where they existed, public services were sparse and utterly segregated. Anything public had to be kept separate from blacks, or degraded, if that wasn’t possible. To get a sense of the scale of white resistance in Mississippi, consider this: During the civil rights movement, white supremacists built a network of state and private agencies to wreak havoc on black activists with surveillance, economic reprisals, and extreme violence…. More than a half-century later, and all of this is dead. But the ideas and culture it built are not. And why would they be? For nearly a 100 years, Mississippi was a white supremacist police state. Of course this made a mark on its culture. Of course these ideas of exclusion—and specifically, of racial hostility to outside interference and public goods—are still embedded in the structure of its politics…”

3. Aleksi Aaltonen and Stephan Seiler: The value of open content production: “Many organisations are developing open platforms to create, store, and share knowledge. This column analyses editing data by Wikipedia users to show how content creation by individuals generates significant ‘spillover’ benefits, encouraging others to contribute to the collective process of knowledge production.”

Jan Hatzius:: Goldman Disagrees With The Fed On Labor Market Slack: “We disagree with the [FOMC’s] view…

on labor market slack. While the unemployment rate is now below 6% and the explicit phrase in the FOMC statement that ‘…underutilization of labor resources is gradually diminishing…’ is factually correct, the implicit notion that underutilization is no longer ‘significant’–the term used in the July and September statement–looks inconsistent with the employment and wage data…

Anatole Kaletsky: The takeaway from six years of economic troubles? Keynes was right: “The policy experiments… since… 2008…

…The main lesson is that government decisions on taxes and public spending have turned out to be more important… than the monetary experiments…. Fiscal policies have been very different and the divergence in outcomes… has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks. Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth…. The six years since 2008 have provided strong empirical support for the supposedly outmoded Keynesian view that government borrowing is more powerful than monetary policy in stimulating severely depressed economies and pulling them out of recession….

The underlying reason… is a matter of simple arithmetic… should not be open to debate…. [With] ‘deleveraging’… in the private sector… arithmetic shows that economic balance can only be restored if some other sector of the economy spends more than its income…. Monetarism… assum[ed]… interest rates could always be reduced sufficiently to stimulate private investment, discourage private savings…. In the era of high inflation when monetarism was introduced, the idea… was reasonable enough…. Ironically… the very success of monetarism and central banking in conquering inflation now means that the era of monetary dominance is over…. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening…. Conversely, fiscal expansion now provides an unqualified economic stimulus because there is no risk of interest rates rising significantly… perhaps not until the end of the decade…

Secular Stagnation

Princeps Cogitationis: If I am going to hold down my consulting and speech-making jobs, I need to understand what Larry Summers is talking about here:

Larry Summers: What to do about secular stagnation?

But it is too long! 3000 words! Help! What can I do?

Oeconomicarus: But I thought you read 300 books a year?

Princeps Cogitationis: I read the last chapter of 300 books a year. Then I read three short reviews of each. And then I opine fearlessly. Working through a difficult 3000-word argument and assessing it is not a good use of my time.

Oeconomicarus: So you want me to use my time enlightening you so that you can stamp your brand on my thoughts and make money off of them?

Princeps Cogitationis: Exactly!

Oeconomicarus: Were you not a literary figure of my rhetorical imagination, and did my Demiurge not have the opportunity to attempt to use twenty first-century communications technologies to leverage this dialogue across an audience global in scope, I would tell you to go where you deserve.

Princeps Cogitationis: But you won’t, will you?

**Oeconomicarus: No

Princeps Cogitationis: Well?

Knut Wicksell: You need to start by recognizing that financial markets powerfully influenced by central banks set the economy’s (safe) real interest rate; that when this market (safe) real interest rate is below the economy’s current “natural” interest rate we have (unexpected) inflation; that when this market (safe) real interest rate is above the economy’s current “natural” interest rate we have depression; and that when this market (safe) real interest rate is at the economy’s current “natural” interest rate we have prosperity (and stable inflation)…

Speculatoricus: And you need to start by recognizing that one factor that can raise the economy’s current (safe) “natural” interest rate is wild and enthusiastic financial overspeculation–but that such “bubbles” can do so only temporarily and unsustainably…

Accumulator: And you need to start by recognizing that no matter what it does the central bank cannot push the market (safe) real interest rate below -π, where π is the current rate of inflation. Because savers can always hoard goods or cash, the market nominal interest rate cannot fall below zero, which means the market (safe) real interest rate cannot be less than the rate of inflation.

Princeps Cogitationis: The four of you have lost me.

Oeconomicarus: (To Speculator, Accumulator, and Knut Wicksell) SHUT UP!! (to Princeps Cogitationis): The central bank controls the market interest rate, and needs to set it no higher than the economy’s natural interest rate to avoid depression. But when inflation is low, the natural interest rate may be so negative that even when the central bank pushes the market interest rate to zero it still doesn’t do the job! OK?

Princeps Cogitationis: OK. But what is this about bubbles and inflation?

Oeconomicarus: If the natural interest rate in terms of money is stuck at less than zero, a higher rate of inflation can raise it and bubble psychology can raise it–both make people less eager to hold cash and more eager to put their money to work, and so both raise the natural interest rate in terms of money, and then the central bank can do its job of avoiding depression.

Princeps Cogitationis: But?

Oeconomicarus: Bubbles are, by their nature, unsustainable–hence not a permanent solution–and disruptive. They are not a good answer to a situation in which the economy’s natural rate of interest is less than zero. Price stability–an inflation rate of 2%/year or less–is also a good thing to have: it makes business and other economic decisions more rational. Hence if at low inflation the non-bubble natural rate of interest in money terms gets stuck less than zero, we have a big macroeconomic problem. Larry Summers says that it is, and we do.

Princeps Cogitationis: So what is the way out?

Oeconomicarus: One way is a higher inflation target than our current 2%/year–or actually 1.75%/year–but Larry doesn’t like that for some reason. The second way is: “increased public investment, reduction in structural barriers to private investment… promot[ing] business confidence”. The third way is: “basic social protections so as to maintain spending power… reduc[ing] inequality… redistribut[ing] income towards those with a higher propensity to spend…”

Clio: Seems to me that I have heard of these three before…

Oeconomicarus: Yes. The third is basically J.A. Hobson’s Imperialism–that an unequal income distribution either required governments to dissipate huge amounts of wealth in conquest and colonization or suffer chronic depression. The second is, in a way, Hayek: that when the long-run rate of profit is not high enough to support the roundabout investments made, overaccumulation is inevitable, and it will then lead to necessary depressions. And the first is basically Friedman’s monetarist k%/year money-stock growth rule as a “neutral” monetary policy, with the in petto corollary that the money-stock growth rate has to be high enough to give enough of an incentive to spend liquid assets for monetarism to gain traction…

Princeps Cogitationis: So why is the problem showing up now?

Oeconomicarus: Summers:

Slower population and possibly technological growth means a reduction in the demand for new capital…. Lower-priced capital goods means… given… saving… purchase[s] more capital…. Iconic cutting edge companies have traditionally needed to go the market to support expansion. Today leading edge companies like Apple and Google are attacked for holding on to huge cash hoards. Rising inequality… raise[s]… income going to those with a lower propensity to spend…. Greater risk aversion… and increased regulatory burdens… debt overhangs… increased uncertainty discourages borrowing… raise the wedge between safe liquid rates and rates charged to borrowers…

Jean-Baptiste Say: But the market can fix it, right? I mean, as long as there are any ways to durably store purchasing power, all you have to do is push the real interest rate below zero for long enough and demand for investment in such storage will rise to get us to full employment, right?

Oeconomicarus: Not if a lack of trust in financial markets creates a failure to mobilize the economy’s risk-bearing capacity…

Thrasymachus: How much would you trust Citigroup or JPMC right now if it told you it had a gold-plated risk-free profitable long-run investment vehicle that you could buy?

Princeps Cogitationis: So if we don’t fix this, what happens to us?

Oeconomicarus: Perhaps a 15% reduction in our prosperity relative to what we might have attained, followed by permanently slower growth thereafter:

Potential output has declined almost everywhere and in near lockstep with declines in actual output…. When enough investment is discouraged in physical capital, work effort and new product innovation… ‘Lack of Demand creates Lack of Supply’… potential declines, the [natural rate of interest] rises, restoring equilibrium, albeit not a very good one…

Princeps Cogitationis: Suppose I sign up for Summers’s “Third Way” policy of radical income redistribution on the first hand, restoration of business confidence and increases in the rate of profit via the government providing various puts to risk-takers and entrepreneurs on the second hand, and aggressive expansionary infrastructure-oriented fiscal policy on the third hand–and it doesn’t work. What is wrong with a higher inflation target?

Apollo: I must say, it does seem rather Delphic: Summers says:

Even if the zero interest rate constraint does not literally bind, there is the possibility that the positive interest rate consistent with full employment is not consistent with financial stability. Low nominal and real interest rates… increase risk taking as investors reach for yield, promote irresponsible lending as coupon obligations become very low and easy to meet, and make Ponzi financial structures more attractive as interest rates look low relative to expected growth rates…. Operating with a higher inflation rate target… or… finding ways such as quantitative easing that operate to reduce credit or term premiums… are also likely to increase financial stability risks…

Oeconomicarus: Perhaps it is best to say that effective price stability–the expectation of stable 2%/year inflation–is a very costly, hard-won, and valuable property of a market economy. It greatly reduces inflation-tax distortions and allows for more accurate economic calculation. It should not lightly be thrown away. And there is no reason to throw it away: progressive income redistribution, the proper mobilization of the economy’s entrepreneurial risk-bearing capacity, and a proper infrastructure-investment oriented fiscal policy can in all likelihood do the full job by themselves.

Princeps Cogitationis: You have just made me sit through a twenty-minute dialogue! I could have read Summers’s original piece in ten minutes!

Thrasymachus: But you wouldn’t have read it, would you? And if you had you wouldn’t have understood it because you would still be ignorant of the proper intellectual context.

Princeps Cogitationis: But how do I boil this down to soundbites? I need soundbites–preferably scary ones about risks that make people sit up and pay attention!

Oeconomicarus: Sorry. Can’t help you. The secular stagnation income has very high asset prices and healthy profits because the lousy labor market produces a depressed labor share. It’s not very good for entrepreneurs. But it’s not the kind of thing to scare the currently rich–that is one big reason we are right now in it.

Thrasymachus: If you want soundbites, go over there to practice “We just jumped the gun on our forecast of hyperinflation! Obamacare is collapsing under its own weight! Massive debasement from quantitative easing is still great threat! Lowering interest rates is a cause of deflation! The spike in the VIX this October proves it” with John Cochrane, Niall Ferguson, Douglas Holtz-Eakin and company…

Princeps Cogitationis: Douglas Holtz Eakin?

Thrasymachus: Yep: Holtz-Eakin says he is going to declare victory, someday:

“The clever thing forecasters do is never give a number and a date. They are going to generate an uptick in core inflation. They are going to go above 2 percent. I don’t know when, but they will…”

plus:

There once was a Fed that did QE II
But got no growth for me and you
It then doubled its bet
Until it tapered out, yet
They still don’t know what to do

Oeconomicarus: (whimpering) But it was QE III, not QE II (sob)…

Apollo: What October 2014 spike in the VIX?

Thrasymachus: You need to look more closely:

or:

Princeps Cogitationis: But I don’t want my soundbites to be wrong! And I do need soundbites!

Oeconomicarus: Tough…

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