…Factory output across the 18 countries that use the euro slumped in August, driven by the largest decline in the manufacture of capital goods since the months following the collapse of Lehman Brothers, and possibly reflecting a similar decline in global business confidence. The European Union’s statistics agency Tuesday said production by factories, mines and utilities during August was 1.8% lower than in July, and 1.9% lower than in the same month of 2013…. The decline more than reversed a 0.9% gain in July, and suggests it is possible output for the third quarter as a whole will be lower than for the second quarter…
Category: Equitablog
Over at Grasping Reality: Monday DeLong Smackdown: Macroeconomy Mean-Reversion Edition
Over at Grasping Reality: Monday DeLong Smackdown: Macroeconomy Mean-Reversion Edition: Robert Waldmann saves me from having to read further in David Graeber’s Debt: The First Five-Thousand Mistakes this Monday… On unemployment-rate mean-reversion:
Robert Waldmann: ‘I will attempt a DeLong smackdown…
…Your analysis is notably different from Paul Krugman’s analysis of private sector employment…. The difference is that you impose the assumption that everything before 2008 was the same. In contrast, Krugman argues (and argued in 2008) that financial crisis recessions are different from inflation fighting recessions. Spring 91 through (at least) Spring 93 saw the ‘jobless recovery’. In 1993 you were attempting to understand why things were different pre- and post-1991. The 2001 mini-recession was followed by recovery with declining employment–the ‘job-loss recovery’. At the time, you wrote something was going very wrong with the US labor market. Now there is a desperate need for jobs and you don’t see a pattern in jobless, job loss, and job lust.”
Infrastructure Investment Truly a No-Brainer : Tuesday Focus for October 14, 2014
I note the publication of the IMF World Economic Outlook and its chapter 3 calling for North Atlantic economies to borrow more and spend it on infrastructure because, right, now in today’s exceptional circumstances, it is–as Larry Summers and I pointed out in 2012–a policy that is self-financing does not increase but rather reduces the relative burden of the national debt.
It is thus time for Larry and me–and everyone else who has been doing the arithmetic–to take a big victory lap.
We have had no effect on policy in the North Atlantic in the past 2 1/2 years. But we were (and are) right. And it is important to register that–both so that our intellectual adversaries rethink their models and thus their positions, and so that the North Atlantic economic policymakers can do better next time. And next time is, come to think of it, right now: interest rates on the debts of reserve currency-issuing sovereigns are no higher, infrastructure gaps are larger, and output gaps are at least as large as they were 2 1/2 years ago. It’s not too late to do the right thing, people!
…for countries with infrastructure needs, the combination of low interest rates and mediocre growth mean that it’s time for an investment push. What’s at stake: For countries with infrastructure needs, the combination of low interest rates and mediocre growth mean that it’s time for an investment push. While Brad DeLong and Lawrence Summers already laid out the theoretical case in a 2012 Brookings paper, the empirical case was laid out this week in Chapter 3 of the latest IMF World Economic Outlook.
Lawrence Summers writes that in a time of economic shortfall and inadequate public investment, there is for once a free lunch – a way for governments to strengthen both the economy and their own financial positions. Greg Mankiw writes that the free-lunch view is certainly theoretically possible (just like self-financing tax cuts), but we should be skeptical about whether it can occur in practice (just like self-financing tax cuts).
Abiad and al. write on the IMF blog that the evolution of the stock of public capital suggests rising inadequacies in infrastructure provision. Public capital has declined significantly as a share of output over the past three decades in both advanced and developing countries. In advanced economies, public investment was scaled back from about 4 percent of GDP in the 1980s to 3 percent of GDP at present (maintenance spending has also fallen, especially since the financial crisis).
This makes a very strong case for sharply increasing public investment in a depressed economy
Paul Krugman writes that this is disinvestment madness. Real interest rates are extremely low, indicating that the private sector sees very little opportunity cost in using funds for public investment. There has been a lot of slack in the labor market, so that many of the workers one would employ in public investment would otherwise have been idle–so very little opportunity cost there either. This makes a very strong case for sharply increasing public investment in a depressed economy; a case that doesn’t rely on claims that there is a large multiplier, although there’s every reason to believe that this is also true.
The authors of the WEO’s chapter 3 write that in contrast to the large body of literature that has focused on estimating the long term elasticity of output to public and infrastructure capital using a production function approach, the IMF analysis adopts a novel empirical strategy that allows estimation of both the short- and medium-term effects of public investment on a range of macroeconomic variables. Specifically, it isolates shocks to public investment that can plausibly be deemed exogenous by following the approach of smooth transition VARs of Auerbach and Gorodnichenko (2012, 2013), where the shocks are identified as the difference between forecast and actual investment. In the WEO chapter, the forecasts of investment spending are those reported in the fall issue of the OECD’s Economic Outlook for the same year.
The positive effects of increased public infrastructure investment are particularly strong when public investment is undertaken during periods of economic slack and monetary policy accommodation
The authors of the WEO’s chapter 3 write that a problem in the identification of public investment shocks is that they may be endogenous to output growth surprises. But the public investment innovations identified are only weakly correlated (about –0.11) with output growth surprises. Another possible problem in identifying public investment shocks is a potential systematic bias in the forecasts concerning economic variables other than public investment, with the result that the forecast errors for public investment are correlated with those for other macroeconomic variables. To address this concern, the measure of public investment shocks has been regressed on the forecast errors of other components of government spending, private investment, and private consumption.
Abiad and al. write on the IMF blog that the benefits depend on a number of factors. The authors find that the positive effects of increased public infrastructure investment are particularly strong when public investment is undertaken during periods of economic slack and monetary policy accommodation, where additional public investment spending is not wasted and is allocated to projects with high rates of return and when it is financed by issuing debt has larger output effects than when it is financed by raising taxes or cutting other spending.
Mario Monti writes that while a simplistic stability pact may have been the right choice when the euro was in its infancy, Europe can no longer afford to stick with such a rudimentary instrument. By failing to recognize the proper role of public investment, it has pushed governments to stop building infrastructure just when they should have built more. What is needed is not the flexibility to deviate from the rules, but rules that are economically and morally rigorous. The new Commission should announce a proposal for updating the rules on fiscal discipline, to reflect the role of productive public investment. The commission would then enforce the existing stability pact while allowing for the favorable treatment of public investment within the limits set out in 2013.
Europe needs mechanisms for carrying out self-financing infrastructure projects outside existing budget caps
Lawrence Summers writes that Europe needs mechanisms for carrying out self-financing infrastructure projects outside existing budget caps. This may be possible through the expansion of the European Investment Bank or more use of capital budget concepts in implementing fiscal reviews.
And:
…That is, an IMF study suggests that the expansionary effects are sufficiently large that debt-financed infrastructure spending could reduce the debt-GDP ratio over time. Certainly this outcome is theoretically possible (just like self-financing tax cuts), but you can count me as skeptical about how often it will occur in practice (just like self-financing tax cuts). The human tendency for wishful thinking and the desire to avoid hard tradeoffs are so common that it is dangerous for a prominent institution like the IMF to encourage free-lunch thinking.”
The Laffer Curve proposition holds true–tax-rate cuts are self-financing–if, defining α to be the elasticity of production with respect to the net-of-tax rate:
τ > 1/(1+α)
If:
τ = 1/(1+α)
then tax revenue is at its maximum. If:
τ < 1/(1+α)
then the Laffer Curve proposition fails, and tax-rate cuts are not self-financing.
Arguments that the Laffer Curve proposition fails–that tax-rate cuts reduce revenue–are invariably arguments, with various bells and whistles added on, that the economy’s parameter α is in the range from 0.25 to 1, depending, and thus that the critical tax rate τ at which the Laffer Curve proposition becomes true is between 50% and 80%, and thus above the current tax rate t.
Arguments that infrastructure investment is not self-financing should, similarly, invariably be arguments, with bells and whistles, that the net revenue raised ρt–the product of ρ, the comprehensive net rate of return on and thus the income produced by a dollar of infrastructure investment, multiplied by the current tax rate t–is less than the real rate of interest r at which the government must borrow to finance its infrastructure investment:
ρt < r
In a world where the real rate at which the U.S. Treasury can borrow for ten years is 0.3%/year and in which the tax rate t is about 30%, infrastructure investment fails to be self-financing only when the comprehensive rate of return is less than 1%/year.
Now you can make that argument that properly-understood the comprehensive rate of return is less than 1%/year. Indeed, Ludger Schuknecht made such arguments last Saturday. He did so eloquently and thoughtfully in the deep windowless basements of the Marriott Marquis Hotel in Washington DC at a panel I was on.
But Mankiw doesn’t make that argument.
And because he doesn’t, he doesn’t let his readers see that there is a huge and asymmetric difference between:
-
my argument that tax-rate cuts are not (usually) self financing, which at a tax rate t=30% requires only that α < 2.33; and:
-
his argument that infrastructure investment is not self-financing, which at a tax rate t=30% requires that ρ < 1%/year.
To argue that α < 2.33 is very easy. To argue that ρ < 1%/year is very hard. So how does Mankiw pretend to his readers that the two arguments are equivalent? By offering his readers no numbers at all.
The data of economics comes in quantities. We can count things. We should count things. Please step up the level at which you play this game, guys…
Afternoon Must-Read: Òscar Jordà, Moritz Schularick, and Alan M. Taylor: The Great Mortgaging
…(1) Mortgage lending was 1/3 of bank balance sheets about 100 years ago, but in the postwar era mortgage lending has now risen to 2/3, and rapidly so in recent decades. (2) Credit buildup is predictive of financial crisis events, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome. (3) Credit buildup in expansions is predictive of deeper recessions, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome as well…
Things to Read at Lunchtime on October 13, 2014
Must- and Shall-Reads:
- Tyler Cowen: The 2014 Nobel Laureate in economics is Jean Tirole
- Tirole and Pasteur
- Pedro da Costa: Overseas Weakness Dampens Fed Optimism at Home
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NASA: Hottest September On Record Globally Pushes 2014 Closer To Hottest Year On Record: “Last month was the warmest September globally since records began being kept in 1880, NASA reported Sunday. January through September data have 2014 already at the third warmest on record. Projections by NOAA make clear 2014 is taking aim at hottest year on record. Remarkably, this September record occurred even though we’re still waiting for the start of El Niño, which reveals just how strong the underlying trend of human-caused warming is. It’s usually the combination of the long-term manmade warming trend and the regional El Niño warming pattern that leads to new global temperature records. In this country, temperatures were quite hot in the West, and just ‘normal’ or very close to the 1951-1980 average in the East, as this NASA chart shows…”
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Annie Lowrey: Amazon Is Not a Monopoly: “Franklin Foer… arguing that Amazon is a monopoly…. There’s just one problem…. Amazon is not a monopoly…. Foer waives this competitive pressure away…. Businesses compete. Very often the bigger one wins. Foer argues, however, that Amazon’s ‘big-footing necessitates a government response,’ without really explaining why…. He describes us all as complicit in… something. I’m not sure what: ‘We’ve all been seduced by the deep discounts, the monthly automatic diaper delivery, the free Prime movies, the gift wrapping, the free two-day shipping, the ability to buy shoes or books or pinto beans or a toilet all from the same place,’ he writes. ‘But it has gone beyond seduction, really. We expect these kinds of conveniences now, as if they were birthrights.’ Is that really such a bad thing? Amazon relentlessly drives down prices for goods and services and delivers them fast and cheap…. None of this is to say that Amazon should not face new regulations to force it to treat its workers better…. None of this is to say that its harassment of Hachette is right or should be legal or should not face some serious pushback…. But Amazon being a shitty, vicious competitor and Amazon being a monopoly are hardly the same thing.” -
Paul Krugman: How Righteousness Killed the World Economy – NYTimes.com: “Revenge of the Unforgiven: Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt. Sometimes this happens explicitly: In the 1930s F.D.R. helped borrowers refinance with much cheaper mortgages, while in this crisis Iceland is outright canceling a significant part of the debt households ran up…. More often, debt relief takes place implicitly, through ‘financial repression’: government policies hold interest rates down, while inflation erodes the real value of debt. What’s striking about the past few years, however, is how little debt relief has actually taken place…. In major economies, very few debtors have received a break. And far from being inflated away, the burden of debt has been aggravated by falling inflation, which is running well below target in America and near zero in Europe…. But it has been very hard to get either the policy elite or the public to understand that sometimes debt relief is in everyone’s interest. Instead, the response to poor economic performance has essentially been that the beatings will continue until morale improves. Maybe, just maybe, bad news–say, a recession in Germany–will finally bring an end to this destructive reign of virtue. But don’t count on it.” -
Michael Graziano: Are We Really Conscious?:
I believe… we don’t actually have inner feelings in the way most of us think we do…. The brain builds models… and those models are often not accurate…. How does the brain go beyond processing information to become subjectively aware of information? The answer is: It doesn’t…. When we introspect and seem to find… awareness, consciousness, the way green looks or pain feels… those models are providing information that is wrong…. You might object that this is a paradox. If awareness is an erroneous impression, isn’t it still an impression? And isn’t an impression a form of awareness?… Attention: a real, mechanistic phenomenon that can be programmed into a computer chip. Awareness: a cartoonish reconstruction of attention that is as physically inaccurate as the brain’s internal model of color…. Like the intuition that white light is pure, our intuitions about awareness come from information computed deep in the brain. But the brain computes models that are caricatures of real things. And as with color, so with consciousness: It’s best to be skeptical…
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Wolfgang Münchau: Germany’s Weak Point Is Its Reliance on Exports: “What is the reason for Germany’s weakness?… The root cause of the problem is the age-old over-reliance on exports–and on plant and machinery exports in particular…. There are no signs of a strong global recovery, let alone of a global investment boom. It is thus reasonable to expect a mediocre performance by the German economy for a while…. On top of that comes a demographic shock…. Now both the core and the periphery are weak. And policy is not responding sufficiently. Add the two together and it is not hard to conclude that secular stagnation is not so much a danger as the most probable scenario.”
Should Be Aware of:
- William Broad: Transcripts Kept Secret for 60 Years Bolster Defense of Oppenheimer’s Loyalty – NYTimes.com
- Francis Collins: Ebola Vaccine Would Likely Have Been Found By Now If Not For Budget Cuts: NIH Director
- CIE Color System
- Ippuku | Yakitori, Soba and Shochu. Izakaya style dinner in Berkeley, CA
- Cheese Tastings & Cheese Appreciation Events at Green Dirt Farm
- Pseudoerasmus: Piketty & Slave Wealth
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Dani Rodrik: Are Services the New Manufactures?:: “Few serious analysts still believe that the spectacular economic convergence experienced by Asian countries, and less spectacularly by most Latin American and African countries, will be sustained…. Developing countries need a new growth model. The problem is not just that they need to wean themselves from their reliance on fickle capital inflows and commodity booms, which have often left them vulnerable to shocks and prone to crises. More important, export-oriented industrialization, history’s most certain path to riches, may have run its course…. While global supply chains have facilitated entry into manufacturing, they have also reduced the gains in terms of value added that accrue at home…. Can service industries play the role that manufacturing did in the past?… In manufacturing, small developing countries could thrive on the basis of a few export successes and diversify sequentially through time–t-shirts now, followed by the assembly of televisions and microwave ovens, and on up the chain of skill and value.
By contrast, in services, where market size is limited by domestic demand, continued success requires complementary and simultaneous gains in productivity in the rest of the economy…. So I remain skeptical that a services-led model can deliver rapid growth and good jobs in the way that manufacturing once did…” -
John Scalzi: My Annual Plug and Appreciation for WordPress VIP: “I was traveling on October 8, the official anniversary date, but today works just as well for this: Hey, I’ve been using WordPress’ VIP service to host Whatever for six years now, and it has been consistently great during all that time: The site never goes down, never buckles under traffic or spikes, and on the very rare occasions when I do have a concern or issue, it’s addressed quickly, efficiently and by people who are awesome and easy to work with. Which is to say WordPress VIP takes the aggravation out of having a site and allows me to focus here on what I do best, which is write. As I do every year, I unreservedly recommend WordPress VIP for folks hoping to run their sites with minimum possible levels of aggravation. It is the best hosting solution I’ve ever had. Likewise, for those folks who just want a corner of the Web to call their own, I can also recommend the standard WordPress offerings. And, also once again, thanks to the people at WordPress VIP who have helped Whatever be a rock solid presence on the Web for the last six years. You folks are the best.”
Morning Must-Read: Wolfgang Münchau: Germany’s Weak Point Is Its Reliance on Exports
…The root cause of the problem is the age-old over-reliance on exports–and on plant and machinery exports in particular…. There are no signs of a strong global recovery, let alone of a global investment boom. It is thus reasonable to expect a mediocre performance by the German economy for a while…. On top of that comes a demographic shock…. Now both the core and the periphery are weak. And policy is not responding sufficiently. Add the two together and it is not hard to conclude that secular stagnation is not so much a danger as the most probable scenario.
Hope is not a plan.
Morning Must-Read: Joe Romm: NASA: Hottest September On Record Globally Pushes 2014 Closer To Hottest Year On Record
…since records began being kept in 1880, NASA reported Sunday. January through September data have 2014 already at the third warmest on record. Projections by NOAA make clear 2014 is taking aim at hottest year on record. Remarkably, this September record occurred even though we’re still waiting for the start of El Niño, which reveals just how strong the underlying trend of human-caused warming is. It’s usually the combination of the long-term manmade warming trend and the regional El Niño warming pattern that leads to new global temperature records. In this country, temperatures were quite hot in the West, and just ‘normal’ or very close to the 1951-1980 average in the East, as this NASA chart shows…”
Morning Must-Read: Annie Lowrey: Amazon Is Not a Monopoly
…There’s just one problem…. Amazon is not a monopoly…. Foer waives this competitive pressure away…. Businesses compete. Very often the bigger one wins. Foer argues, however, that Amazon’s ‘big-footing necessitates a government response,’ without really explaining why…. He describes us all as complicit in… something. I’m not sure what: ‘We’ve all been seduced by the deep discounts, the monthly automatic diaper delivery, the free Prime movies, the gift wrapping, the free two-day shipping, the ability to buy shoes or books or pinto beans or a toilet all from the same place,’ he writes. ‘But it has gone beyond seduction, really. We expect these kinds of conveniences now, as if they were birthrights.’ Is that really such a bad thing? Amazon relentlessly drives down prices for goods and services and delivers them fast and cheap…. None of this is to say that Amazon should not face new regulations to force it to treat its workers better…. None of this is to say that its harassment of Hachette is right or should be legal or should not face some serious pushback…. But Amazon being a shitty, vicious competitor and Amazon being a monopoly are hardly the same thing.
- to protect their hardcover markets by reducing the utility of ebooks by imposing onerous DRM on them;
- thinking that even though this then handed a near-monopoly over ebooks to kindle because of first-mover and lock-in effects;
- Amazon would then share its monopoly ebook profits with them;
- and when the big publishers found out this was not true, they persuaded Apple to help them organize a cartel to try to force Amazon to share some of the ebook monopoly profits;
- at which point the Justice Department slapped them down.
If the big publishers wanted to break Amazon’s ebook monopoly tomorrow they could by simply issuing DRM-free ebooks to anyone who had a kindle file. But they really, really do not want to do this. If Hachette does not like the way that Amazon is negotiating with it about the terms under which it can get its books on Kindles, Hachette can solve this problem tomorrow by selling kindle ebooks to kindle owners directly and so bypass Amazon.
The big publishers are a technologically-regressive cartel that collectively have a near-monopoly of print books; Amazon is a technologically-progressive monopoly wannabe of ebooks. Amazon’s wannabe monopoly status was created by and is dependent on the unwillingness of the big publishers to do anything that might accelerate the decline of their hardcover market. That does not seem to me to create on obvious case for the government to put its thumb on the scales on the publishers’ side.
Morning Must-Read: Paul Krugman: How Righteousness Killed the World Economy
…Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt. Sometimes this happens explicitly: In the 1930s F.D.R. helped borrowers refinance with much cheaper mortgages, while in this crisis Iceland is outright canceling a significant part of the debt households ran up…. More often, debt relief takes place implicitly, through ‘financial repression’: government policies hold interest rates down, while inflation erodes the real value of debt. What’s striking about the past few years, however, is how little debt relief has actually taken place…. In major economies, very few debtors have received a break. And far from being inflated away, the burden of debt has been aggravated by falling inflation, which is running well below target in America and near zero in Europe…. But it has been very hard to get either the policy elite or the public to understand that sometimes debt relief is in everyone’s interest. Instead, the response to poor economic performance has essentially been that the beatings will continue until morale improves. Maybe, just maybe, bad news–say, a recession in Germany–will finally bring an end to this destructive reign of virtue. But don’t count on it.
Bankers got bailed out of their bad loans and got lots of low-interest financial support when they needed it. And with only a few exceptions the senior bankers who were supposed to oversee the system that generated the systemic risk in the crisis did not lose their jobs. Moreover, they did not lose their chips in the game of political bank regulation either.
GM and Chrysler got lots of low-interest financial support when they needed it. But their executive hierarchy got decapitated and their unions took a substantial hit in their pensions.
Homeowners got absolutely nothing–no effective programs to provide large-scale refis either with or without equity kickers attached.
Morning Must-Read: Michael Graziano vs. Rene Descartes
I believe… we don’t actually have inner feelings…
in the way most of us think we do…. The brain builds models… and those models are often not accurate…. How does the brain go beyond processing information to become subjectively aware of information? The answer is: It doesn’t…. When we introspect and seem to find… awareness, consciousness, the way green looks or pain feels… those models are providing information that is wrong…. You might object that this is a paradox. If awareness is an erroneous impression, isn’t it still an impression? And isn’t an impression a form of awareness?… Attention: a real, mechanistic phenomenon that can be programmed into a computer chip. Awareness: a cartoonish reconstruction of attention that is as physically inaccurate as the brain’s internal model of color…. Like the intuition that white light is pure, our intuitions about awareness come from information computed deep in the brain. But the brain computes models that are caricatures of real things. And as with color, so with consciousness: It’s best to be skeptical…
That there is no single energy transition that produces a photon of white light does not mean that WhiteLight is not a thing. That subjective awareness is the mind’s approximate and subjective model of its attention processes, and that subjective awareness of one’s subjective self is the mind’s approximate and subjective model of what happens when it tries to focus its attention on itself does not mean that “consciousness” is not a thing.