Category: Equitablog

I find myself agreeing with Jonathan Chait here: Tom Frank’s big problem is that he doesn’t want his imagination limited by information about what policies would actually work…

Jonathan Chait: Have Nerds Betrayed the Left?: “I pointed out that [Tom] Frank… held…

…a lack of familiarity with even the basic concepts of political science, which can explain how structural limits (like divided government and polarization) constrain the domestic powers of a president in a way that cannot be broken with ideological willpower or inspirational speechmaking. Now Frank has written a column… assailing the influence of political science, which he views as a kind of corrupting force draining the left of its populist fervor…. A good chunk of Frank’s polemic is taken up with generalized experts of all kinds…. He distrusts them all as corrupt handmaidens of power….

After establishing his anti-academic-populist bona fides, Frank provides his readers with an example of the kind of political-science-driven analysis that so perturbs him: a column by New York Times election analyst Nate Cohn that explains why the House map is prohibitively tilted toward the Republican Party, making the race for control of the chamber essentially out of reach this fall. ‘It is this kind of strikingly unoriginal thinking’, responds Frank, ‘which I am sure is shared by the blue team’s high command, that explains why the Democratic Party looks to be headed for another disaster this fall’. Of course, if you believe Cohn, it is not the Democratic Party’s awareness of the GOP’s prohibitive structural advantage but the prohibitive structural advantage itself that explains why the Republicans are going to win the midterm elections….

At the end of his rant, Frank almost seems to concede that his problem with political science is that it leads to conclusions he finds inconvenient. ‘The fatalism here may be science-driven’, he concedes, ‘but still it boggles the mind’. Let that phrase roll around in your head for a moment. Frank has just told you everything you need to know here.

Must- and Shall-Reads:

• Megan Geuss: Why Apple Pay could succeed where others have had underwhelming results. Not because Apple is a huge and influential company, but because the timing is right
• Lance Taylor: Structuralist Response to Piketty’s Capital in the Twenty-First Century
• Cardiff Garcia: The Fed can take its time, if it wants to
• Wei Gu: Almost Half of Wealthy Chinese Want to Leave, Study Shows

1. Derek Thompson: How the Rich and Poor Spend Money Today—and 30 Years Ago: “The biggest difference between the lowest- and highest-earning Americans is what they spend on housing. Less than 40 percent of the bottom quintile owns a home, compared with 90 percent of Americans at the top. As a result, the top quintile outspends the bottom on housing by $21,000 a year (remember: that gap alone is basically the entire budget of a lower-income family) and $13,000 more on transportation. At just about every income level, we spend about half our income on living and getting around. But after houses and transportation, what are the biggest spending gaps between the top and bottom quintiles today? The poor spend nearly twice as much (as a share of their budget) on food at home and utilities; the rich spend more on entertainment and education.”

2. Daniel Kuehn: Documents on Koch intentions on FSU econ department hiring here. Note, this is an internal memo about the Koch’s expectations. Because of the outrage this caused (even in the absence of these documents) the advisory group was eventually restricted in how much they could impact these decisions. This is really not good for anyone that cares about economics as an objective science and people who receive Koch money (which is not inherently bad at all of course), should be saying that.”

3. Dean Baker: Influencing the Debate from Outside the Mainstream: Keep it Simple: “The route for making progress is to get outside of the profession. For this it is necessary to appeal to people in policy positions, to reporters, to the general public, or to people who might follow economic debates, but don’t have extensive backgrounds in economics. And it is important to recognize what you are asking these people to do. You are asking these people to accept your claims over the claims of the most prominent economists in the profession. This means that you better keep what you have to say simple…. To my mind the gold standard is a chart with two bars, where bar A is bigger than bar B…. The first, and perhaps best, example is the debate over the famous Reinhart-Rogoff 90 percent debt cliff…. President Bush said that he had just gained some political capital and that he intended to now use it. The task at hand was privatizing Social Security…. The big potential attraction to many people who were not especially political was the promise of getting a much higher benefit on average from investing their money in the stock market…. The problem with this assumption is the price to earnings ratios in the stock market were far above their historic average…. Arguing this point directly on its merits required more attention from reporters and people in policy positions than they were prepared to sacrifice; so we… developed the ‘no economist left behind test’… write down decade by decade averages for dividend yields and capital gains that would add up to give their 7.0 percent real return over Social Security’s 75-year forecasting horizon…. Finally Paul Krugman blasted the test into the national debate with a column in early February…”

4. The New Yorker: Briefly Noted: The Teacher Wars, by Dana Goldstein (Doubleday): “This engaging history chronicles a hundred and seventy-five years of educational-reform initiatives, union conflicts, and moral panic, from the nineteenth-century ideal of schoolhouses as “secular churches” to denunciations of the perceived zealotry of Teach for America. Goldstein ably sketches reformers past and present, asserting that the common force behind each new wave of school reforms is evangelical conviction, and that new movements often seem based more on faith than on factual evidence. Thorough and fair-minded, she offers limited proposals for practical improvements, but her ability to illuminate each new wave’s ‘hype-disillusionment cycle’ is a welcome treatment of a fraught subject.”

5. Paul Krugman: How to Get It Wrong: “The enormous intellectual failure of recent years took place at several levels…. In what sense did economics go astray?… The widespread conviction among economists that such a crisis couldn’t happen… an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly…. Assuming away irrationality and market failure meant assuming away the very possibility of the kind of catastrophe that overtook the developed world six years ago. Still, many applied economists retained a more realistic vision of the world, and textbook macroeconomics, while it didn’t predict the crisis, did a pretty good job of predicting how things would play out in the aftermath…. But while economic models didn’t perform all that badly after the crisis, all too many influential economists did–refusing to acknowledge error, letting naked partisanship trump analysis, or both: ‘Hey, I claimed that another depression wasn’t possible, but I wasn’t wrong, it’s all because businesses are reacting to the future failure of Obamacare.’… Would it have mattered if economists had behaved better? Or would people in power have done the same thing regardless?… The big problem with economic policy is not, however, that conventional economics doesn’t tell us what to do. In fact, the world would be in much better shape than it is if real-world policy had reflected the lessons of Econ 101. If we’ve made a hash of things–and we have–the fault lies not in our textbooks, but in ourselves.”

6. Jon Hilsenrath: Fed Chief Yellen Seeks Interest-Rate Consensus: “Chairwoman’s Actions in Her First Six Months Confound View of Her as Strong Advocate of Easy Money…. Her next test is this week. Meeting on Tuesday and Wednesday, Fed officials will discuss whether to shift their guidance on the short-term rate. They also are seeking to complete a new plan for managing the mechanics of future rate changes…. Ms. Yellen spent much of the spring and summer formulating a plan to manage the mechanics of future rate increases…. A new plan, which the Fed could unveil this week, emphasizes two new interest rates. One is a rate paid to banks on money they keep on reserve at the Fed. The other is a rate the Fed will pay money-market funds in trades conducted by the New York Federal Reserve Bank. Shifting these two rates is the planned new mechanism for changing the fed-funds rate. The apparent recent lessening of labor-market progress has eased pressure on the Fed to move relatively quickly toward a higher fed-funds rate. But some officials are pushing, once again, for the Fed to shift its guidance to the public on that rate. Because of the uncertainty on how the job market will play out in the months ahead, more Fed officials want to stop offering assurances the Fed will wait a ‘considerable time’ to move on rates. Ms. Yellen, in her preparations for Tuesday’s meeting, is looking for an approach on which her colleagues can agree.”

Should Be Aware of:

• Nick S.: “Given the recent comments about ogged trolling the blog, I tip my hat to another master of the genre, with Clay Shirky’s defense of Amazon…
• Timothy Ash: Massacre at Ilovaisk proves turning point in Russia’s war against Ukraine
• Josh Brown: Three Reasons the Remainder of 2014 is About Loss Avoidance

1. Ian MacKay: The wind beneath my Ebola virus” “I think it’s a stretch to spend so many words on the chance that an airborne virus will emerge rather than one that causes more bleeding, or less diarrhoea, or more vomiting, or more shedding in sweat, more rash, more hiccups…. Why this really quite complex outcome of air travel, instead of many/any others?… Dr Osterholm did hit some other nails flush with the timber…. West Africa needs fewer promises… more plans that include actual rapid mobilization and on-the-ground experienced leadership… getting beds for sick people… tracing contacts…. Thankfully some promising signs are appearing. The scope of this outbreak has now been guesstimated… 20k-100k…. I list this range rather than extending it to much higher levels because I do still have hope that things will improve and interventions will turn the exponential case growth curves away from the sky and back to the horizon, sooner rather than before entire nations are destroyed. Because that’s what is coming without successful intervention. For now at least, the Ebola virus in 5 countries in and around West Africa has the upper hand. This tiny self-assembling unthinking, thing is totally dependent on our cells to replicate itself–and we are not doing enough to starve it of those cells. It clearly doesn’t ‘need’ to be airborne to spread efficiently.”

2. Justin Cheng et al,: How Community Feedback Shapes User Behavior: “Social media systems rely on user feedback and rating mechanisms for personalization, ranking, and content filtering. However, when users evaluate content contributed by fellow users (e.g., by liking a post or voting on a comment), these evaluations create complex social feedback effects. This paper investigates how ratings on a piece of content affect its author’s future behavior. By studying four large comment-based news communities, we find that negative feedback leads to significant behavioral changes that are detrimental to the community. Not only do authors of negatively-evaluated content contribute more, but also their future posts are of lower quality, and are perceived by the community as such. Moreover, these authors are more likely to subsequently evaluate their fellow users negatively, percolating these effects through the community. In contrast, positive feedback does not carry similar effects, and neither encourages rewarded authors to write more, nor improves the quality of their posts. Interestingly, the authors that receive no feedback are most likely to leave a community. Furthermore, a structural analysis of the voter network reveals that evaluations polarize the community the most when positive and negative votes are equally split.”

4 Scott Lemieux: Since the Beginning of Time, Republicans Have Yearned To Massively Expand Medicaid: “Thomas Frank’s lastest profit-taking Salon column begins with the germ of an interesting argument about the problem of over-reliance on experts. Alas, from there it follows the typical path straight down Pundit’s Fallacy Gulf. Along the way, he makes the usual historical and empirical errors your really don’t need to be a fancy-pants political scientist to identify: ‘In 2010, the two parties repeated the act, with D’s embracing the extremely unpopular Republican bailout strategy (and a more modestly unpopular Republican healthcare program) and R’s pretending to be some kind of ’30s-style protest movement waving signs in the street.’ Omitted: any national Republicans or state-level Republicans not governing alongside massive Democratic supermajorities who supported a massive expansion of Medicaid accompanied by a much more tightly regulated private insurance industry. I also note the implicit argument that the original Medicaid, which left large numbers of poor people ineligible, was ‘real’ liberalism while the ACA’s version, making a significantly superior program available to everyone within 138% of the federal poverty line, was not. Nor do I think there’s anything particularly progressive about letting the entire financial system collapse in 2008. At any rate, the idea that the Democratic Congress in 2009 and 2010 was focused on enacting a ‘Republican’ agenda is simply absurd. This particular howler is the culmination of the anti-history we’re familiar with…”

When economic historians write about how it happened that under Fed Chair Ben Bernanke the U.S. economy performed worse than it had under any Fed Chair since Eugene Meyer 1930-1933–or maybe, if we are being strict, Arthur Burns 1970-1978–one important reason will be Ben Bernanke’s desire to seek consensus within the FOMC instead of doing what his previous academic analyses suggested was the right thing to do.

In that context, one cannot but find this from Jon Hilsenrath very worrisome:

Jon Hilsenrath: Fed Chief Yellen Seeks Interest-Rate Consensus: “Chairwoman’s Actions in Her First Six Months Confound View of Her as Strong Advocate of Easy Money….

…Many expected Ms. Yellen to steer the central bank toward extending its long period of superlow interest rates. But she has shown herself willing to move toward exiting from that policy as officials found the economy to be on stronger footing. Ms. Yellen has spent much of this year winding down a bond-buying program meant to hold down long-term interest rates and planning for an eventual increase in the short-term rate the Fed controls, a ‘tapering’ begun before her tenure started. With the bond program set to end next month, officials are turning to sensitive discussions about when to raise the short-term rate—and how to signal the move. Her next test is this week. Meeting on Tuesday and Wednesday, Fed officials will discuss whether to shift their guidance on the short-term rate. They also are seeking to complete a new plan for managing the mechanics of future rate changes….

Ms. Yellen spent much of the spring and summer formulating a plan to manage the mechanics of future rate increases. These mechanics have become more complicated because of all the money the central bank has pumped into the financial system since the financial crisis. Traditionally, the Fed has managed its benchmark rate by moving relatively small amounts of money into and out of the banking system. A new plan, which the Fed could unveil this week, emphasizes two new interest rates. One is a rate paid to banks on money they keep on reserve at the Fed. The other is a rate the Fed will pay money-market funds in trades conducted by the New York Federal Reserve Bank. Shifting these two rates is the planned new mechanism for changing the fed-funds rate.

The apparent recent lessening of labor-market progress has eased pressure on the Fed to move relatively quickly toward a higher fed-funds rate. But some officials are pushing, once again, for the Fed to shift its guidance to the public on that rate. Because of the uncertainty on how the job market will play out in the months ahead, more Fed officials want to stop offering assurances the Fed will wait a ‘considerable time’ to move on rates. Ms. Yellen, in her preparations for Tuesday’s meeting, is looking for an approach on which her colleagues can agree.

As best as I have been able to determine, the thinking among the executives and editors of the Washington Post who commissioned and published this piece back in September 2008 was roughly: “We need to publish an economy-is-actually-in-good-shape piece so that the McCain campaign and the Republicans won’t be made at us”. Whether the piece was true, whether the numbers quoted in it were accurate or representative, or even whether the author had a conceptually and analytically interesting perspective did not enter their thinking at all. For none of those conditions were satisfied.

I have been waiting ever since for somebody in the Washington Post to decide that they need to commission somebody to do a deep dive about how and why this piece got commissioned and published, and how they drifted so very very far away from the idea that a newspaper exists to inform its readers about the world.

I suppose I am going to have to keep waiting, and when the last piece of newsprint spins through the Washington Post presses and the last update is posted to the Washington Post servers, it will still not have dared to come clean with its readers about what went so wrong.

For your pleasure:

Donald Luskin (2008): Quit Doling Out That Bad-Economy Line | The Washington Post: “‘It was the worst of times, and it was the worst of times’…

…I imagine that’s what Charles Dickens would conclude about the current condition of the U.S. economy, based on the relentless drumbeat of pessimism in the media and on the campaign trail. In the past two months, this newspaper alone has written no fewer than nine times, in news stories, columns and op-eds, that key elements of the economy are the worst they’ve been “since the Great Depression.” That diagnosis has been applied twice to the housing “slump” and once to the housing “crisis,” to the “severe” decline in home prices, to the “spike” in mortgage foreclosures, to the “change” in the mortgage market and the “turmoil” in debt markets, and to the “crisis” or “meltdown” in financial markets.

It’s a virus–and it’s spreading. Do a Google News search for “since the Great Depression,” and you come up with more than 4,500 examples of the phrase’s use in just the past month.

But that doesn’t make any of it true. Things today just aren’t that bad. Sure, there are trouble spots in the economy, as the government takeover of mortgage giants Fannie Mae and Freddie Mac, and jitters about Wall Street firm Lehman Brothers, amply demonstrate. And unemployment figures are up a bit, too. None of this, however, is cause for depression–or exaggerated Depression comparisons.

Overall, the pessimists are up against an insurmountable reality: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That’s virtually the same as the 3.4 percent average growth rate since–yes–the Great Depression.

Why, then, does the public appear to agree with the media? A recent Zogby poll shows that 66 percent of likely voters believe that “the entire world is either now locked in a global economic recession or soon will be.” Actually, that’s a major clue to what started this thought-contagion about everything being the worst it has been “since the Great Depression”: Politics.

Patient zero in this epidemic is the Democratic candidate for president. As it would be for any challenger, it’s in his interest to portray the incumbent party’s economic performance in the grimmest possible terms. Barack Obama has frequently used the Depression exaggeration, including during a campaign speech in June, when he said that the “percentage of homes in foreclosure and late mortgage payments is the highest since the Great Depression.” At best, this statement is a good guess. To be really true, it would have to be heavily qualified with words such as “maybe” or “probably.” According to economist David C. Wheelock of the Federal Reserve Bank of St. Louis, who has studied the history of mortgage markets for the Fed, “there are no consistent data on foreclosure or delinquency going all the way back to the Depression.”

The Mortgage Bankers Association (MBA) database, which allows rigorous apples-to-apples comparisons, only goes back to 1979. It shows that today’s delinquency rate is only a little higher than the level seen in 1985. As to the foreclosure rate, it was setting records for the day–the highest since the Great Depression, one supposes–in 1999, at the peak of the Clinton-era prosperity that Obama celebrated in his acceptance speech at the Democratic National Convention late last month. I don’t recall hearing any Democratic politicians complaining back then.

Even if Obama is right that the foreclosure rate is the worst since the Great Depression, it’s spurious to evoke memories of that great national calamity when talking about today–it’s akin to equating a sore throat with stomach cancer. According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure. During the Great Depression, according to Wheelock’s research, more than 50 percent of home loans were in default.

Moreover, MBA data show that today’s foreclosures are concentrated in that small fraction of U.S. homes financed by subprime mortgages. Such homes make up only 12 percent of all mortgages, yet account for 52 percent of foreclosures. This suggests that today’s mortgage difficulties are probably a side effect of the otherwise happy fact that, over the past several years, millions of Americans of modest means have come to own their own homes for the first time.

Here’s another one not to be too alarmed about: Obama is flat-out wrong when he frets on his campaign Web site that “the personal savings rate is now the lowest it’s been since the Great Depression.” The latest rate, for the second quarter of 2008, is 2.6 percent–higher than the 1.9 percent rate that prevailed in the last quarter of Bill Clinton’s presidency.

Full disclosure: I’m an adviser to John McCain’s campaign, though as far as I know, the senator has never taken one word of my advice. He’s been sounding a little pessimistic on the economy of late, too. And to be fair, he isn’t immune to the Depression-exaggeration virus, either. At a campaign news conference in July, my fellow adviser Steve Forbes warned that Obama was seeking “the biggest tax increase since Herbert Hoover and the Great Depression.” Factual? Almost certainly not.

But at least Forbes wasn’t dissing the economy–he was dissing Obama. And Obama’s infection by the Depression-exaggeration bug goes way back. His first outbreak came on Oct. 2, 2002, in his famous speech opposing the invasion of Iraq, delivered when he was an Illinois state senator. He said that the invasion was “the attempt by political hacks like Karl Rove to distract us from” a litany of economic troubles including “a stock market that has just gone through the worst month since the Great Depression.”

Quite an exaggeration. When state senator Obama made that remark, the Standard & Poor’s 500 had just dropped 11 percent for the month of September 2002. But stocks dropped twice that much in October 1987. Since the Great Depression, the stock market has had bigger one-month drops on four occasions. Obama’s pessimism on stocks then happened to be as ineptly timed as it was factually incorrect. Exactly one week later, stocks hit bottom, and over the next five years the S&P 500 more than doubled, surging to new all-time highs.

So much for Obama’s hyperbole about our terrible economy. But what about the media’s?

A housing “slump,” a housing “crisis”? A “severe” price decline? According to the latest report from the National Association of Realtors, the median price of an existing home is up 8.5 percent from the low of last February. And according to the U.S. Census Bureau, the median price of a new home is up 1.3 percent from the low of last December. Home prices may not be at all-time highs–and there are pockets of continuing decline in some urban areas — but overall they’ve clearly stopped going down and have started to recover. So why keep proclaiming a “crisis” after it’s over?

“Turmoil” in the debt markets? Sure, but we’ve seen plenty worse. According to the FDIC, there have been a total of 13 bank failures in 2007 and so far into 2008. There were 15 in 1999-2000, the climax of the Obama-celebrated era of Clintonian prosperity. And in recession-free 1988-89, there were 1,004 failures–almost an order of magnitude more than today. Since the Great Depression, the average number of bank failures each year has been 94.

Despite highly publicized losses in subprime mortgage lending, bank equity capital–the best measure of core financial strength–is now $1.35 trillion, more than the $1.28 trillion level of mid-2007, before the “turmoil” even began.

Financial market “crisis” and “meltdown”? Yes, from all-time highs last October, the S&P 500 has fallen 20 percent. But that’s nothing by historical standards. Stocks have often fallen more than that over comparable spans of time. They fell more than twice that much in 1974–which was truly the worst drop since the Great Depression. Even the present 20-percent loss isn’t what it seems. The damage has been heavily concentrated in the financial sector–banks, investment firms and mortgage companies. If you exclude that sector, stocks are off 14.8 percent.

Some economic indicators–export growth and non-defense capital goods orders such as industrial machinery, for example–are running at levels associated with brisk expansion. Others are running at middling levels, such as the closely followed Institute for Supply Management manufacturing index. But it’s actually difficult to find many that are running at truly recessionary levels.

There have been 11 recessions since the Great Depression. And we’re nowhere close to being in the 12th one now. This isn’t just a matter of opinion. Words–even words as seemingly subjective as “recession”–have meaning.

In a new working paper, economist Edward Leamer of UCLA’s Anderson School of Management shows that changes in the unemployment rate, payroll jobs and industrial production almost precisely explain every recession as officially determined by the National Bureau of Economic Research. At present, only the unemployment rate exceeds the recession threshold. The other two factors are far from it. According to Leamer’s paper, we’ll only fall into recession “if things get much worse.”

This would suggest that anyone who says we’re in a recession, or heading into one–especially the worst one since the Great Depression–is making up his own private definition of “recession.” And probably for his own political purposes.

McCain campaign adviser and former U.S. senator Phil Gramm was right in July when he said that our current state “is a mental recession.” Maybe he was out of line when he added that the United States has become “a nation of whiners.” But when it comes to the economy, we have surely become a nation of exaggerators.

Yet Gramm was pilloried for his remarks, and McCain had to distance himself from his adviser by joking that in a McCain administration, Gramm would be ambassador to Belarus. What does it say about our nation that it has become political suicide to state the good news that our economy is not in recession?

Whatever the political outcome this year, hopefully this will prove to be yet another instance of that iron law of economics and markets: The sentiment of the majority is always wrong at key turning points. And the majority is plenty pessimistic right now. That suggests that we’re on the brink not of recession, but of accelerating prosperity.

Maybe this will turn out to be the best of times–at least since the Great Depression.

Dean Baker: Influencing the Debate from Outside the Mainstream: Keep it Simple: “The route for making progress is to get outside of the profession…

…For this it is necessary to appeal to people in policy positions, to reporters, to the general public, or to people who might follow economic debates, but don’t have extensive backgrounds in economics. And it is important to recognize what you are asking these people to do. You are asking these people to accept your claims over the claims of the most prominent economists in the profession. This means that you better keep what you have to say simple…. To my mind the gold standard is a chart with two bars, where bar A is bigger than bar B…. The first, and perhaps best, example is the debate over the famous Reinhart-Rogoff 90 percent debt cliff…. President Bush said that he had just gained some political capital and that he intended to now use it. The task at hand was privatizing Social Security…. The big potential attraction to many people who were not especially political was the promise of getting a much higher benefit on average from investing their money in the stock market…. The problem with this assumption is the price to earnings ratios in the stock market were far above their historic average…. Arguing this point directly on its merits required more attention from reporters and people in policy positions than they were prepared to sacrifice; so we… developed the ‘no economist left behind test’… write down decade by decade averages for dividend yields and capital gains that would add up to give their 7.0 percent real return over Social Security’s 75-year forecasting horizon…. Finally Paul Krugman blasted the test into the national debate with a column in early February…

Daniel Kuehn: Documents on Koch intentions on FSU econ department hiring here. Note, this is an internal memo…

…about the Koch’s expectations. Because of the outrage this caused (even in the absence of these documents) the advisory group was eventually restricted in how much they could impact these decisions. This is really not good for anyone that cares about economics as an objective science and people who receive Koch money (which is not inherently bad at all of course), should be saying that.

Must- and Shall-Reads:

• Richard Mayhew: Healthcare 2020
• Barry Eichengreen: Restructuring Debt Restructuring
• Kahn-Rich Productivity Model Update (August 2014)
• Bill McBride: Calculated Risk FOMC Preview

1. Dylan Matthews: Rethinking Economics Conference on Livestream:

2. **Nick Rowe: What’s special about monetary coordination failures?: “This is a response to Brad DeLong’s and David Glasner’s good posts… [that] forced me to think…. Apples and bananas are perishable, but gold lasts forever. One apple tree produces 100 apples per year, regardless. One banana tree produces 100 bananas per year, regardless. Trees cannot be produced. Gold cannot be produced. Gold is the medium of account. Apples and bananas are priced in gold. Those prices may be sticky…. There are two parallel economies… a barter economy… a monetary exchange economy…. For the second shock (a change in preferences away from apples towards bananas), we get the same reduction in the volume of trade whether we are in a barter or a monetary economy. Monetary coordination failures play no role in this sort of ‘recession’. But would we call that a ‘recession’? Well, it doesn’t look like a normal recession, because there is an excess demand for bananas. For both the first and third shocks, we get a reduction in the volume of trade in a monetary economy, and none in the barter economy. Monetary coordination failures play a decisive role in these sorts of recessions, even though the third shock that caused the recession was not a monetary shock. It was simply… because agents became more patient. And these sorts of recessions do look like recessions, because there is an excess supply of both apples and bananas…. P.S.: I think this is all in Benassy, somewhere. P.P.S.: If you said ‘this is all ISLM, only ISLM with and without barter’, you would be basically right…”

3. Dietz Vollrath: Taxes and Growth: “William Gale and Andy Samwick have a new Brookings paper out on the relationship of tax rates and economic growth…. They do not identify any change in the trend growth rate of real GDP per capita with changes in marginal income tax rates, capital gains tax rates, or any changes in federal tax rules…. Stokey and Rebelo (1995)…. You can see that the introduction of very high tax rates during WWII, which effectively became permanent features of the economy after that, did not change the trend growth rate of GDP per capita in the slightest. The only difference after 1940 in the lower panel is that the fluctuations in the economy are less severe…. Taxes as a percent of GDP don’t appear to have any relevant relationship to growth rates…. Hungerford (2012)… looks at whether the fluctuations in top marginal tax rates (on either income or capital gains) are related to growth rates. You can see in the figure that they are not. If anything, higher capital gains rates are associated with faster growth…. There is no evidence that you can change the growth rate of the economy–up or down–by changing tax rates–up or down. Their conclusion is more coherent than anything I could gin up, so here goes: ‘The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel. However, theory, evidence, and simulation studies tell a different and more complicated story. Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity.'”

4. American Progress on Twitter: “.@EconomicPolicy sets the record straight on who would benefit if we #RaiseTheWage http://t.co/5sIQL2GXIU

Should Be Aware of:

• Richard Layard: The Importance of Mental Health

1. Chris Morran (2013): On 5-Year Anniversary Of Mortgage Meltdown, Those Responsible Are Doing Just Fine “Former Lehman CEO Richard Fuld… with several hundred million dollars in his pocket… has got homes in Connecticut, Florida, and Idaho, and he’s now running his own consulting firm, Matrix Advisors…. Former Bear Stearns CEO Jimmy Cayne isn’t working as hard as Fuld… is holed up in the Plaza Hotel with Heloise, playing in online bridge tournaments…. Merrill Lynch lost $8 billion under the leadership of Stanley O’Neal…. He took his $165 million golden parachute and traded it for aluminum, landing a seat on the board of Alcoa. Ken Lewis’s hubris… Bank of America snatching up Countrywide and Merrill Lynch… didn’t really do his due diligence… walked away with around a quarter of a billion dollars…. Countrywide… Stanford Kurland… second in command…. Kurland bailed on Countrywide in 2006… cashed in $200 million… quietly forming a Countrywide clone called PennyMac…”

2. Martin Longman: The Very Serious Rand Paul: “Sen. Rand Paul (R-Ky.) said on Thursday that if he became president he would repeal all previous executive orders. ‘I think the first executive order that I would issue would be to repeal all previous executive orders’, he said, according to Breitbart News. Isn’t that a great idea? ‘Repealing all executive orders has the potential to undo a large amount of policy. Executive orders, for example, ban assassinations by the United States and organize intelligence agencies under the Director of National Intelligence.’ Hmm. Maybe it’s not such a great idea. ‘”Senator Paul’s statement was meant to emphasize this president’s overt and unconstitutional executive orders, it was not meant to be taken literally”, Paul spokesman Sergio Gor wrote in an email.’ Alrighty then. Never mind. I take it that this falls in the same category as serial plagiarism. It doesn’t matter if you said it or pretended to write it because it wasn’t intended to be taken seriously.”

Dietz Vollrath: Taxes and Growth: “William Gale and Andy Samwick have a new Brookings paper out…

…on the relationship of tax rates and economic growth…. They do not identify any change in the trend growth rate of real GDP per capita with changes in marginal income tax rates, capital gains tax rates, or any changes in federal tax rules…. Stokey and Rebelo (1995)…. You can see that the introduction of very high tax rates during WWII, which effectively became permanent features of the economy after that, did not change the trend growth rate of GDP per capita in the slightest. The only difference after 1940 in the lower panel is that the fluctuations in the economy are less severe…. Taxes as a percent of GDP don’t appear to have any relevant relationship to growth rates…. Hungerford (2012)… looks at whether the fluctuations in top marginal tax rates (on either income or capital gains) are related to growth rates. You can see in the figure that they are not. If anything, higher capital gains rates are associated with faster growth…. There is no evidence that you can change the growth rate of the economy–up or down–by changing tax rates–up or down. Their conclusion is more coherent than anything I could gin up, so here goes: ‘The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel. However, theory, evidence, and simulation studies tell a different and more complicated story. Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity.'”

Nick Rowe produces an explanation of his point of view with which I have only linguistic quibbles:

**Nick Rowe: What’s special about monetary coordination failures?: “This is a response to Brad DeLong’s and David Glasner’s good posts…

…[that] forced me to think…. Apples and bananas are perishable, but gold lasts forever. One apple tree produces 100 apples per year, regardless. One banana tree produces 100 bananas per year, regardless. Trees cannot be produced. Gold cannot be produced. Gold is the medium of account. Apples and bananas are priced in gold. Those prices may be sticky…. There are two parallel economies… a barter economy… a monetary exchange economy….

I am now going to hit both economies with some shocks. 1. Increased demand for gold (g increases), holding prices fixed…. In the barter economy, absolutely nothing happens to the allocation of resources…. There is an excess demand for gold and an excess supply of apples in the apple/gold market. There is an excess demand for gold and an excess supply of bananas in the banana/gold market. But that affects nothing. Agents want to buy gold with apples and bananas, but they can’t…. In the monetary economy there is a recession…. There is an excess demand for gold and an excess supply of apples in the apple/gold market. There is an excess demand for gold and an excess supply of bananas in the banana/gold market. And that affects everything…. Sales of apples and bananas fall until the stock of gold is willingly held…. 2. A switch in demand from apples to bananas… holding prices fixed. In both barter and monetary economies, we get exactly the same result. Banana producers can sell as many bananas as they want, and buy as many apples as they want. Apple producers will be unable to sell as many apples as they want, and unable to buy as many bananas as they want…. 3. An increased demand for fruit trees relative to current consumption of apples and bananas (r falls)…. In the monetary economy, there is a recession. The price of fruit trees rises…. This lowers the rate of return on owning a fruit tree, and this lowers the opportunity cost of holding gold, which increases the demand for gold. It’s exactly the same as… my first case…. In the barter economy, nothing happens to the allocation of resources….

For the second shock… monetary coordination failures play no role in this sort of ‘recession’. But would we call that a “recession”?… There is an excess demand for bananas. For both the first and third shocks, we get a reduction in the volume of trade in a monetary economy, and none in the barter economy. Monetary coordination failures play a decisive role in these sorts of recessions, even though the third shock that caused the recession was… simply an increased demand for fruit trees because agents became more patient. And these sorts of recessions do look like recessions, because there is an excess supply of both apples and bananas…. I think this is all in Benassy, somewhere…. If you said ‘this is all ISLM, only ISLM with and without barter’, you would be basically right…

In my lifetime, I have seen people claim that recessions have been caused by:

1. A decrease (relative to expectations) in the supply of liquid cash money.

2. An increase in the desire to hold liquid cash money.

3. An increase in desired holdings of long-term savings vehicles to transfer wealth from the present into the future

4. An increase in the desire to hold assets that are safe stores of nominal value in the short run–the flip side of a desire to deleverage.

5. A recognition that previous expectations that roundabout methods of production were not as profitable as had been believed, and a consequent increase in the demand for more direct relative to more roundabout methods of production.

6. A belief that the Kenyan Muslim Socialist is about to make owning capital and engaging in enterprise unprofitable.

7. A belief that the Kenyan Muslim Socialist is about to alter incentives to make taking a Great Vacation extremely attractive.

8. A sudden forgetting of the most productive methods of transforming factors of production into useful commodities.

9. A sudden recognition that the supply of a key factor of production will be significantly lower than had been anticipated and that we need to massively shift resources to sectors that use that factor less intensively.

10. A sudden fall in the perceived value of the productive skills possessed by a substantial part of the labor force.

Now my (1) and (2) are Nick Rowe’s (1), and my (3) and (4) are Nick Rowe’s (3). But my Bagehot-Minsky-Kindleberger (4) is not really in IS-LM. And Hayekians say–vociferously and angrily–that (5) is not (3), that their recessions are not simply adverse Keynesian IS-shocks. And there are (6) through (10)…

Presumably Nick would say that (6) through (10) are all versions of his (2), and that people should not call them “recessions” because in each case there is not a general glut but rather the flip-side of an excess supply of (most) currently-produced goods and services is an excess demand–for leisure by entrepreneurs, for leisure by workers, for leisure by everybody, for capital that uses the now-scarce factor efficiently, or for leisure by the now structurally-unemployed workers.

Now it seems to me that Nick and I could make two kinds of arguments against those who claim that (5) through (10) are important.

Our first set of arguments is that they have valid boxes, but that these analytical boxes are empty: that it is possible to envision a recession along their lines, but when you dig deeper you find that in the real world the real macroeconomically-significant market failure that caused the decline in aggregate output relative to potential was some version of my (1) through (4) and his (1) and (2).

Our second set of arguments is that whether or not their boxes are empty in the empirical world, their boxes are not analytically macroeconomic ones–that they need to go find some other name than “recession” to describe what they think the result of their problem is.

I suspect that the first set of arguments is the better one to make–the second set smells a little too much to me like linguistic quibbling, and presupposes a bright line that may be hard to maintain if we ever shift from a pure fiat money system back to a system in which liquid cash requires costly resources to produce and can be produced (i.e., gold standard, silver standard, BitCoin mining).