Category: Equitablog

Paul Krugman: The Forever Slump: “It’s hard to believe, but almost six years have passed….

…Recovery is far from complete, and the wrong policies could still turn economic weakness into a more or less permanent depression. In fact, that’s what seems to be happening in Europe…. The great policy argument… has been a debate between the too-muchers and the not-enoughers. The too-muchers have warned incessantly that the things governments and central banks are doing to limit the depth of the slump are setting the stage for something even worse… a Greek-style crisis any day now–within two years, declared Alan Simpson and Erskine Bowles some three and a half years ago. Asset purchases by the Federal Reserve would “risk currency debasement and inflation,” declared a who’s who of Republican economists, investors, and pundits…. The not-enoughers… have argued all along that the clear and present danger is Japanification rather than Hellenization…. To say the obvious, none of the predictions and warnings of the too-muchers have come to pass….

On the whole, the too-muchers have had much more influence in Europe than in the United States, while the not-enoughers have had no influence at all. European officials eagerly embraced now-discredited doctrines that allegedly justified fiscal austerity even in depressed economies…. The E.C.B… failed to match the Fed’s asset purchases… raised interest rates back in 2011 to head off the imaginary risk of inflation…. And now growth has stalled…

Indeed it has: no growth in eurozone industrial production in the past year:

“June 2014 compared with May 2014: Industrial production down by 0.3% in euro area…. In June 2014 compared with June 2013, industrial production remained stable in the euro area…”

Eurozone industrial production is at 101 on a 2005=100 basis. The U.S., by contrast, is at 110 on a 2005=100 basis.

I do confess I have a very difficult time understanding the attitude of the US Federal Reserve. It needs to gain some sea room before the next adverse macroeconomic shock hits, and so doing whatever is needed in order to get it to a state quickly in which raising interest rates is appropriate seems a no-brainer. Yet that is not what the Federal Reserve is doing. But my puzzlement at the policies of the Federal Reserve are absolutely dwarfed by my puzzlement at the policies of the ECB.

My extremely-shap next-door office neighbor Barry Eichengreen writes:

Barry Eichengreen: The ECB Tries Again “Rather than bemoaning the failure of President Draghi & Co. to move earlier…

…it is more productive at this stage to ask: are the central bank’s measures now up to the task… in the sense of taking deflation off the table and giving a boost to economic growth?… If policy is going to make a difference, policy will have to be unconventional…. The ECB is contemplating… purchasing securitized corporate and household loans. But in Europe, unlike the U.S., securitization markets are small…. If ECB officials conclude that the impact of TLTRO and securities purchase will be marginal, they should not give up hope; rather, they should strive to do more. There are other creative idea…. Jeffrey Frankel of Harvard suggests that the ECB should buy foreign bonds with the goal of pushing down the exchange rate, and through that channel fostering expectations of inflation rather than deflation. For some ECB governing council members, this may be a bridge too far. If so, it is incumbent upon them to explain what they will do instead and why, to paraphrase President Draghi, ‘believe me, it will be enough’.

The reference is to Draghi’s 2012 promise to do whatever was needed to preserve the euro.

Perhaps the explanation is that even though the Eurozone does not have a recovery, Germany does, and Germany rules the Eurozone? That is getting harder and harder to believe as time passes and as even the German economy flatlines:

In the middle 2011 it was possible to say that Germany had recovered from the crisis, that the remaining problems of southern Europe were the result of their own fecklessness, and that German growth was about to resume–it was wrong to say that, but it was possible. But we will soon have three years of no industrial production growth in Germany. I used to say back in 2010-2011 was that Europe’s real problem was the chaos in the south was good for the German economy: that every time a police car was torched on the streets of Athens, the euro dropped in value at another container of machine tools left Hamburg. But that has not been true for three years.

Keynes said, famously:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas…

But who are the economists–alive or defunct?–To whom the mad men in authority in Europe today are deferring? Convey, or someone representing them, please come out and publicly debate us?

The extremely-sharp Nick Rowe continues to elaborate his monetarist take on the foundations of macroeconomics:

Nick Rowe: Worthwhile Canadian Initiative: Money, prices, and coordination failures: “The symptom that is the identifying signature of a recession, and that explains those other symptoms…

…is that it becomes harder than normal to sell other goods for money and easier than normal to buy other goods for money. Shouldn’t anyone looking at that symptom immediately ask what is special about money… this year?….

Walras’ Law says that if you have a $1 billion excess supply of newly-produced goods, you must have a $1 billion excess demand for something else. And that something else could be anything. It could be money, or it could be bonds, or it could be land, or it could be safe assets, or it could be… anything other than newly-produced goods. The excess demand that offsets that excess supply for newly-produced goods could pop up anywhere. Daniel Kuehn called this the “Whack-a-mole theory of business cycles”. If Walras’ Law were right, recessions could be caused by an excess demand for unobtanium…. If you want to buy more unobtanium, or bonds, or land, or safe assets, or whatever, than you are actually able to buy, there is nothing you can do about it. And if you suddenly stopped wanting to buy more unobtanium than you were able to buy, nothing would change. If you want to buy more money than you are actually able to buy, there is something you can do about it. You can sell less money, and get to have more money that way instead…. An excess demand for unobtanium/bonds/land/safe assets/whatever doesn’t matter. If people stopped wanting to have more unobtanium than they actually had, nothing else would change…

I have to say that most of what I have quoted from Nick seems wrong to me. Yes, in 1982-1983 it was true to say “it became harder than normal to sell other goods for money and easier than normal to buy other goods for money”–we saw the prices of all currently-produced goods and services slump below their previously-expected values, and the prices of all financial and other capital assets slump as well. But this was not true in 2008-9: then there was definitely a downturn, and yet it did not become harder but easier to sell U.S. Treasury bonds–and other debts of reserve currency-issuing sovereigns–for cash. The prices of safe interest-yielding assets spiked, and spiked high. Not what you would expect if the problem were properly and fully characterized as an excess demand for liquid cash money, no?

And it is also not true today. Today there is definitely a downturn: it is still much harder than usual or than previously expected to sell your labor and to make and sell currently-produced goods and services for money. But not just safe interest-yielding assets but a whole host of assets from Treasury bonds to coastal real estate to corporate bonds and even risky equities command premium prices: it is easier than usual or than previously expected to sell them for cash. That is why I get a flyer a week now from a real estate agent pointing out how incredibly easy it would be to sell my Berkeley, CA house for cash–and how much cash I could get. Once again, not what you would expect if the problem were properly and fully characterized as an excess demand for liquid cash money, no?

And if the problem is not properly and fully characterized as an excess demand for liquid cash money, why is printing up more liquid cash money being sold by Nick and his karass as a full and complete solution?

Nick does have a fallback position:

A worsening of asymmetric information problems in financial markets, which is a coordination problem in its own right, also causes an increased demand for money and a monetary coordination problem. Should we say that the problem in financial markets is the “root cause” of the recession, and one that should be addressed directly, if possible, by something other than monetary policy? No. Monetary policy should take the world as it is, warts and all, and do what it can do…. It does not matter, for the monetary authority, whether that increased demand for money was caused by some natural event like the weather, which nobody can change, or whether it was caused by some other problem, which the fiscal authority can and should fix…

Perhaps it would be better to say that our highly-complicated and finely-divided societal division of labor runs on markets and trust. You have to trust when you sell goods and services for future consideration that your counterparty will deliver. You have to trust it when you provide consideration and buy goods and services for future delivery that what will be delivered is as specified. Without that trust, it does not work. Without money and without contract law, the extent of the division of labor that we can directly access is limited to our circle of trust: our kin, our neighbors, and our close friends–and only the subsets of those whose word we have confidence is good. Money and contract law are both ways of expanding this circle of trust, but they do so in different ways, and they do so imperfectly.

But as long as Nick Rowe recognizes that fixing situations of depressed activity by simply printing money gets us not to the first-best but the second-best in many situations, I can have no quarrel. But if Nick Rowe fails to recognize that when the root cause is insufficient infrastructure or insufficient government borrowing-and-spending or insufficient risking duration transformation by financial intermediaries that expansionary monetary policy is not the first-best fix, then I do have a quarrel…

*Noah Smith:8 Silicon Valley Can Solve the Big Problems: “I am annoyed when writers accuse Silicon Valley…

…of not solving big problems… take us into space, solve the global energy crunch or invent new labor-saving devices. And presumably they aren’t satisfied that SpaceX, Tesla, SolarCity, and the Google Self-Driving Car project, among others, are working…. What critics of Silicon Valley’s vision fail to realize, though, is that the really big problems aren’t the hard ones or the spectacular ones. The really big problems are things that affect the quality of human life…. The problems of this higher rung of Maslow’s ladder are exactly the ones that tech companies like Facebook and Match.com have begun to crack. Consider the impact of dating sites on the lives of divorced people. For a young person, dating sites–OKCupid or Tinder–are a marginal improvement over the old singles scene…. But for divorced middle-aged people, who are often socially isolated and occupied with work, meeting people is a much more daunting task. For these people, dating sites are a godsend…. Most of what people in the developed world want in life has to do with other human beings, not with the physical world around us. Peter Thiel, one of the founders of PayPal, famously griped that “We wanted flying cars, instead we got 140 characters.” But I guarantee you that if I had a flying car, after the first few days I would stop gawking at the scenery and start tweeting. I believe that the advent of social technology is a huge step toward solving the really big, really tough problems… connect[ing] with old friends and meet[ing] romantic partners…. Mars is just a ball of rock and ice. Here on Earth, there are much vaster worlds to explore: the worlds in other people’s minds…. Those Silicon Valley nerds, with their hoodies and their silly jargon, are building us the ships to explore those universes, and in the process changing what it means to live a full and complete human life. To me, that’s a big idea.

Tim Duy sends us to Josh Lehner: Graph of the Week: Squaring Fed Policy “The following compares the Fed’s own forecasts…

…for nominal GDP (actually real GDP + PCE) on a 2 year ahead basis. Most forecasters, including the Fed, have performed relatively well on a 1 year ahead basis but keep calling for an improvement “next year” which has largely not materialized at the national level. Some states, such as Oregon, have seen acceleration in job growth but others have decelerated at the same time leaving U.S. growth at consistent rates…

Alan Blinder and Mark Watson: Presidents and the U.S. Economy: An Econometric Exploration “The U.S. economy has grown faster—-and scored higher on many other macroeconomic metrics…

…when the President of the United States is a Democrat rather than a Republican. For many measures, including real GDP growth (on which we concentrate), the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 complete presidential terms. This paper asks why. The answer is not found in technical time series matters (such as differential trends or mean reversion), nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior TFP performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near- term future. Many other potential explanations are examined but fail to explain the partisan growth gap.”

Alan Blinder teams up with Mark Watson to try to figure out why the economy has grown faster by 1.8%/year under Democratic than under Republican presidents. Alas, they do not get very far–which is not surprising, given that there haven’t been that many presidents. I want to say that the Nixon made his own bad luck for Nixon-Ford by focusing overwhelmingly on his reelection rather than on good economic policy from day one, and that both Coolidge-Hoover and George W. Bush were ideologically hobbled and unable to even think of responding properly to the financial bubbles of their terms. But there is just no way to sort this out statistically.

Must- and Shall-Reads:

1. Margaret Sullivan: On Alexandra Alter, Craig Shirley, and Rick Perlstein: Was an Accusation of Plagiarism Really a Political Attack? “There’s a problem here. An article about polarized reaction to a high-profile book is, of course, fair game. But the attention given to the plagiarism accusation is not. Yes, the claim was ‘out there’ but so are smears of all kinds as well as claims that the earth is flat and that climate change is unfounded….. By taking it seriously, The Times conferred a legitimacy on the accusation…. And while it is true that Mr. Perlstein and his publisher were given plenty of opportunity to respond, that doesn’t help much…. The Times is saying: Here’s an accusation; here’s a denial; and, heck, we don’t really know…. Readers frequently complain to me about this he said, she said false equivalency — and for good reason. So I’m with the critics. The Times article amplified a damaging accusation of plagiarism without establishing its validity and doing so in a way that is transparent to the reader. The standard has to be higher.”

2. Jeff Faux: The Neoliberal Mind at Work: Brad DeLong’s Muddled Defense of NAFTA The election of 1988… stolen by the U.S.-backed ‘winner’ Carlos Salinas, revealed widespread resistance among the Mexican electorate. Protecting the rights of foreign capital in an international treaty… was designed to put the neo-liberal regime beyond the reach of Mexican democracy. DeLong seems to know there was an ugly American politics to NAFTA. In an aside he says he now agrees that Mexico’s energies would have been better put to a development strategy. Unfortunately, it’s a little late. This was the reason Mexican progressives opposed NAFTA. When I raised it during the debate, NAFTA-backers responded that this was exactly the kind of ‘statist’ thinking they had to crush. During the congressional debate, Clinton’s U.S. Trade Representative blurted out to me that ‘we have to keep the Left out of power down there’. While Cuauhtémoc Cardenas was trying to save Mexico’s capacity for self-development, DeLong was busy helping Rubin, Clinton, and the U.S. Business Roundtable do all they could to make it impossible. NAFTA was not some default ‘second-best’ policy; it was designed to kill the first-best…”

3. Tim Duy: Heading into Jackson Hole: “The Kansas City Federal Reserve’s annual Jackson Hole conference is next week…. A dovish path… the conference title itself–“Re-Evaluating Labor Market Dynamics”–points in that direction, as it emphasizes a topic that is near and dear to Yellen’s heart…. Today we received the June JOLTS report… another gain in job openings, leading to further speculation that labor slack is quickly diminishing. Anecdotally, firms are squealing that they can’t find qualified workers. Empirically, though, they aren’t willing to raise wages…. A ‘peculiar form of logic’ indeed, but one that appears endemic to US employers nonetheless. Meanwhile, from Business Insider: ‘Profit margins are still getting wider…. The nightmare scenario she wants to avoid is hiking rates only to see financial markets and the economy take such a hit that she has to backtrack. Until the Fed has gotten rates up from the current level near zero to more normal levels, it would have little room to respond if the economy threatened to head into another recession.’ Gasp! Is the reality of the zero bound finally sinking in at the Fed?… The Fed needs to at least risk overshooting to pull interest rates into a zone that allows for normalized monetary policy during the next recession…. Yellen can point out that since the disinflation of the early 90’s, the Fed has not faced an inflation problem, but instead has struggled with three recessions. This on the surface suggests that monetary policy has erred in being too tight on average…. Anything other than a dovish message coming from the Jackson Hole conference will be a surprise…”

4. Paul Ryan (2011): The Path to Prosperity: “Autopilot spending will soon crowd out all other priorities in the federal budget, with spending on Medicare, Medicaid, Social Security and interest on the national debt eclipsing all anticipated revenue by 2025. Borrowing and spending by the public sector will crowd out investment and growth in the private sector…. Americans face the most predictable economic crisis in this nation’s history. Absent reform, the panic ahead is no longer a question of if, but rather when. A deterioration of confidence by investors in government’s ability to pay its bills will drive interest rates up, increasing borrowing costs for government, small businesses and families alike. A vicious cycle of debt will compound upon itself; the available exit options once the crisis hits will be limited; and all will involve pain…”

5. Jessica Wolpaw Reyes: Lead Exposure and Behavior: Effects on Antisocial and Risky Behavior among Children and Adolescents: “It is well known that exposure to lead has numerous adverse effects on behavior and development. Using data on two cohorts of children from the NLSY, this paper investigates the effect of early childhood lead exposure on behavior problems from childhood through early adulthood. I find large negative consequences of early childhood lead exposure, in the form of an unfolding series of adverse behavioral outcomes: behavior problems as a child, pregnancy and aggression as a teen, and criminal behavior as a young adult. At the levels of lead that were the norm in United States until the late 1980s, estimated elasticities of these behaviors with respect to lead range between 0.1 and 1.0.”

6. Mark Thoma: Why Do Macroeconomists Disagree? “The lack of a consensus within the profession on the economics of the Great Recession, one of the most significant economic events in recent memory, provides a window into the state of macroeconomics…. If you ask macroeconomists what caused the crisis… some will argue it was lack of regulation of the financial sector, others will cite the buildup up of household debt driven by stagnating middle class incomes. Still others will argue the Fed was at fault for holding interest rates too low for too long and fueling the housing bubble. You will also hear that it was a case of financial innovation gone awry…. Even stories that have been thoroughly debunked are still cited by some, for example the argument that it was all caused by government’s attempt to increase homeownership among lower income households…. Economists also disagree about why the crisis was so severe…. One group… argues that the crisis would have been just as bad even if the financial sector hadn’t had such severe problems…. And when it comes to explaining why the recovery has been so slow, there is also – surprise – little agreement…. Why can’t we agree?…. One reason is… the non-experimental nature of the data…. Even when the econometric models do give clear answers, those answers are often ignored in the public debate… due, in large part, to economists who are willing to ignore clear empirical evidence in order to sow confusion and promote ideological goals, and the culture within the profession that does little to penalize such behavior. If we don’t have the ability to settle debates decisively with empirical evidence, then each side will retain its beliefs and preconceptions…. We can’t stop the charlatans and cranks from speaking out, but we can do a much better job of labeling them as such when they do.”

7. Brad Hershbein: More Education = Delayed Fertility = More Mobility? “One of our most striking findings is the recent and dramatic divergence in resources of children between more and less educated mothers…. Better-educated women have always given birth later than less-educated women, but this gap widened considerably for women born after World War II…. This growing gap means that the material resources available to children with better educated mothers would be greater than they used to be even if incomes were not rising faster for the college educated (which they are)…”

And:

• Thoreau: “I think it is appropriate to judge a society or a state in part on how it treats its minorities…. The Kurds have apparently taken huge risks to rescue Yazidis trapped on a mountain…. If we absolutely must take a side in a Middle Eastern dispute, there are liberal arguments for siding with the Kurds of Iraq.”
• Sam Ro: Fed Vice Chair Fischer Has Made Very Clear Where He Sits on the Hawk-Dove Scale
• Mike Konczal: Big Business’s Frenemy in the White House
• Robert Scott: Brad Delong’s Case for NAFTA: Based on Assumptions, Not on Data
• Marc Lynch: Would arming Syria’s rebels have stopped the Islamic State?
• Anat R. Admati et al.: Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive
• Anat Admati et al.: The Parade of the Bankers’ New Clothes Continues: 28 Flawed Claims Debunked
• Jason Zengerle: The New Racism: The Civil Rights Movement Is Going in Reverse in Alabama
• Robert Cieri: Did Lower Testosterone Help Civilize Humanity?

Should Be Aware of:

1. Geoff Pender: McDaniel lists own lawyer as irregular vote: “As Chris McDaniel’s team continues to scour voting records to add to an expected legal challenge of his loss to Thad Cochran, it has listed McDaniel’s lead lawyer in the challenge, and his wife, as irregular votes that should be tossed out…. Tyner and his wife, Sloane Tyner, were flagged by a McDaniel volunteer as ‘CROSSOVER/IRREGULAR VOTING’ in one of the affidavits claiming problems with Madison County voting. The affidavit says that with Tyner and his wife’s votes, records showed ‘voted written in margin and on June 24’…”

2. David Glasner: Raghu Rajan Misunderstands (Totally!) Currency Devaluations: “Rajan is… totally clueless about the role of monetary policy and the art of central banking in combating depressions…. [His] notion that competitive currency devaluations in the Great Depression were a zero-sum game is fallacy, an influential fallacy to be sure, but a fallacy nonetheless… [and] a highly dangerous fallacy…. The classic refutation… was provided on numerous occasions by R. G. Hawtrey…”

3. Caitlin MacNeal: Huckabee Clarifies He ‘Never’ Said Obama Should Be Impeached: “Last week, he told Iowa radio host Steve Deace that Obama ‘has done plenty of things worthy of impeachment.’ But… Saturday, Huckabee said…. ‘Let me be very clear. I never said he should be impeached. In fact I was explicitly clear. As often is the case, only half of what I said got quoted. I was asked the specific question: Had he committed impeachable offenses. And I said yes. But he’s not going to be impeached, and he shouldn’t be. Impeachment ought to be something that would be used in the rarest and most unusual of circumstances.'”

4. Ewen Callaway: Geneticists say popular book misrepresents research on human evolutiong “More than 130 leading population geneticists have condemned… A Troublesome Inheritance, by… Nicholas Wade…. ‘It’s just a measure of how unified people are in their disdain for what was done with the field’, says Michael Eisen… who helped to draft the letter…. ‘This letter is driven by politics, not science’, Wade said in a statement. ‘I am confident that most of the signatories have not read my book and are responding to a slanted summary devised by the organizers’. Wade added that he had asked the letter’s authors… for a list of errors…. ‘While Wade is obviously welcome to choose his quotes and observations, he consistently seems to ignore the caveats and cautions people lay out in their papers when they do not suit his ends’, Coop says…. Sarah Tishkoff… says that the five clusters are somewhat arbitrary. In a 2009 study that included numerous African populations, her team found that 14 clusters (most of them composed of Africans) were a better explanation…. ‘He’s claiming to be a spokesperson for the science and, no, he’s not’, she says.”

Comment on: Ayako Saiki and Jon Frost: “How Does Unconventional Monetary Policy Affect Inequality? Evidence from Japan”

I want to make three big points:

1. Figuring out what we expect QE to mean for income and wealth inequality is difficult because we are not sure what QE is supposed to do for the macroeconomy. Is it a way of credibly committing to lower nominal interest and higher inflation rates in the long run by goosing the monetary base at the zero lower bound? Is it a way of reducing the supply of assets subject to risk and thus reducing the risk premium? If the first, it is the government imposing–relative to the baseline–a transfer from those who are going to save, who are going to cut their spending below their income and shift purchasing power into the further future, and to those who are going to borrow and to those who have saved in the past. If the second, it is the government imposing–relative to the baseline–a transfer from those who are going to supply risk-bearing services to those who will lay off risks into the future and those who have already committed to bearing risk in the past. In either case, it is bound to be the rich today who have born risk in the past (and been lucky) or who have saved in the past. So today’s inequality should, we think, rise. It is nice to see that it is true–and it is interesting that the effects look to be so large…

2. Looking forward, however, QE seems to be a piece of what Keynes called the euthanasia of the rentier–or of the risk-bearer. Wealthholders who are going to stay influential wealthholders must reinvest at rate n+g, so their true free cash is only r-n-g. What if they spend more? Keynes thought that there was a social compact: if the rich do not accumulate–if they spend more than r-n-g–then the political process will soon take their wealth away. Thus a world of QE is a world in which the rich have extremely high wealth levels, yet surprisingly little weight, given their wealth, on consumption patterns. There is high wealth inequality. And there is very high income inequality along the transition path as asset prices attain their new equilibrium levels. But less spending inequality.

\

3. The Geithner view of the world: monetary policy is unreliable witchcraft, fiscal policy is “sugar” that makes you feel really good for four hours before you drop into a diabetic coma, the only source of durable prosperity is to reinforce business and financial prosperity by giving them the returns they think they deserve–and then a little more. I parody. But this is the dominant view in the North Atlantic, at least. Basically, the bankers and investors and CEOs have us by the plums. If QE reinforces business confidence, it is worth doing in spite of its inequality effects. If, on the other hand, QE scares our upper class by (a) making them fear that asset prices are unsustainably high and will crash, and (b) making them fear that their future deals will have to squeeze returns out of an eyedropper, then the inequality effects are yet another reason to exit as fast as possible. Now I am not a believer in Geithnerism. But many people are. And it is certainly a live analytical position.