Category: Equitablog

Gary Clyde Hufbauer and Cathleen Cimino: NAFTA Rejoinder: The Effects are Positive (Part I): “[The CEPR] preferred the pre-1980 Mexican economic developmental model…

…of protection and state control to the NAFTA model of free trade and private markets. In our view the Mexican financial crises of 1982 and 1994 convincingly demonstrate that the pre-1980 model had run out of gas, but we will not further rehash that debate. Everyone agrees that Mexican economic performance over the past 20 years has been subpar, since real per capita GDP grew only 1.3 percent annually. The question is why: Too big a dose of liberal economic policies and integration with the US economy (the CEPR explanation), or negative factors that were partly offset by a strong push from NAFTA (the PIIE explanation)?… McKinsey’s research shows that the ‘NAFTA sector’ of the Mexican economy (large firms with 500 employees or more) has performed strongly over the past 20 years: Productivity per worker grew 5.8 percent annually, and output of the ten largest Mexican auto plants grew 5.5 percent annually. Unfortunately, the large firms in the NAFTA sector still employ only 20 percent of the labor force… productivity has actually declined among smaller firms (those with ten or fewer employees), falling by 6.5 percent per year. Oppressive regulation largely explains the poor performance of these firms…. (for an overview, see Gordon Hanson [2010], ‘Why Isn’t Mexico Rich?’ [pdf]). Three other negative factors… are the chaos and cost of drug wars (largely fueled by American dollars), widespread corruption, and continued monopolistic control in critical sectors (illustrated by telecommunication and petroleum)…. While Mexico’s growth performance falls short of other countries that have liberalized their economic policies, it exceeds the performance of many economies still relying on state control in an overall assessment of past and potential growth.

Simon Wren-Lewis and Nick Rowe annoy each other by arguing over whose position is more politically hopeless, as well as whether the right way to think of aggregate demand deficiencies is as:

• being always and everywhere and monetary phenomenon.
• being somewhat more complicated–usually but not always a monetary phenomenon.

I am going to wait and wait in only at the bottom, After both have had their say…

Start with Simon Wren-Lewis:

Simon Wren-Lewis: What annoys me about market monetarists: “The main point Paul [Krugman] was trying to make…

…was about how far the Republican base were on monetary policy from anything reasonable…. By implication, neomonetarism was something more reasonable, although he had well known problems with its ideas. So a sort of backhanded compliment, if anything. Nick responded by pointing out that what he called neofiscalists (those, like me, who argue for fiscal stimulus at the Zero Lower Bound (ZLB)) hadn’t done too well at finding a political home recently either. Which, alas, is all too true, but I think we kind of knew that…

Indeed. Nick Rowe starts:

Nick Rowe: Neofiscalist delusions?: “It seems I need to respond to Paul Krugman…

…The neomonetarist movement starts from an acknowledgement of reality: shortfalls of aggregate demand do happen, and they do matter, and we need an answer. Like the original monetarists, however, they reject any government role in the form of discretionary fiscal policy. Instead, they argue that the Fed and its counterparts can do the job all on their own if they really want to.

OK. That’s me…. But there’s absolutely nothing “neo” about that policy position. It’s the neofiscalist position that is new. What I call a “neofiscalist” is exactly the same as what Paul calls a “neomonetarist”, except at the Zero Lower Bound. When the central bank hits the ZLB, neofiscalists throw up their hands in despair, and call for fiscal policy to manage aggregate demand…. Is there any constituency for their ideas in the modern (US?) left-of-centre movement? Well, if we look at actual existing fiscal policy by an actual existing modern US left-of-centre government, I think the answer is “no”….

Yes, “conventional” monetary policy right now means keeping expected inflation constant at 2%…. So what? A century ago, “conventional” monetary policy meant keeping the dollar price of gold constant. If we had been targeting NGDP for the last 20 years, inflation targeting would seem far beyond “conventional” monetary policy. And which is riskier? Having the central bank hold “unconventional” assets? Having the central bank hold an “unconventionally” large balance sheet of both assets and liabilities? Changing the monetary policy target so central banks don’t need to do either of those things? Or having a government needing to make large changes in its debt liabilities that are unrelated to the other objectives of fiscal policy?… Targeting a fixed and pre-announced level-path for NGDP is no more “activist” than targeting inflation, or targeting the price of gold….

The neomonetarist home is with anyone who is prepared to think radically…. Neomonetarism is a radical position. We want to get to the root of the problem of insufficient aggregate demand. We see aggregate demand as a monetary phenomenon, that only makes sense conceptually in a monetary exchange economy. And we see insufficient aggregate demand (just like an inflationary surfeit of aggregate demand) as due to an underlying failure of monetary institutions…

And Simon-Wren Lewis continues:

What interests me is how annoyed each side gets with each other…. I will use the label market monetarist (MM) rather than neomonetarist. It seems to me that I understand a little why those in the MM camp get so annoyed with those like me who go on about fiscal policy. Let me quote Nick:

We don’t like fiscal patches that cover up that underlying problem. Because fiscal policy has other objectives and you can’t always kill two birds with the same fiscal stone. Because we can’t always rely on fiscal policymakers being able and willing to do the right thing. And because if your car has alternator trouble you fix the alternator; you don’t just keep on doing bodge-jobs like replacing the battery every 100kms…

In their view, the proper way to do stabilisation policy outside a fixed exchange rate regime is, without qualification, to use monetary policy. So the first best policy is to try every monetary means possible, which may in fact turn out to be quite easy if only policymakers adopt the right rule. Fiscal policy is a second best bodge. MM just hates bodgers…. The situation is not symmetric. I do not get annoyed with MM because I think monetary policy is a bodge. I have spent much time discussing what monetary policy can do at the ZLB, and I have written favourably about nominal GDP targets. But, speaking for just myself, I do get annoyed by at least some advocates of MM….

To understand why I do get annoyed with MM…. We are going downhill, and the brakes do not seem to be working properly. I’m sitting in the backseat with a representative of MM. I suggest to the driver that they should keep trying the brake pedal, but they should also put the handbrake on. The person sitting next to me says:

That is a terrible idea. The brake pedal should work. Maybe try pressing it in a different way. But do not put on the handbrake. The smell of burning rubber will be terrible. The brake pedal should work, that is what it is designed for, and to do anything else just lets the car manufacturer off the hook. Have you tried pressing on the accelerator after trying the brake?…

When you have a macroeconomic disaster, with policymakers who are confused, conflicted and unreliable, you do not obsess over the optimal way of getting out of the disaster. There will be a time and place for that later. Instead you try and convince all the actors involved to do things that will avoid disaster. If both monetary and fiscal policymakers are doing the wrong thing given each other’s actions, and your influence on either will be minimal, you encourage both to change their ways…. Nick says we can’t always rely on fiscal policymakers being able and willing to do the right thing. But since at least 2011 we have not been able to rely on monetary policymakers…

I am on Simon Wren-Lewis’s side, and am in fact even more on his side than he is. The way I like to put it is to move into a Walras’s Law framework and say that a deficiency in demand for and hence a general glut of currently-produced goods and services can be the result of any one of three things:

1. A shortage relative to demand of the stock of the liquid medium of exchange, with no fundamental mismatch in the supply and demand of either savings vehicles as a whole or of risk-bearing capacity.

2. A shortage relative to demand of the stock of safe assets, of which the stock of the liquid medium of exchange is an important component, because of the inability of private financial intermediaries to mobilize the risk-bearing capacity of society and do the risk transformation to match the profile of the assets they can create to the assets that safety-loving wealth-holders wish to hold.

3. A shortage relative to demand of savings vehicles as a whole, of which the stock of the liquid medium of exchange is an important component.

In the case of (1), conventional interest rate-based monetary policy works. Liquid cash is at a premium relative to longer-duration safe nominal assets–short term interest rates are high–and so the central bank can rebalance the economy and boost demand for currently-produced goods and services back to where it should be by swapping cash for longer-duration safe nominal assets.

In the case of (3), conventional interest-rate based monetary policy will not work. All savings vehicles are at a premium relative to currently-produced goods and services–all along the risk spectrum interest rates are low–but there are not enough positive net present value investments to satisfy current wealthholders’ desires to move purchasing power from the present into the future. Conventional monetary policy that swaps liquid cash for short-term safe nominal assets cannot help unless and until it summons the Inflation Expectations Imp and so makes interest rates at the zero interest rate lower bound consistent with the configuration of real interest rates across the risk spectrum that corresponds to the current Wicksellian natural rate. The neo-fiscalist question in such a situation is “why bother”? Why not just have the government borrow (through issuing either bonds or money) and spend? Yes, the better monetary policy rule might well have kept the economy from being wedged. But once the economy is wedged, what is the gain to circling Robin Hood’s barn and de-anchoring inflation expectations?

In the case of (2), the key shortage is not of the stock of the liquid medium exchange per se or an elevation of the entire risk spectrum of real interest rates above the Wicksellian natural rate because of the zero lower bound, but rather the inability of financial intermediaries to raise enough capital and trust to do the risk transformation. The consequence is safe interest rates at or below their first-best Wicksellian natural values and risky interest rates well above their first-best Wicksellian natural values. In this case a resort to monetary expansion–even if the economy is away from its zero interest-rate lower bound–provides incentives to invest too much of society’s wealth in long-duration assets, with the added complication that the financial sector has a difficult time distinguishing A valid long-duration asset from a Ponzi scheme because neither requires the investors be shown the money in any serious way. In (2), there is a case for fiscal policy–for the government as financial intermediary and mobilizer of risk-bearing capacity–even if the economy is away from the zero interest rate lower bound.

By ruling out (2) and (3)–or, rather, by claiming that there is nothing problematic either in the de-anchoring of inflation expectations, in incentives to create long-duration assets about de-anchoring inflation expectations, or in attaining policy credibility in the summoning of the Inflation Expectations Imp needed to solve (2) and (3) by monetary policy alone–I think that the neo-monetarists and the market monetarists do us no good service…

1735 words

Sky Masterson: Comedic Monologue: “On the day when I left home…

…to make my way in the world, my daddy took me to one side. “Son,” my daddy says to me:

I am sorry I am not able to bankroll you to a very large start, but not having the necessary lettuce to get you rolling, instead I’m going to stake you to some very valuable advice. One of these days in your travels, a guy is going to show you a brand new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you’re going to wind up with an ear full of cider…

Over at Grasping Reality: Elementary Philosophy of Probability and the War on Nate Silver: The (Not Very) Honest Broker for the Week of August 2, 2014: Of all the weird things that have happened in the American public sphere in my life, the most weird was the War on Nate Silver–launched in the fall of 2012 by David Brooks, Joe Scarborough, Dylan Byers, and a remarkably large company. The underlying argument appeared to be that Nate Silver was doing something wrong and unfair by using… evidence. By… counting things. By… using statistics. By… estimating probabilities…

Must- and Should-Reads:

1. Ari Phillips: Paul Ryan Says Climate Change Is An Excuse To Illegally Grow Government And Raise Taxes: “Rep. Paul Ryan (R-WI) said Wednesday that ‘climate change occurs no matter what’, but that the EPA’s recent efforts to reduce emissions from existing power plants are ‘outside of the confines of the law’, and ‘an excuse to grow government, raise taxes and slow down economic growth’…. The ‘federal government, with all its tax and regulatory schemes’ can’t do anything about climate change… and ‘end[s] up… making the U.S. economy less competitive’…. EPA chief Gina McCarthy recently said that she wouldn’t put forth a rule that ‘doesn’t respect the Clean Air Act and isn’t legally solid’, and that she is confident the regulations will survive any legal challenge…”

2. Jason Furman and John Podesta: We Can’t Wait: The Cost of Delaying Action to Stem Climate Change: “We do face significant uncertainty…. That uncertainty, however, is an argument for doing more and doing it sooner…. The costs of achieving a fixed climate change goal would be 40 percent larger if we waited a decade to take action. And those costs could grow exponentially with a longer wait…. Delay means losing years of research in effective carbon-reducing technologies, along with bigger investments in older, carbon-intensive technologies, meaning that we would have to adopt more stringent and therefore more costly measures in the future to make up for lost time…”

3. Cardiff Garcia: All those US indicators: what did we learn this week?: “We received further confirmation that the first quarter slump really was just a temporary, weather-stricken pause…. Nominal wage growth has improved, but… not nearly enough for policymakers to start worrying about its impact on inflation… higher inflationary pressures in the second quarter were concentrated mainly in April and May…. The economy has created about 230,000 jobs per month this year…. Furthermore, in June there was a rise in the labour force participation rate…. The labour market isn’t yet healthy, but it is healing. The Fed… explicitly emphasised that ‘a range of labor market indicators suggests that there remains significant underutilization of labor resources’…. Yellen’s position on labour market slack and her call that some unexpectedly high inflation readings earlier this year were ‘noise’ look pretty good right now…”

4. **Jonathan Landay and Ali WatkinsThe CIA lied: agency admits it hacked Senate computers to snoop on torture investigations: “CIA employees improperly accessed computers used by the Senate Intelligence Committee to compile a report on the agency’s now defunct detention and interrogation program, an internal CIA investigation has determined. Findings of the investigation by the CIA Inspector General’s Office ‘include a judgment that some CIA employees acted in a manner inconsistent with the common understanding reached between SSCI (Senate Select Committee on Intelligence) and the CIA in 2009’, CIA spokesman Dean Boyd said in a statement. The statement represented an admission to charges by the panel’s chairwoman, Dianne Feinstein, D-Calif., that the CIA intruded into the computers her staff used to compile the soon-to-be released report on the agency’s use of harsh interrogation methods on suspected terrorists in secret overseas prisons during the Bush administration…”

5. Adam Ozimek: Instead of Moving, Workers Are Dropping Out: “Geographic mobility has long set the U.S. apart from Europe, and its recent decline has created concerns. A new paper from the IMF suggests that one cause of this decline is a change in the way people respond to regional economic shocks…. Workers have become less likely to leave their states of residence in search of work and more likely to instead leave the labor force…. Declining geographic mobility is seen as yet another worrisome sign of a general decrease in economic dynamism. With labor force participation down more than would be expected following the last recession, the new research suggests these factors may be related…”

6. Paul Krugman: Knowledge Isn’t Power: “It usually turns out that there is much less professional controversy about an [economic] issue than the cacophony in the news media might have led you to expect…. [Asked] whether the American Recovery and Reinvestment Act–the Obama ‘stimulus’–reduced unemployment… a vote of 36 to 1. A follow-up question on whether the stimulus was worth it… 25 to 2…. Let me ask, instead, whether you knew that the pro-stimulus consensus among experts was this strong…. You certainly didn’t hear about that consensus on, say, CNBC…. More important, over the past several years policy makers across the Western world have pretty much ignored the professional consensus on government spending and everything else, placing their faith instead in doctrines most economists firmly reject…. Am I saying that the professional consensus is always right? No. But when politicians pick and choose which experts–or, in many cases, ‘experts’–to believe, the odds are that they will choose badly. Moreover, experience shows that there is no accountability…”

And:

• Luigi Pasinetti: Institutional Forces and the Discipline of Economics
• Mark Thoma: Behind the Fed’s promise about short-term rates
• Nick Bunker: A Post-War History of U.S. Economic Growth: An Examination of the Contributions to Growth of the Components of Gross Domestic Product
• Cosma Shalizi (2009): On the Certainty of the Bayesian Fortune-Teller
• Trygve Haavelmo (1944): The Probability Approach in Econometrics

Should Be Aware of:

1. Peter Dorman: Figuring out the Inflation Vigilantes: “Paranoia about inflation is a widespread, longstanding phenomenon, with immense influence over public discourse and economic policy, and out of all proportion to the actual… threat. It deserves to be studied by the normal tools of social science, the ones we devote to other significant political, religious and social ideologies…. The disinflation lobby is an important part of the political landscape…. Seeing the spending side of inflation and not the income side is Type II money illusion… actively purveyed by the media and even, on occasion, prominent members of the economics profession…”

2. J.W. Mason: The Rentier Would Prefer Not to Be Euthanized: “Here’s another one for the ‘John Bull can stand many things, but he cannot stand two percent’ files. As Krugman says, there’s an endless series of these arguments that interest rates must rise. The premises are adjusted as needed to reach the conclusion…. But what are the politics?… The rentiers would prefer not to be euthanized…. To the extent that pure money-holders facilitate production, it is because money serves as a coordination mechanism, bridging gaps–over time and especially with unknown or untrusted counterparties–that would otherwise prevent cooperation from taking place. [1] In a world where liquidity is abundant, this coordination function… can no longer be a source of authority or material rewards…. The problem is, the liquidity specialists don’t want to go away…. So we get all these arguments that boil down to: Money must be kept scarce so that the private money-sellers can stay in business…”

3. Karl Marx (1867: Cooperation: “Capitalist production only… really begins… when… the labour-process is carried on on an extensive scale and yields… large quantities…. At first… the difference is purely quantitative…[then] a modification takes place…. The simultaneous employment of a large number of labourers effects a revolution in the material conditions of the labour-process…. They are used in common, and therefore on a larger scale…. The effect is the same as if the means of production had cost less…. Just as the offensive power of a squadron of cavalry, or the defensive power of a regiment of infantry is essentially different from the sum of the offensive or defensive powers of the individual cavalry or infantry soldiers taken separately, so the sum total of the mechanical forces exerted by isolated workmen differs from the social force that is developed, when many hands take part simultaneously in one and the same undivided operation, such as raising a heavy weight, turning a winch, or removing an obstacle. In such cases the effect of the combined labour could either not be produced at all by isolated individual labour, or it could only be produced by a great expenditure of time, or on a very dwarfed scale…. We [have] here… the creation of a new power, namely, the collective power of masses…”

4. Amos Oz: “I would like to begin the interview… by presenting one or two questions…. What would you do if your neighbor across the street sits down on the balcony, puts his little boy on his lap and starts shooting machine gun fire into your nursery? What would you do if your neighbor across the street digs a tunnel from his nursery to your nursery in order to blow up your home or in order to kidnap your family? With these two questions I pass the interview to you.”

Cardiff Garcia: All those US indicators: what did we learn this week?: “We received further confirmation…

…that the first quarter slump really was just a temporary, weather-stricken pause…. Nominal wage growth has improved, but… not nearly enough for policymakers to start worrying about its impact on inflation… higher inflationary pressures in the second quarter were concentrated mainly in April and May…. The economy has created about 230,000 jobs per month this year…. Furthermore, in June there was a rise in the labour force participation rate…. The labour market isn’t yet healthy, but it is healing. The Fed… explicitly emphasised that ‘a range of labor market indicators suggests that there remains significant underutilization of labor resources’…. Yellen’s position on labour market slack and her call that some unexpectedly high inflation readings earlier this year were ‘noise’ look pretty good right now…

At one point my grandfather was the richest man between Orlando and Tampa, and I figure that about $15K/year (in 2014-value dollars) of his money has been spent on me, one way or another, since my birth. That’s a substantial dole to live on, and–needless to say–I am extremely grateful to my late grandfather and grandmother for giving it to me. But has this harmed me?

Brink Lindsey would presumably say that yes, it has:

Brink Lindsey:* Why Living on the Dole is Bad for You: “I worry that a UBI would further encourage mass idleness…

…a serious and worsening social blight among the less educated and less skilled, I favor instead… wage subsidies for low-skill work…. It is true that the choices of UBI recipients are less constrained than those of workers who receive wage subsidies…. The great virtue of a UBI is its directness and simplicity…. [But] my reading of the available evidence convinces me that a social policy that channels benefits through work and thereby encourages paid employment has important advantages over a UBI….

You might think that not having to work would free people… [for] potentially more rewarding activities. But life doesn’t seem to work that way…. In 2013, employed men averaged 6.43 hours a day on work and related activities…. Men without jobs… spent 19 extra minutes a day on housework, 11 more minutes on socializing, 9 more minutes on exercise and recreation, 8 more minutes on childcare… 6 more minutes on organizational, civic, and religious activities… an extra hour sleeping (for a total of 9.25 hours a day!) and two extra hours watching TV (4.05 hours a day!)….

You don’t need a paycheck to thrive. But for most working-age people, paid employment is the most reliable path to commitment, engagement, and a sense of purpose…. For so-called prime-age males aged 25-54, the labor force participation rate has fallen from 96 percent in 1970 to 88 percent today…. The rise of mass joblessness among the less skilled is a catastrophe…. Unconditional income support reduces labor supply. Perhaps not dramatically, but still the impact is going in the wrong direction. By contrast, wage subsidies… increase the attractiveness of work and boost labor force participation…. We may someday enjoy a post-work society of productive, creative leisure, but maintaining and expanding the underclass aren’t the way to get there.

As I look back, this “basic income” had three effects:

1. It allowed me to buy more stuff–largely expensive private school education when young, and more expensive houses and hence bigger bets placed on real estate when older.

2. It made me confident and hence a greater risk taker–it is much easier to embark on something that may be a high-wire act if you know there is a safety net down there.

3. I found myself under less pressure to make money early by doing boring things.

Would I be better off if that money had been channeled to me in the form of a wage subsidy–say, a dollar-for-dollar match for the first $750,000 I earned in the marketplace?

Well, it would seem to depend on how good my judgment is, isn’t it? If my judgment is lousy, then I would be better off responding more to market forces–and on way to make me do more of that is to amplify the ample financial incentives that the market already provides. If my judgment is good–if I am already properly weighting financial, personal development, and lifestyle objectives–than conditioning the cash on market income is throwing yet another spanner into the works. Any judgment that wage subsidies are superior to a basic income would seem to me to entail a pretty strong presumption that people’s judgments are, by and large, lousy.

Moreover, there are two additional considerations. First, what about the people who do not respond to the wage subsidy? They are making a big mistake. That tells us that their cognitive processing is very poor–which means that they are people who really could use some help, and who have been dealt a very poor hand in the game of life. If there is anybody for whom social insurance is desirable, it is them. And yet they do not benefit from a wage-subsidy program. Second, when people’s judgment is poor, our usual response is to try to make it better: teach them, nudge them, set up societal systems in which the issues are presented fairly and clearly to make it easy to make good judgments, and hard to make ones that afterwards all will recognize as stupid. Replacing a UBI with a wage-subsidy program is not a nudge–it is more like being beaten with a club.

Milton Friedman was always on the side of (a) universal basic income, plus (b) education programs–of all kinds–to try to help people figure out how to think more clearly. The only edge that a wage subsidy program has over that combination that I can see is that a wage subsidy program has greater political traction in America today…

Jason Furman and John Podesta: We Can’t Wait: The Cost of Delaying Action to Stem Climate Change: “Some are still claiming uncertainty…

…about the underlying science of climate change, saying it would be better to wait for more data, analysis and time to act…. We do face significant uncertainty…. That uncertainty, however, is an argument for doing more and doing it sooner…. Acting now to put in place policies that reduce carbon emissions is like taking out an insurance policy…. The costs of achieving a fixed climate change goal would be 40 percent larger if we waited a decade to take action. And those costs could grow exponentially with a longer wait…. Delay means losing years of research in effective carbon-reducing technologies, along with bigger investments in older, carbon-intensive technologies, meaning that we would have to adopt more stringent and therefore more costly measures in the future to make up for lost time…. Rather than waiting to address these challenges in the future, taking action today will also save us substantial sums. The United States cannot solve climate change alone. But we are well-positioned to lead the way–and the sooner we act, the sooner the world will join us.