Category: Equitablog

Paul Krugman admonishes me for thinking I should try to work out what model underlies the Bank for International Settlements’ 84th Annual Report. It is, he says, not so much a macroeconomic model or an analytical framework. Rather, he says, it is a mood: the rhetorical stance of austerity a outrance:

Paul Krugman: Liquidationism in the 21st Century: “The BIS position… [is] that of 1930s liquidationists like Schumpeter…

…who warned against any ‘artificial stimulus’ that might leave the ‘work of depressions undone’. And in 2010-2011 it had an intellectually coherent–actually wrong, but coherent–story… that mass unemployment was the result of structural mismatch… [and] easy money would lead to a rapid rise in inflation…. it didn’t happen. So… it… look[ed] for new justifications for the same [policy] prescriptions… playing up the supposed damage low rates do to financial stability…. That over-indebtedness on the part of part of the private sector is exerting a persistent drag on the economy… is a reasonable story…. But the BIS… doesn’t understand that model… as if they were equivalent to… real structural problems… [which] makes a compelling case for… fiscal deficits to support demand while the private sector gets its balance sheets in order, for monetary policy to support the fiscal policy, for a rise in inflation targets both to encourage whoever isn’t debt-constrained to spend more and to erode the real value of the debt. The BIS, however, wants governments as well as households to retrench… and–in a clear sign that it isn’t being coherent–it includes a box declaring that deflation isn’t so bad, after all. Irving Fisher wept….

Are the BIS’s methods unsound? I don’t see any method at all. Instead, I see an attitude, looking for justification…

And Simon Wren-Lewis has an equally difficult time finding an analytical method here:

Simon Wren-Lewis: Why macroeconomists, not bankers, should set interest rates: “Notice what is going on here…

…The implication is that a financial crisis only happens because interest rates are set at the wrong level. The Great Recession was all the fault of the Fed, who kept interest rates too low after the 2001 recession. The gradual deregulation of the financial sector in the decades before?–not an issue. The widespread misselling of subprime mortgages?–these things happen. All the other examples of misselling and fraud?–boys will be boys. An industry that profits from a massive implicit public subsidy?–we see no subsidy. Classifying subprime products as AAA? Massive increases in bank leverage in the 00s?–all the result of keeping interest rates too low.

When those putting the BIS case tell you that macroprudential controls (a.k.a. financial regulations) are ‘untested’ and ‘uncertain in their impact’, what they are really saying is that the financial system cannot be regulated to make it safe when interest rates are low. There is no evidence for that proposition, and a lot of history that says otherwise…. But of course most working in the financial sector hate regulation. They have an interest in perpetuating different stories about the Great Recession. If you spend too much time around bankers, there is a danger that you come to believe these self-serving stories…

As does Noah Smith:

Noah Smith: Should the Fed crash the economy now to prevent a crash later?: “Asset prices, by historical measures, are high across the board…. Low risk-free rates, courtesy of the Federal Reserve, are driving investors… into risk assets. To many, the implication is clear: The Fed needs to raise interest rates in order to prevent a destabilizing market crash. That isn’t a good idea…. First of all, higher asset prices due to lower safe interest rates… [are] rational price appreciation, not a bubble.

OK, but what if a bubble does occur?… Bubbles form when people think they can find some greater fool to sell to. But when practically everyone is convinced that asset prices are relatively high, like now, it’s pretty obvious that there aren’t many greater fools…. [In] past bubbles… there was always a large contingent of society that thought it wasn’t a bubble at all–that ‘this time, it’s different’. Who nowadays thinks that there’s some special Big New Thing?… No one I know of. Paradoxically, the one time it’s hardest to have a bubble is when everyone and their dog is unhappy about asset prices and scared that there’s a bubble….

There’s laboratory evidence for bubbles…. It’s true that when you give traders in the lab more cash, you get more and bigger bubbles. Unfortunately, it’s also the case that raising interest rates doesn’t pop the bubbles, which tend to form whenever some people don’t understand fundamentals…. Basically, the people calling for Fed Chief Janet Yellen and the Fed to raise rates are demanding that the Fed crash asset prices in order to avoid an asset price crash….

There is also the idea that the rise in asset prices is simply unnatural or artificial. But the Fed has been regulating the monetary base for many decades, and for a lot of that time there were no big bubbles. Like it or not, the Fed is a natural part of the financial ecosystem…. It seems to me that ‘naturalness’ is a pretty weak justification for deliberate government action to crash the value of Americans’ retirement accounts…. The Fed isn’t yet worried enough… to use the blunt hammer of rate hikes. Its cautious, middle-of-the-road policy seems very at-odds with the extremism that a lot of people in the finance industry seem to attribute to it. I say we hold off on our calls for anti-bubble rate hikes.

I am not so sure. I do think that there is a chance that the BIPS view will turn out to be a live analytical position–if only I could figure out what it was. And let me say that the way the BIS phrases its case is not the way that I find helpful at all. But I–tentatively–conclude that it is a live position, albeit a weak one.

The three clearly live analytical positions–on the (1) fear-not, (2) drum-of-creation, and (3) remove-obstacles hands, respectively–are the monetarist, balance-sheet-fiscalist, and balance-sheet-austerian. The question is whether the BIS’s position qualifies as a live analytical position on the (4) flame-of-destruction hand…

On the (1) fear-not hand, the monetarist position holds that central banks can successfully rebalance economies at full employment with low inflation by central banks’ setting the short-term safe interest rates they control low enough and promising to credibly keep them low enough long enough to match Wicksellian planned investment to desired saving at full employment. The major critiques of the monetarist position are three: First, the question of how to manufacture sufficient credibility out of thin air–why should trying to summon the Inflation-Expectations Imp be any easier or more effective than trying to summon the Business-Confidence Fairy? Second, the zero lower bound means that the short-term safe real interest rate now is above its optimum value, and so getting the long-term safe interest rate now to its optimum value requires expected future state real interest rates below their optimum values: a reliance on monetary policy alone requires future expansionary monetary irresponsibility. Third, if (as I believe) the root problem is not a global savings month or investment shortfall but an absence of risk tolerance and a broken credit channel, expansionary policy that reduces all rather than just risky interest rates distorts the economy by incentivizing the creation of too-many long-duration assets. Fourth, very low long-term real interest rates amplify principal-agent problems because debtors no longer have to show their creditors the money via substantial positive cash flows.

On the (2) drum-of-creation hand, the balance-sheet-fiscalist position holds that the key problem is a broken credit channel and a lack of private-sector risk tolerance: savers no longer trust financial intermediaries to do the risk transformation and so to properly back financial assets of the degree of safety savers want to hold with appropriately-managed claims on the income from risky capital, and savers do not have the risk-tolerance to hold the financial assets that they do trust financial intermediaries to create. The solution is therefore to use the government to mobilize the risk-bearing capacity of the taxpayers, and to either guarantee loans in order to create the safe assets that savers want to hold or simply to create the safe assets savers want to hold directly: borrow money and buy stuff. The first critique is that we do not have great confidence that the government will get good-enough value either from its direct expenditures or from its loan guarantees. The second critique is the balance-sheet-austerian position.

On the (3) remove-obstacles hand, the balance-sheet-austerian position is that the problem is indeed a shortage of risk-tolerance and a credit channel that cannot fund enough risky investment projects to attain full employment, but that that is not the root problem: the root problem is excessive leverage. The solution is thus a painful-slog: we must wait for time, bankruptcy, rescheduling, and amortization to deleverage the economy until full employment is once again sustainable given saver tolerance for and intermediary ability to transform risk. The right policy is that government should do what little it can to hurry along the process of deleveraging, to the extent that it can. And this process can certainly be assisted by monetary expansion a outrance and (somewhat) higher inflation.

What this process cannot be assisted by, on the balance-sheet-austerian view, is fiscal expansion. Why not? Because expansionary fiscal and credit policies are very likely to crack the government’s status as safe borrower. If expanded government debt means that the government also loses its status as a creator of safe assets, then we have not reduced but widened the gap between the (diminished) supply of safe assets from financial intermediaries (including the government) and the (enhanced) demand for safe assets from savers. We have thus worsened the problem by greatly amplifying the amount of deleveraging necessary, and so deepened and lengthened the depression.

I believe that all three of these positions–monetarist central-banks-can-do-it, balance-sheet-austerian painful-slog, and balance-sheet-fiscalist borrow-and-spend–are intellectually-coherent arguments that might be true here and now and are definitely true in some possible worlds (and, I would argue, in some past historical episodes). If we want to put them in a table depending on whether they judge monetary and fiscal expansion now to be helpful, neutral, or harmful, it looks like this:

The question is whether there is a fourth live analytical position–a coherent argument that both monetary and fiscal expansion are, here and now, bad, and whether as the BIS argues budget deficits need to be further slashed and interest rates raised RIGHT NOW!!:

I think the balance-sheet-fiscalist position is more correct. Not that more monetary expansion is unhelpful, mind you, just that it is not first-best and is likely to be insufficient. But it could work. And we should try it. And not that deleveraging is unhelpful, mind you, just that it is not first-best. Put me down as saying: (5) try everything. (And, parenthetically, note that there are four boxes left unfilled: I know of absolutely nobody even trying to take position (6)–both fiscal policy and monetary policy right now are practically perfect in every way–or position (7)–expansionary fiscal policy is good and expansionary monetary policy bad. And positions (8) and (9) that either monetary or fiscal expansion bad but the other neutral seem to slide rapidly into the BIS view…)

Why am I not in either the monetarist or the balance-sheet-austerian boxes? Because I buy the four critiques of the monetarist position, and I think that here and now the chances that additional fiscal expansion will crack the reserve-currency issuing governments’ status as safe borrowers are very low, and that we will have plenty of advance warning should that process of the cracking of safe-asset-issuer status even begin.

So let us now try to dig into the mind of the BIS. The place to start is with Claudio Borio (2012): The Financial Cycle and Macroeconomics: What Have We Learnt?, for the BIS report is an implementation of that paper’s theoretical framework. The paper summarizes its section on monetary policy during the post-balance-sheet-recession recovery thus:

What about monetary policy?… Extraordinarily aggressive and prolonged monetary policy easing can buy time but may actually delay, rather than promote, adjustment…. Monetary policy is likely to be less effective in stimulating aggregate demand…. There are at least four possible side-effects of extraordinarily accommodative and prolonged monetary easing. First, it can mask underlying balance sheet weakness…. Second, it can numb incentives to reduce excess capacity in the financial sector and even encourage betting-for-resurrection behaviour…. Third, over time, it can undermine the earnings capacity of financial intermediaries. Extraordinarily low short-term interest rates and a flat term structure, associated with commitments to keep policy rates low and with bond purchases, compress banks’ interest margins. And low long-term rates sap the strength of insurance companies and pension funds, in turn possibly weakening the balance sheets of non-financial corporations, households and the sovereign…. Finally, it can atrophy markets and mask market signals, as central banks take over larger portions of financial intermediation…. Over time, political economy considerations may add to the side-effects… [the] central bank’s autonomy and, eventually, credibility may come under threat….

The first point made is the standard critique of the monetary-policy-is-enough view: In a balance-sheet recession and especially at the zero lower bound, expansionary monetary policy has only limited traction. It must reduce expected future short-term safe interest rates by credibly promising future monetary policies that seem incredible. And beyond that it can only have traction on long-term real interest rates by summoning the Inflation-Expectations Imp. This is, of course, a very standard argument these days. It says that the benefits of expansionary monetary policy in a balance-sheet recession at or near the zero lower bound are low.

More problematic are the next five points: costs of expansionary monetary policy as it:

1. masks underlying balance sheet weakness.
2. numbs incentives to reduce excess financial-sector capacity and encourages betting-for-resurrection.
3. undermines the earnings capacity of financial intermediaries by compressing banks’ interest margins and sapping the strength of insurance companies and pension funds.
4. atrophying markets and masking market signals, as central banks take over larger portions of financial intermediation.
5. political economy considerations as the central bank’s autonomy and credibility come under threat.

It does not seem to me that (5) should be a consideration: it is the business of central banks to choose the right technocratic policy and to fight for the technocratic autonomy to do so. Economists do such central banks no good service when they curb their advice as to what is the technocratic first-best and so rob central banks of the ammunition that they need in their contest with political masters.

It also does not seem to me that (4) should be a consideration. We are in this mess in large part because the–deregulated–financial market could not produce the right price signals and had opened up markets in types of debt that really should not have existed, no? That the process of repairing the damage requires a somewhat larger public-sector role until the damage is fixed is regrettable, but not a reason not to do the job.

And it does not seem to me that (3) should be a consideration either. Organizations like pension funds and insurance companies have assets with a short and liabilities with a long duration. When circumstances have made the Wicksellian natural long-run safe real rate of interest very low, they are weak. Their strength has been sapped. The question is whether they should be given a special government subsidy by having the government keep the interest rate above its full-employment “natural” Wicksellian level. The answer, save for those who are stakeholders, lobbyists, or agents of influence of financial intermediaries, is no.

Thus we are left with (1) and (2): that the necessary process of deleveraging to fix the root problem underlying the balance-sheet recession would be slowed by monetary ease. And this, too, seems to me to be wrong. In an environment with substantial nominal liabilities, (moderate) inflation is an important tool for speeding deleveraging. And so here I side with Rogoff against Borio–monetary ease is a useful crutch, not a handicap, until normal is reattained.

But Borio is looking beyond the normal to the post-mid-cycle phase of the expansion:

Financial liberalisation weakens financing constraints, supporting the full self-reinforcing interplay between perceptions of value and risk, risk attitudes and funding conditions. A monetary policy regime narrowly focused on controlling near-term inflation removes the need to tighten policy when financial booms take hold…. Major positive supply side developments… provide plenty of fuel for financial booms…. Credit and asset price booms reinforce each other, as collateral values and leverage increase…. The financial boom…[does] not just precede the bust but cause it… sows the seeds of the subsequent bust, as a result of the vulnerabilities that build up…. The presence of debt and capital stock overhangs…. The weakening of financing constraints… leads to misallocation of resources, notably capital but also labour, typically masked by the veneer of a seemingly robust economy…. Too much capital in overgrown sectors holds back the recovery. And a heterogeneous labour pool adds to the adjustment costs. Financial crises are largely a symptom of the underlying stock problems and, in turn, tend to exacerbate them….

[Thus there is a] distinction between potential output as non-inflationary output and as sustainable output…. Current thinking… identifies potential output with what can be produced without leading to inflationary pressures…. Inflation is generally seen as the variable that conveys information about the difference between actual and potential output…. And yet, as the previous analysis indicates, it is quite possible for inflation to remain stable while output is on an unsustainable path, owing to the build-up of financial imbalances and the distortions they mask in the real economy…. Sustainable output and non-inflationary output need not coincide…

These are interesting claims: that output can be too high and “too much” labor can be employed without generating accelerating inflation because the only thing that creates the demand for the excess labor is the unrealistic expectations of savers and investors, and when savers’ and investors’ expectations return to normal they are unwilling to pay the excess workers the real wages that are required to get them to work. I do not think these are likely to be true because I do not believe that our current low levels of employment for 25-54 year olds in either the United States or the Eurozone qualify as in any sense equilibrium levels. Prime-age employment in the United States is now 4%-points below its mid-2000s peak. Prime-age employment in the Eurozone is also 4%-points below its mid-2000s peak–and is 2%-points below its level as of three years ago:

To the extent that this argument has bite, it seems to me to be a claim not that employment is “too high” during the–non-inflationary–boom, but rather that bad macroprudential regulation has meant that the full-employment level of aggregate demand is attained in an improper way that creates vulnerabilities. The policy response called for is thus not an easier monetary policy–not higher interest rates–but rather better and stricter macroprudential regulation. There seems to me at least to be an analytical error here. To reiterate:

Paul Krugman: Liquidationism in the 21st Century: “Throughout the annual report…

…balance-sheet problems are treated as if they were… real structural problems… a good reason to accept a protracted period of high unemployment as somehow natural, and to reject artificial stimulus that might alleviate the pain. That, however–as Irving Fisher could have told them!–is not at all the correct implication to draw from a balance-sheet view. On the contrary, what balance-sheet models tell us is that left to itself, the process of deleveraging produces huge, unnecessary costs: debtors are forced to cut back, but creditors have no comparable incentive to spend more, so there is a persistent shortfall of demand that leads to great pain and waste. Moreover, the depressed state of the economy can cripple the process of deleveraging itself…

The curious thing, however, is that, once we recognize that right now fiscal space is definitely not scarce for credit-worthy sovereigns who print reserve currencies, Borio (2012) appears to call for more aggressive policy both on the deleveraging and on the fiscal fronts:

Fiscal policy…. The challenge here is to use the typically scarce fiscal space effectively, so as to avoid the risk of a sovereign crisis…. If agents are overindebted, they may naturally give priority to the repayment of debt and not spend the additional income: in the extreme, the marginal propensity to consume would be zero. Moreover, if the banking system is not working smoothly in the background, it can actually dampen the second-round effects of the fiscal multiplier…. Importantly, the available empirical evidence that finds higher fiscal multipliers when the economy is weak does not condition on the type of recession (eg, IMF (2010)). And some preliminary new research that controls for such differences actually finds that fiscal policy is less effective than in normal recessions…. The objective would be to use the public sector balance sheet to support repair and strengthen the private sector’s balance sheet… [both] financial institutions… [and] households, including possibly through various forms of debt relief…. Importantly, this is not a passive strategy, but a very active one. It inevitably substitutes public sector debt for private sector debt. And it requires a forceful approach, in order to address the conflicts of interests between borrowers and lenders, between managers, shareholders and debt holders, and so on….

Whence then comes the BIS’s calls for further fiscal austerity? It remains a mystery to me. But on financial deleveraging it seems to me that Borio has hit the nail on the head.

So how to sum up?

It seems to me that one way to make sense of this is to conclude that the BIS has not made the argument it really wants to make. What it really wants to argue for is (a) aggressive government promotion of deleveraging and recapitalization to solve the balance-sheet recession and (b) fiscal expansion by credit-worthy sovereigns that print reserve currencies. And, I think, it also wants to argue that effective macroprudential policies are impossible because of banking-sector capture of the regulators. And thus its arguments for monetary tightness are, I think, a counsel of despair: since the macroprudential tools cannot be used to manage and limit risk, higher interest rates once we pass the mid-cycle point are the only game in town.

---

3776 words

Simon Wren-Lewis: Why macroeconomists, not bankers, should set interest rates: “[The] interest rate… which closes the output gap…

[maintains] the level of output and unemployment that will keep underlying inflation constant… [is] the Wicksellian natural rate…. But, respond[s]… the BIS… monetary policy cannot afford to ignore the financial sector, and the risk of excessive lending and bubbles…. The implication is that a financial crisis only happens because interest rates are set at the wrong level…. The… deregulation of the financial sector in the decades before?–not an issue. The widespread misselling of subprime mortgages?–these things happen. All the other examples of misselling and fraud?–boys will be boys. An industry that profits from a massive implicit public subsidy?–we see no subsidy. Classifying subprime products as AAA? Massive increases in bank leverage in the 00s?–all the result of keeping interest rates too low. When those putting the BIS case tell you that macroprudential controls (a.k.a. financial regulations) are ‘untested’ and ‘uncertain in their impact’, what they are really saying is that the financial system cannot be regulated to make it safe when interest rates are low….

I like to praise the current UK government when I can. In setting up a Financial Policy Committee that is separate from the Monetary Policy Committee they did exactly the right thing. This formalises an assignment: macro prudential policy to control financial sector excess, and interest rates to control demand and inflation. Most macroeconomists know this makes sense. But the financial sector has a pecuniary interest in pretending otherwise. Those that get too close to that sector should be kept well away from setting interest rates.

Noah Smith: Should the Fed crash the economy now to prevent a crash later?: “To many, the implication is clear: The Fed needs to raise interest rates in order to prevent a destabilizing market crash. That isn’t a good idea…. Higher asset prices due to lower safe interest rates aren’t some kind of nefarious plot–this is just Finance 101…. That’s rational price appreciation, not a bubble…. When practically everyone is convinced that asset prices are relatively high, like now, it’s pretty obvious that there aren’t many greater fools out there. If you look at past bubbles, such as the late-’90s tech bubble or the mid-2000s housing bubble, you see that there was always a large contingent of society that thought it wasn’t a bubble at all…. Who nowadays thinks that there’s some special Big New Thing that’s going to push stocks and bonds and commodities all to stratospheric heights forever?…. I say we hold off on our calls for anti-bubble rate hikes.

Nick Rowe: Some simple arithmetic for mistakes with Taylor Rules: “If you see your neighbour thinking of doing something daft…

…apparently unaware of one of the problems, you ought to speak up. Especially if it will affect you too, because you do a lot of trade with your neighbour. A fixed Taylor Rule… makes the danger of hitting the ZLB bigger than you think it is. And Taylor Rules don’t work at the ZLB…. What happens if you are wrong about the natural rate of interest, or wrong about potential output?… If actual potential output is one percentage higher than you think it is, that makes you set the nominal rate 0.5 percentage points too high, and so inflation would need to be 0.33 percentage points too low on average to have a big enough offsetting effect to cancel out your mistake…. For a normal central bank, that is a problem, but it is not a big problem…. They fix mistakes in their Taylor Rule as they go along…. That’s probably the main reason why we always observe a lagged interest rate in the equation when we estimate a central bank’s reaction function…. But if the parameter values of the Taylor Rule are fixed by law, central banks are not allowed to learn from their mistakes…. If you really really want to legislate a Taylor Rule, OK. But there’s a price you must pay, if you want to maintain the same margin of safety against hitting the ZLB. That price is a higher average rate of inflation built right into that legislated Taylor Rule. Your choice: legislated Taylor Rules; hitting the ZLB more frequently; a higher rate of inflation. Pick any two…”

Should-Reads:

1. Kevin Drum: Economic Growth Looks Pretty Grim These Days: “The glass-half-full view is: Whew! That huge GDP drop in Q1 really was a bit of a blip, not an omen of a coming recession. The economy isn’t setting records or anything, but it’s back on track. The glass-half-empty view is: Yikes! If the dismal Q1 number had really been a blip, perhaps caused by bad weather, we’d expect to see makeup growth in Q2. But we’re seeing nothing of the sort. We lost a huge chunk of productive capacity in Q1 and apparently we’re not getting it back…. I am, by nature, a glass-half-empty kind of person, so feel free to write off my pessimism about this. Nonetheless, the GHE view sure seems like the right one to me. It’s just horrible news…”

2. Am I the only one who sings the Goldfinger theme as 'schrodinger, he's the man, the man whose cat might be dead/or alive instead'?

   — Charlie Jane Anders (@charliejane) February 26, 2014

3. Noam Scheiber: Hillary Clinton’s Inequality Rhetoric Is Weak: “One of the lines I tripped over during Hillary Clinton’s riff on income inequality last week was her contention that ‘we have to have a…. consensus on how to deal with this’…. The challenge Clinton faces in channeling the current populist mood without alienating her longtime Wall Street benefactors…. A nugget that brought that ‘consensus’ line immediately back to mind… ‘We’re all in this mess together’, the mess being taxes, financial regulation, and economic growth…. This is apparently how Clinton frames the discussion these days. It is, to say the least, discouraging. The only other time I’ve heard people use words like ‘consensus’ and ‘in this together’ during conversations about financial regulation was while talking to Wall Street executives…. Has Hillary picked up this line because she’s spent too much time in the company of well-heeled corporate types?…”

4. Cosma Shalizi: A Statement from the Editorial Board of the Journal of Evidence-Based Haruspicy: “Attention conservation notice: Leaden academic sarcasm about methodology. The following statement was adopted unanimously by the editorial board of the journal, and reproduced here in full: “We wish to endorse, in its entirety and without reservation, the recent essay ‘On the Emptiness of Failed Replications’ by Jason Mitchell. In Prof. Mitchell’s field, scientists attempt to detect subtle patterns of association between faint environmental cues and measured behaviors, or to relate remote proxies for neural activity to differences in stimuli or psychological constructs. We are entirely persuaded by his arguments that the experimental procedures needed in these fields are so delicate and so tacit that failures to replicate published findings must indicate incompetence on the part of the replicators, rather than the original report being due to improper experimental technique or statistical fluctuations. While the specific obstacles to transmitting experimental procedures for social priming or functional magnetic resonance imaging are not the same as those for reading the future from the conformation and coloration of the liver of a sacrificed sheep, goat, or other bovid, we see no reason why Prof. Mitchell’s arguments are not at least as applicable to the latter as to the former. Instructions to referees for JEBH will accordingly be modified to enjoin them to treat reports of failures to replicate published findings as ‘without scientific value’, starting immediately. We hope by these means to ensure that the field of haruspicy, and perhaps even all of the mantic sciences, is spared the painful and unprofitable controversies over replication which have so distracted our colleagues in psychology.’ Questions about this policy should be directed to the editors; I’m just the messenger here…”

Should Be Aware of:

• The Stanford Geospatial Network Model of the Roman World
• Miles Kimball: John Stuart Mill on the Tension Between Maintaining the Variation that Ferrets Out Improvements and the Quick Diffusion of Best Practices as Currently Perceived
• Daniel Tompkins: “No Poetry From the Past”: Moses Finley’s “Ancestral Constitution”
• Roman Frydman: Putting economic models in perspective
• Mark Mufford: The best worst president ever
• Thomas Theiner: Yanukovich’s Ukraine: Corruption You Can’t Imagine
• Rose Nyamunga
• Middle East Food Market, Fremont, CA
• Kasey Dufresne: Kenneth Arrow on Markets
• Roger Ebert: A Guide to Film Noir
• Louis de Rouvroy, Duc de Saint-Simon

And:

1. Sandy B.: Singularities in the rearview mirror: “And the future is not evenly distributed even in a single place; Trevor Noah [South African comedian, funny, daywalker] was talking about the first escalator in , I think, Mozambique; it was in a mall. People lined up to ride it. And when their friends rode it, they took videos. On their iPhones. And posted them to Facebook…”

2. Mistermix: We Are So Out of Touch: “My wife dropped her iPhone 5 and the screen shattered…. Using only my unfettered free will, and Google, I was able to find a replacement screen assembly for $80. I’ve worked on a lot of computers over the years, including fixing a laptop or two, but mein Gott are the parts inside that phone tiny. Through the intercession of Baby Jesus, and Google, I fortunately purchased an assembly that included a lilliputian tool set, and man did I need it…. I only had to remove a total of 5 interior screws to do this repair because the Middle Way taught by Gautama Buddha, and Google, led me to a screen assembly rather than a screen, which means that it included the home button, camera and earpiece already attached…. Now I realize that over at Foxconn, the workers probably have a better set of tools and a magnifying lamp, but I was about to have suicide nets installed around my house by the time I got those fucking screws in and out during the three tries it took to get this repair right…. I cannot imagine a life spent working 12 or 16 hour days putting these devices together.”

3. Prarie Weather: The underclasses: blacks, hispanics, women, and all young voters: “‘Millennials’ are now well aware that the suppress-the-vote efforts of the Republican party include them.  One Gen Y-er writes in the Washington Post: ‘For a time, the targeted populations were primarily racial, ethnic and income groups that traditionally vote Democratic. Now they happen to include Gen-Y’ers, more specifically my college-age brethren…. Our generation’s motley, liberal-to-libertarian-leaning ideological preferences still threaten red-state leadership. In response, Republicans have set out to erect creative, if potentially unconstitutional, Tough-Mudder-style obstacle courses along our path to the polls…’ Catherine Rampell… enumerates the heavy-handed efforts of Republican operators… to keep … American voters from actually voting. It’s not that the voting rates for millennials is especially high.  It’s that Republicans are desperate… [and] back on controlling access to the ballot box.”

Already-Noted Must-Reads:

1. Steve Randy Waldmann: : Depression is a choice: “I enjoyed Matt Yglesias’ suggestion that depressions are merely a technical problem that will go away once the obsolescence of cash eliminates the zero lower bound on interest rates, and Ryan Avent’s rejoinder…. Avent has the better of the argument when he characterizes our current policy impotence as reflecting behavioral rather than technical constraints. We don’t lack for technical means to counter people’s self-defeating impulse to hoard cash and safe financial assets. On the contrary, we have a whole cornucopia of options!… Squabbling… between market monetarists and post-Keynesians and mainstream saltwater economists is an argument over which of many… options would most perfectly address address this not-really-challenging problem…. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives…. The preferences of developed, aging polities… are obvious…. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary…. I am often told that this is absurd because, after all, wouldn’t creditors be better off in a booming economy than in a depressed one?… The revealed preference of the polity is to resist losses for incumbent creditors much more than it is to seek gains…. The policies that might engender a boom are not guaranteed to succeed…. The polity prefers inaction to bearing this risk…”

2. State of Working America: Figure 4N | College wage premium, by gender, 1973–2011

3. Paul Krugman: Liquidationism in the 21st Century: “The BIS position has basically been the same as that of 1930s liquidationists like Schumpeter, who warned against any ‘artificial stimulus’ that might leave the ‘work of depressions undone’. And in 2010-2011 it had an intellectually coherent–actually wrong, but coherent–story underlying that position… that mass unemployment was the result of structural mismatch…. It therefore claimed that easy money would lead to a rapid rise in inflation, despite the high level of unemployment. But it didn’t happen. So… it… look[ed] for new justifications for the same [policy] prescriptions… playing up the supposed damage low rates do to financial stability….
    
   “That over-indebtedness on the part of part of the private sector is exerting a persistent drag on the economy… is a reasonable story…. But the BIS either doesn’t understand that model’… as if they were equivalent to… real structural problems… a good reason to accept a protracted period of high unemployment as somehow natural, and to reject artificial stimulus…. That, however–as Irving Fisher could have told them!–is not at all the correct implication to draw from a balance-sheet view…. The balance-sheet view… makes a compelling case for… fiscal deficits to support demand while the private sector gets its balance sheets in order, for monetary policy to support the fiscal policy, for a rise in inflation targets both to encourage whoever isn’t debt-constrained to spend more and to erode the real value of the debt.
    
   “The BIS, however, wants governments as well as households to retrench… and–in a clear sign that it isn’t being coherent–it includes a box declaring that deflation isn’t so bad, after all. Irving Fisher wept…. Are the BIS’s methods unsound? I don’t see any method at all. Instead, I see an attitude, looking for justification…”

4. Marco Del Negro et al.: Inflation in the Great Recession and New Keynesian Models: “It has been argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent great recession. We challenge this argument by showing that a standard DSGE model with financial frictions available prior to the recent crisis successfully predicts a sharp contraction in economic activity along with a modest and protracted decline in inflation following the rise in financial stress in the fourth quarter of 2008. The model does so even though inflation remains very dependent on the evolution of economic activity and of monetary policy…”

Writers with Drinks: An Evening of Oversharing About Money: 7:30 p.m. July 12 :: Make-Out Room :: 3225 22nd St. San Francisco, CA :: Price: $5-$20 http://writerswithdrinks.com: “If time is money, then consider this evening with Charlie Jane Anders, J. Bradford DeLong, Frances Lefkowitz, Farhad Manjoo, and Carol Queen to be a good investment…”

---

Oversharing About Money: An International Financial Wire Transfer from Lafayette, California, USA to Ahero, Nyando District, Nyanza Province, Kenya

J. Bradford DeLong

As I finish the story, the hedge-fund mogul smiles, as he says: “Always watch the bottom tail of what might happen…” And it reminds me of things about myself and the world that make me uneasy…

A few short years ago we lived, for the school district, in Lafayette. Lafayette is close to here in space and time, but distant in attitude. Lafayette is a place an unkind observer based in and comfortable in San Francisco might describe as an unholy mix of the worst parts of northern and southern California. There we had a neighbor, Bie Bostrom. She had been the oldest Peace Corps volunteer in East Africa. She kept in touch with what had been her town: Ahero, population 10K, in Nyando District, Nyanza Province, Kenya. And there she funds and runs a one-elderly-woman one-town NGO with zero administrative overhead: Grandmothers Raising Grandchildren. That’s http://grgahero.org: godzilla-rath of Khan (with an r)-godzilla-alien-hitchhiker-empire strikes back-rath of Khan-omen-dot-omen-rath of Khan-godzilla. No, I’m not going to hit you up–you’ve been hit up already coming here, at the door.

But when we think about HIV and AIDS here in San Franciso, we tend to think locally–and we should think globally as well. HIV and AIDS continues to be the grim reaper of Africa, and it cut an enormous generational swath. Ahero, total population 10K, has orphans in the three figures who had not been adopted by aunts and uncles–if there were any aunts and uncles left alive–but rather left to be raised by their grandmothers. And that is the target population of Bie Bostrom’s one-elderly-woman one-town zero-overhead NGO:

• The grandmothers weave baskets.
• Bie carries the baskets back to San Francisco Bay and sells them for $40 each.
• Bie carries the money back to Ahero, Kenya.
• Bie hires Moses to oversee what is going on on site.

Moses distributes rice and beans to the grandmothers; disburses school and scholarship money; buys very cute goats–alas! meat goats, for this is not a lactose-tolerant population–and gives them to the families; takes the billy goat–who must think that he has lucked into a very good life indeed–around on a rope from house to house so that there can be more goats; finds proxy cutouts to buy the goats because by now the local goat-dealers rub their hands with glee whenever they see Moses coming. You get the picture. Total monthly expenditure? The very low four figures.

We agree to sponsor a 24-hour basket sale on my website, and to match whatever money is raised. There are at most 50 baskets on hand, after all. But what if websurfing people want to give in addition to the cost of the basket? What if they wish to give without buying a basket? What if weblog commenters begin writing: “This is our opportunity to bankrupt Brad DeLong!!” We, remember, promise to match not basket sales but money raised.

24 hours later we do not–as I thought we would–face a commitment in the low four figures. Rather, we face a commitment in the low five figures. Taking what we had promised and the spike produced by the websurfers, Bie has an extra year’s worth of money, or more, to spend in Ahero to support the grandmothers trying to raise their AIDS-orphaned grandchildren and great-grandchildren.

The thing I discover about myself that I do not like: I find myself writing a check in the low five rather than in the low four figures with a surprisingly bad heart. Given the amount of money that flows through the household, this is really not a big deal at all–less than one-quarter’s college for one child, less than a 1% impact on our current net worth, less than an 0.5% downward move in the Berkeley housing market. Yeshua bar Yusuf would definitely raise an eyebrow, for we are well into “giving of our surplus, not our substance” territory here.

Moreover, the money has the potential to do a lot of good: it is a big deal for Ahero. We are perhaps eight times as well-off as the American median; grandmothers raising AIDS-orphaned grandchildren are less than one-half as well-off as the Kenyan median; the United States is perhaps 100 times as well-off as Kenya; and by the time you multiply those numbers together you conclude that $10K in grassroots contributions plus a $10K match has a relative salience for those to whom it is going in Kenya that is the same as $5M would have for us. And if I cannot set that in motion with a genuinely good heart, what does that say about me?

There remains the question: What to do with the extra money? Bie decides to build a well–and to build a well not out in the fields where it would be useful for irrigating the rice but near the houses. Bie’s view: the girls of Ahero need to go to school–and if you spend up to three hours a day carrying water back to the house, your school attendance is going to be spotty. The local powerbrokers have a different view. Their view: Ahero runs on rice. If there is enough water to grow the rice (and beans), then lots of things are possible. Then everyone can be fed. Then there will be enough labor to grow and process coffee and oilseeds. Then there will be money for teachers. Then there will be time for students to attend school. If there is not enough water…

In the end we play the heavies: the weirdos from Greater San Francisco who believe in education and quality-of-life for girls, rather than investment in productive and badly needed agricultural infrastructure. Is this the right thing to do with the money? We have no idea. Bie strongly thinks it is, but her values are not necessarily their values. And who are the “they” whose values should count anyway?

Thus symbols that were once claims on resources that clients of Fidelity Investor Services once owned have been transferred to us in return for my informing people of my view of likely future Federal Reserve policy, and we now offer to let people in Ahero if they do what we say control those symbols so that internationally-traded goods and services that would otherwise flow around Ahero as if it were not there flow into it, and can be utilized there. This is not economic democracy–the people of Kenya do not decide collectively what to invest in. This is not even local autonomous oligarchy–the power brokers who have successfuly obtained or maintained status in Ahero deciding what to do. This is neo-neo-colonalism: it is (or some of it is) our money, and we decide how it is to be spent.

Once the money is earmarked and sitting in the bank account, how do you get a well dug in western Kenya? We investigate well-digging machines. Ahero is ten miles outside of Kisumu, population 500K, on the road to Nairobi. Ahero is 100 miles from Nairobi, population 3.5M. How costly can it be to get a well-digging machine from Kisumu–or Nairobi–to Ahero along the road and use it to dig the well?

Too costly.

When Bie costs it out, it turns out that we could dig two wells by hand for the cost of hiring one better-funded and larger NGO to dig the well by machine. We can send purchasing power halfway around the globe in less than a second. Once you pack your commodities–durable, non-spoilable–in the container, you can ship them halfway around the world for less than $1/cubic foot. But actually exercising control and getting value-for-money 8K miles away is much more difficult.

I am a neoclassical economist–in fact, I am a card-carrying neoliberal. In my lectures at Berkeley I stress what a marvelous, miraculous, and effective mechanism for coordinating our societal division of labor is our property, contract, exchange, and money-based market economy. I point out that in the 20th century we ran a gigantic natural experiment in which those peoples trapped by politics and the result of war behind the Iron Curtain experimented with eliminating the market economy of self-adjusting equilibrating prices via supply and demand. The consequence was that the really-existing socialist economies threw away 80% of their potential economic productivity by banning the market economy. Even they, however, relied heavily on money and the promise of differential rewards and promotions to positions that offered more money as major incentivizing devices. Those who tried to go beyond Lenin in the direction of “Full Communism”–say, Che Guevara in Cuba and his Ten Million Ton Sugar Harvest campaign and his attempt to divide societies into a vanguard of new men motivated by moral incentives, a mass who were to be educated into being motivated by moral incentives, and los gusanos to be motivated not by carrots but by sticks–either quickly abandoned their dreams or found themselves abandoned by their comrades.

But.

Waving money in people’s faces to try to get them to do what you want is a very narrow-bandwidth communications channel. Even to implement our desire to get goats to the grandmothers, we would be largely out of luck–we would be taken to the cleaners by the local goat-dealers–if we did not have Moses, and if Moses did not have the ability to hire local proxy cutouts to buy the goats for him, and if Moses were not committed enough to the mission to actually care about getting good value for the grandmothers from Bie’s money. If Moses sought, say, to boost his local standing by overpaying people who he thought it would be useful to him to have them owing him favors in the future, we would be in big trouble.

If the well is going to be useful we think we need much more bandwidth and, thus, control over what will actually happen on the ground. This is not uncommon: I remember a conversation I had once with one person active in African development. He told me that he would never in a thousand years have thought that he would find himself spending his time writing policies to prohibit the transport of smoked monkey meat in backseats occupied by visiting foreign dignitaries–no matter how high a price smoked monkey would bring.

But we have Moses on the scene. Thus it turns out to be much more cost-effective to dig the well by hand. Moses hires men with shovels. We find that it is the case that here–or, rather, not here but there–and now, in the twenty-first century, we find that the best way to deploy our intercontinental social power to make this happen is to induce young men with testosterone-fueled muscles and iron shovels–technologies that hit the shores of Lake Victoria 3000 years ago–to dig the well by hand.

In my lectures at Berkeley I talk about how the iron-and-steam technologies of the Industrial Revolution 200 years ago meant that humans could and would no longer add much value by using their large muscles to move heavy things. William Gibson’s famous line is: “the future is here–it is just not evenly distributed”. But he does not say that the present is not evenly distributed here. And even what we regard here as the past of centuries ago is not evenly distributed enough to have made it to rural East Africa, at least not when we try to figure out how to get the best well dug at the lowest cost.

Now when we look at the totals on our quarterly index-fund statements, there is perhaps a difference in the third significant figure. Now if you were to go to Ahero, Nyando District, Nyanza Province, Kenya, you would find an extra well–one located not near the rice fields but in among the houses, with an elderly woman charging pennies for you to fill a bucket. And perhaps you would find a substantial number of additional girls sitting in school rooms rather than walking extra miles with buckets on their heads. And perhaps a substantial number of men and their relatives are grateful to Moses for getting them some money by giving them the opportunity to work on the well.

So a feel-good story, no? But telling it again reminds me that I ought to set this process in motion with a better heart. Telling it again reminds me that we ought not to live in a world in which $20K distributed among AIDS-survivors in Ahero, Kenya has the same salience that $5M has for people like me in Greater San Francisco. And telling it again reminds me that we ought not to live in a world in which we lack the organizational competence to use productive modern rather than less-productive 3000-year-old technologies to dig wells near the shores of Lake Victoria.

Marco Del Negro et al.: Inflation in the Great Recession and New Keynesian Models: “It has been argued that existing DSGE models…

…cannot properly account for the evolution of key macroeconomic variables during and following the recent great recession. We challenge this argument by showing that a standard DSGE model with financial frictions available prior to the recent crisis successfully predicts a sharp contraction in economic activity along with a modest and protracted decline in inflation following the rise in financial stress in the fourth quarter of 2008. The model does so even though inflation remains very dependent on the evolution of economic activity and of monetary policy.

Paul Krugman: Liquidationism in the 21st Century: “The BIS position has basically been the same…

…as that of 1930s liquidationists like Schumpeter, who warned against any ‘artificial stimulus’ that might leave the ‘work of depressions undone’. And in 2010-2011 it had an intellectually coherent–actually wrong, but coherent–story underlying that position… that mass unemployment was the result of structural mismatch…. It therefore claimed that easy money would lead to a rapid rise in inflation, despite the high level of unemployment. But it didn’t happen. So… it… look[ed] for new justifications for the same [policy] prescriptions… playing up the supposed damage low rates do to financial stability….

That over-indebtedness on the part of part of the private sector is exerting a persistent drag on the economy… is a reasonable story…. But the BIS either doesn’t understand that model’… as if they were equivalent to… real structural problems… a good reason to accept a protracted period of high unemployment as somehow natural, and to reject artificial stimulus…. That, however–as Irving Fisher could have told them!–is not at all the correct implication to draw from a balance-sheet view…. The balance-sheet view… makes a compelling case for… fiscal deficits to support demand while the private sector gets its balance sheets in order, for monetary policy to support the fiscal policy, for a rise in inflation targets both to encourage whoever isn’t debt-constrained to spend more and to erode the real value of the debt.

The BIS, however, wants governments as well as households to retrench… and–in a clear sign that it isn’t being coherent–it includes a box declaring that deflation isn’t so bad, after all. Irving Fisher wept…. Are the BIS’s methods unsound? I don’t see any method at all. Instead, I see an attitude, looking for justification…

State of Working America: Figure 4N | College wage premium, by gender, 1973–2011: