Category: Equitablog

Can anyone put forward a credible explanation for this?

Chris House (July 13, 2014): Traditional Macroeconomic Models and the Great Recession: “Commentators like Paul Krugman…

…should also own up to the mounting evidence that the older models (even the paleo-Keynesian models that some prefer) clearly failed…. They made clear predictions about inflation that were supposedly at the center of the New Keynesian mechanism–predictions that never materialized.

Paul Krugman (April 13, 2013): The Missing Deflation: “Keynesians…. One area where things haven’t worked out as [we] expected…

…however, is on the deflation front. Inflation has stayed very subdued; but coming in to the crisis I certainly thought that actual Japanese-style deflation was a real possibility. That hasn’t materialized (and for that matter, even Japan never had more than very gradual deflation). Why?

One possibility was that there wasn’t as much slack in the economy as we thought, that a lot of the problem was structural rather than cyclical.

Another possibility, however, which I at least noted fairly early on, was that downward nominal wage rigidity could explain why the fairly rapid falls in inflation seen in previous slumps weren’t happening this time; if wages are “reluctant” to actually fall, inflation becomes “sticky” at low levels even with a very depressed economy.

So now we have two new analyses, by Hobijn and Daly at a Boston Fed conference, and in the IMF’s new World Economic Outlook, both of which strongly suggest that the issue isn’t structural unemployment, it’s low responsiveness of inflation to unemployment when inflation is low to begin with.

Three points here:

1. This does say that there is little risk of accelerating inflation. Indeed, Hobijn and Daly suggest that there’s a “pent-up demand for wage cuts” that will probably push inflation lower even if the economy is recovering.

2. Central banks and other policy makers will be making a terrible mistake if they look at low, stable inflation and pat themselves on the back for a job well done. Low, stable inflation, it turns out, is entirely consistent with catastrophic economic mismanagement.

3. Notice how Keynesians responded to the partial failure of a prediction: by asking what they got wrong, and how their model of the world needed to be adjusted. This, of course, shows what fools we are: everyone on the other side of these debates knows that you respond to mistakes by never acknowledging them, and doubling down on whatever you originally claimed.

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…

Should-Reads:

1. Lars Syll: Hendry and Mizon on the limited value of DSGE models: “David Hendry and Grayham Mizon [have] a great article, confirming much of Keynes’s critique… underlining that to understand [the] real world… stationary probability distributions are of no avail… [because] the probabilities that ruled the past are not those that will rule the future…. Advocates of econometrics want to have deductively automated answers to fundamental causal questions. But to apply ‘thin’ methods we have to have ‘thick’ background knowledge of what’s going on in the real world…”

2. Dani Rodrik: Why the super-rich are mistaken to believe that they can dispense with government: “The American corporate elite in the postwar era had ‘an ethic of civic responsibility and enlightened self-interest’… cooperated with trade unions and favored a strong government role in regulating and stabilizing markets… understood the need for taxes to pay for important public goods such as the interstate highway and safety nets for the poor and elderly. Business elites were not any less politically powerful back then. But they used their influence to advance an agenda that was broadly in the national interest. By contrast, today’s super-rich are ‘moaning moguls’, to use James Surowiecki’s evocative term…”

3. Kevin Drum: Who’s Afraid of an Itsy Bitsy Bit of Inflation, Anyway?: “I’d guess that it’s a few things. First, the sad truth is that virtually no one believes that high inflation helps economic growth when the economy is weak. I believe it. Krugman believes it. DeLong believes it. But among those who don’t follow the minutiae of economic research—i.e., nearly everyone—it sounds crazy. That goes for the top 0.1 percent as well as it does for everyone else. If they truly believed that higher inflation would get the economy roaring again, they might support it. (Might!) But they don’t. Second, there’s the legitimate fear of accelerating inflation once you let your foot off the brake. This fear isn’t very legitimate, since if there’s one thing the Fed knows how to do, it’s stomp on inflation if it gets out of control. Nonetheless, there are plenty of people…. There’s fear of the 70s, which apparently won’t go away until everyone who was alive during the 70s is dead. Which is going to be a while…”

4. David Dayen: The Costs of Obama’s Housing Mistakes Keep Piling Up: “The Federal Housing Finance Agency (FHFA), which oversees mortgage giants Fannie Mae and Freddie Mac, wants to help around 676,000 homeowners it has identified as eligible for refinancing under the government’s Home Affordable Refinancing Program (HARP)…. These homeowners currently hold mortgages with interest rates that are at least 1.5 percent above the current market rate, and would save roughly $200 a month if they used HARP to refinance. They also have little or no equity…. This week, Mel Watt, the new head of the FHFA, participated in a town hall meeting in Chicago designed to encourage eligible residents to refinance…. But these remaining homeowners appear to have no interest in the program, and Watt explained why in Chicago. ‘We have written to them. We have called them, and they’re saying this is too good to be true’, he said. Why would homeowners exhibit so much skepticism in a government program that they feel inclined to turn down thousands of dollars in free money? You can track it back to all the promises made over the past five years to help homeowners, and the unfortunately sorry results…. The Home Affordable Modification Program (HAMP)… only around 900,000 hold active permanent HAMP modifications, while millions of others either re-defaulted or were rejected…. The process devolved into a horror show for homeowners. Servicers prolonged trial modifications well past the three-month period set out in HAMP guidelines so that they could rack up late fees. They deliberately lost borrower’s income documents to extend the default period, even shredding documents and purging records to do so. They pursued foreclosure while negotiating the modification, against HAMP rules. They granted modifications that folded servicer fees into the principal of the loan, increasing the unpaid principal balance–and thus their profit–while pushing the borrower further underwater.  And they trapped borrowers after denying modifications, demanding back payments, missed interest and late fees, with the threat of foreclosure as a hammer…”

Should Be Aware of:

• Nick Bunker: Is employment segregation holding back economic growth? | Washington Center for Equitable Growth
• Cory Doctorow: Realtors hire ruined millionaires to pretend to live in vacant megamansions
• Lee Hutchinson: The Oatmeal convinces Elon Musk to donate $1 million to Tesla Museum
• Elise Brezis and Francois Crouzet (1995): The Role of Assignats During the French Revolution: An Evil or a Rescuer?
• Igor Volsky: Marco Rubio Decides To Support His Own Immigration Bill Again
• Bill Gurley: How to Miss By a Mile: An Alternative Look at Uber’s Potential Market Size
• Interfluidity: Welfare economics: housekeeping and links: “A correspondent asks that I give the welfare series a table of contents. So here’s that… Welfare economics: Introduction The perils of Potential Pareto Inequality, production, and technology Welfare theorems, distribution priority, and market clearing Normative is performative, not positive. I think I should also note the “prequel” of the series, the post whose comments inspired the exercise: Should markets clear?…”
• Bill Gates: Here’s a Chapter From My Favorite Business Book: “Business Adventures, by John Brooks, is the best business book I’ve ever read. Unfortunately, it is not easy to find. The book went out of print in the early 1970s. The original publisher is out of business, and Brooks died in 1993. But his family kindly agreed to provide one chapter as a free e-book, which you can download below…”

And:

1. Jonathan Chait: Portman Slams Hillary Clinton As ‘Mainstream’: “Wait, What?… Ohio Senator Rob Portman spoke with Bloomberg yesterday, showing a little leg on his potential 2016 presidential candidacy. Portman started explaining that Republicans should not be afraid to run against Hillary Clinton. One reason he offered is that Clinton might lose the Democratic nomination. That’s when the talking points started to go wrong: ‘I mean, the Democratic Party is more populist and more liberal than it was when she ran last time, and yet she’s more mainstream, if anything. So… it is no longer the party of Bill Clinton.’ I suppose that would be a good line to use if Hillary Clinton loses the nomination–the Democrats used to be sensible when the Clintons were in charge, but now they’ve gone crazy. However, the odds of that happening are really small. In the meantime, you just admitted that the candidate who is overwhelmingly likely to be heading the opposing ticket in 2016 is ‘mainstream’. Great message!”

2. Clyde Hufbauer: NAFTA 20 Years Later: Setting the Record Straight – YouTube:

3. John Holbo: Anti-Freedom Conservatives and Anti-Liberty Conservatives: “For marketing purposes, conservatives need a way to sound like they are opposed to other conservatives, for deep, principled reasons, while preserving a sense that all conservatives are, in principle, always right. You need that pivot for electoral reasons, even though it’s analytic doom. You also need a way for conservatives to come across as deep and consistent and intellectual while actually being rather… uneffortful and unreflective in the thought department–because, hey, politics ain’t political theory. Analytically, if your characterization of each group, or sub-group, doesn’t sound a bit pejorative, you aren’t doing the analysis right. Because any correct analysis is going to make any political faction sound philosophically half-baked and unlikely to appeal to most voters…”

Already-Noted Must-Reads:

1. Nicholas Bagley: Can the House sue over the employer mandate?: “The legality of delaying the employer mandate is questionable…. [But] the lawsuit isn’t going anywhere…. The House of Representatives as an institution hasn’t suffered the sort of concrete, particularized injury that the courts are constitutionally empowered to review…. The only arguments I’ve seen in favor of standing–they’re sketched out in a memo from Boehner–don’t withstand even cursory scrutiny. The primary claim seems to be that ‘[t]here is no one else….’ But so what? The Supreme Court has been unusually emphatic in holding that ‘the assumption that if [the challengers] have no standing to sue, that no one would have standing to sue, is not a reason to find standing’. Not every fight can or should see the inside of a courtroom…. Congress could… enact a statute withdrawing the President’s claimed enforcement discretion…. Congress isn’t willing to use its power, not that it lacks the power. Finally, the memo suggests that ‘explicit House authorization for the lawsuit’ may confer standing on Congress. But why? In Chadha v. INS, the Supreme Court flatly dismissed the idea that the House or Senate, acting alone, could constitutionally wield legislative power. Boehner’s resolution has as much legal effect as an open letter signed by members of his caucus…. This lawsuit looks like a waste of time and taxpayer money.”

2. John Bogle: Achieving Greater Long-Term Wealth Through Index Funds: “Let’s start off with the obvious. Imagine a circle representing 100% of the U.S. stock market, with each stock in there by its market weight. Then take out 30% of that circle. Those stocks are owned by people who index directly through index funds. The remaining 70% are owned by people who index collectively. By definition, they own the exact same portfolio as the indexers do in aggregate, so they will capture the same gross return as the direct indexers. But by trading back and forth, trying to beat one another, they will inevitably lose by the amount of their transaction costs, the amount of the advisory fees they pay, and the amount of all those mutual fund management costs they incur: marketing costs, processing, technology investments, everything. When we look at the big picture of the costs of investing, including sales loads as well as expense ratios and cash drag, it is a foregone conclusion that active investors, in aggregate, will underperform index investors…. It’s the relentless rules of humble arithmetic…. In a 7% return market, indexing should deliver approximately 6.95% to investors. (A typical Vanguard all-market index fund charges 0.05%.) The remainder—those who are trading back and forth, hiring managers, and all that kind of thing—will incur costs, in round numbers, of about 2% per year. So, the indexers are going to capture pretty close to a 7% return in a 7% market, while the active investors, who also collectively own the index, are getting the same 7% gross return minus about 2% for all those fees and costs, a net return of 5%. It is definitional tautology that the indexers win and the traders lose…”

3. Richard Mayhew: Any publicity is good publicity: “‘After controlling for other state characteristics… I observe a positive association between the anti-ACA spending and ACA enrollment… anti-ACA ads may unintentionally increase the public awareness about the existence of a governmentally subsidized service and its benefits for the uninsured.’ I think this is a case of trying not to think about the elephant after being told about the elephant.  People in states that were getting Koch bombed, knew about the Exchanges, knew they existed and could do something about that, while people in states where the Kochs weren’t trying to block access to affordable, subsidized private market health insurance (doesn’t that sound absurd when it is put that way), awareness was lower as they were never told to not think about the elephant.”

4. Katharine Bradbury: Availability of Unemployment Insurance: “Economists often expect unemployment insurance (UI) benefits to elevate unemployment rates because recipients may choose to remain unemployed in order to continue receiving benefits, instead of accepting a job or dropping out of the labor force. This paper uses individual data from the Current Population Survey for the period between 2005 and 2013—a period during which the federal government extended and then reduced the length of benefit availability to varying degrees in different states—to investigate the influence of program parameters in the UI system on monthly transition rates of unemployed individuals. The main finding is that unemployed job losers tend to remain unemployed until they exhaust UI benefits, at which point they become more likely to drop out of the labor force; transitions to a job appear to be unaffected by UI benefit extensions. These findings imply that the longer periods of benefit eligibility under the federal programs EUC08 and EB—up to 99 weeks in many states in 2011 and 2012—contributed to the elevated jobless rates observed during that period, but not via lower employment. By the same token, the sharp contraction of benefit weeks that occurred in 2012 and continued more gradually in 2013 likely contributed to declines in unemployment and participation rates beyond what one would expect based on the improving economy alone. Similarly, the December 28, 2013 sudden cutoff of federal UI payments to an estimated 1.3 million jobless Americans who had been looking for work for more than six months is adding to the pace of transitions from unemployment to dropping out of the labor force, thus reducing the unemployment rate and the labor force participation rate further in the first half of 2014, although very modestly.”

5. Ezra Klein: Boehner is suing Obama so he doesn’t have to impeach him: “If Speaker John Boehner wins his lawsuit against President Barack Obama… Obama [will then] implement the Affordable Care Act’s employer mandate without further delay. Which… might mean the court will order Obama to do something he has already done. What’s even odder about the suit is that Boehner hates Obamacare’s employer mandate. And the business groups that back Boehner hate Obamacare’s employer mandate. So Boehner is lifting heaven and earth to get the court to demand Obama more rapidly enforce a policy Boehner hates, that Boehner’s allies hate, and that Obama says he’s going to start enforcing in a few months anyway…. Boehner’s argument is that this isn’t about the mandate at all. It’s about the Constitution… Boehner… was House Majority Leader in May 2006, when President George W. Bush chose to waive Medicare Part D’s penalties for low-income and disabled seniors who signed up late…. There is little evident difference between Obama’s unilateral delay of the employer mandate in Obamacare and Bush’s unilateral delay of the late-enrollment penalties in Medicare Part D. But Boehner sees one as a threat to the republic while the other passed like a breeze in the night….
    
   “There’s another possible reading of Boehner’s lawsuit. Under this theory, Boehner’s lawsuit isn’t so much about reversing what Obama has done as it’s about stopping what Republicans might do…. Calls for impeachment are mounting…. Boehner… has watched ideas like this move from ridiculous to inevitable in an instant (see Government Shutdown, 2013). He also watched what happened the last time Republicans tried to impeach a president who was more popular than they were: they lost the midterm election and Newt Gingrich had to resign as Speaker of the House…. Boehner can argue that attempting impeachment before the case finishes would be counterproductive: if Republicans raise impeachment as a remedy there’s no way the courts will get involved. They’ll just let Congress work it out. Boehner is letting Republicans throw as many parties as they want in the House so he can make sure they don’t drink and drive home.
    
   “Boehner’s particular legislative genius is his ability to keep House conservatives from detonating the Republican Party while maintaining just enough conservative credibility to retain his speakership. This might be his masterstroke.”

6. 
   Sharon Long et al.: Number of Uninsured Adults Continues to Fall under the ACA: Down by 8.0 Million in June 2014

Sharon Long et al.: Number of Uninsured Adults Continues to Fall under the ACA: Down by 8.0 Million in June 2014:

I confess that I do not understand the recent BIS Annual Report. I have tried–I have tried very hard–to wrap my mind around just what the BIS position is. But I have failed.

So let me try to lay out how I see it–where I think we are, and what I think the three live macroeconomic-policy positions are:

First, where we are:

We had in the late-1990s a high-pressure full-employment low-inflation tight-fiscal equilibrium. It was, however, unsustainable: based on exaggerated beliefs not about the utility but the profitability of companies based on the high-tech computer and communications technologies of the 1990s. When expectations adjusted to the reality of profitability, the high investment part of the 1990s boom went away, and the economy fell into the minor recession of the early 2000s.

We had in the mid-2000s a medium-pressure high-employment low-inflation loose-fiscal equilibrium. It was, however, unsustainable: based on exaggerated beliefs about the safety of leveraged investments in U.S. real estate. When expectations adjusted to reality, the housing bubble collapsed, the New York financial system nearly collapsed, the tolerance of private-sector savers for risky assets collapsed, the confidence of private-sector savers that money-center banks could accurately characterize the risk of the products they sold collapsed, and the economy fell into the Lesser Depression in which we are now mired.

Second, the positions:

I have, up until now, seen the debate over what policies should be now as a three-cornered debate:

• On the fear-not hand, there was a monetarist view–call it the Janet Yellen view–that relies on interest rates low enough and expected to continue to be low enough for long enough to rebalance the economy at full employment and low inflation.

• On the remove-obstacles hand, there was a painful-slog view–a Ken Rogoff or a Richard Koo view–which appears to hold that the problem is not that the fundamental interest rate consistent with full-employment low-inflation equilibrium had fallen, but rather that excessive leverage had broken the credit channel. We must thus 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.

• On the drum-of-creation hand, there was a fiscalist-financialist view–call it the Larry Summers-Brad DeLong view–that requires the government to issue safe debt itself (or to guarantee private debt in order to make it safe) to substitute and compensate for sharply-reduced saver risk tolerance, substantially-impaired intermediary ability to undertake risk transformation, and the resulting broken financial credit channel.

• And the fourth flame-of-destruction hand was empty.

The Fear-Not Hand: First, the Janet Yellen view–which is also the Ben Bernanke view–is that the root problem is that the economy suffers from a global savings glut (or, if you prefer, a global investment shortfall). Thus maintaining real interest rates at what were equilibrium levels in the 1990s leads to slack output and idle capital and labor. The Wicksellian natural rate of interest has fallen. Appropriate monetary policy to balance the economy needs to recognize this fall in the natural rate. Central banks need to keep interest rates at unusually low levels as long as they do not lead to elevated inflation–until, that is, something happens to either reduce desired savings or increase desired investment. In the Janet Yellen view high asset prices and low asset yields are an equilibrium reflection of fundamental shifts that have raised the value of the future in terms of the present and thus reduced the equilibrium premium return the borrowers have to offer in order to induce savers to lend. These low interest rates lead to a redirection of economic activity in the direction of building more long-duration assets and undertaking more highly speculative long-run investments. But this is a good thing.

The Remove-Obstacles Hand: Second, we have the Rogoff-Koo view–if I understand it correctly–that holds that the monetarist approach is inadequate. We do not have a global savings glut that has lowered all interest rates and raised all asset prices via a fall in the Wicksellian natural rate of interest that the central bank ought to accommodate. We have, rather, excessive leverage, and a consequent collapse in private-sector financial risk-tolerance plus a loss of trust in the ability of financial intermediaries to be good and trustworthy agents who will take savers’ money and manage it wisely. Savers will not buy-and-hold risky financial assets offered by financial intermediaries. Savers will not trust financial intermediaries to produce safe assets.

This excessive-leverage has three results: The first result is a safe-asset shortage: an extraordinary increase in the value of assets perceived as safe–Treasury bonds–with a consequent fall in the rates of return on such assets. The second result is a risky-asset surplus: even with extremely high safe-asset values, there is no extraordinary increase in the value of assets perceived as risky: indeed, by standard metrics equity investments are high but not that high relative to current fundamentals. The third result is that entities that would normally rely on financial intermediaries’ ability and willingness to grade and manage risks to give them access to capital find themselves rationed out of the market. We must thus 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. And the right policy is that government should do what it can to hurry along the process of deleveraging to the extent that it can.

The Drum-of-Creation Hand: Third, the Larry Summers-Brad DeLong view agrees with Rogoff-Koo on the deficiencies of the monetarist approach, but holds that expansionary fiscal and credit policy by the government is the short-term and perhaps the medium-term solution. Like Rogoff-Koo, the root problem is different than a simple fall in the Wicksellian natural rate of interest. And like Rogoff-Koo in the Summers-DeLong view high asset prices and low asset yields for assets perceived as safe are not the best fix. But for Summers-DeLong the Yellen solution of lowering interest rates and keeping them low for the long run is only a third-best response to the breakdown of the credit channel. The first best would be fixing the credit channel: restoring the willingness of savers to accept and hold risky assets that have been vetted by financial intermediaries worthy of trust–which requires the recreation or creation of financial intermediaries worthy of trust as well. But–and here comes the difference with Rogoff-Koo–the second best would be using the government as a financial intermediary: have the government spend, borrow, and tax in the future, thus dragooning taxpayers into playing the role of the risk-bearers who have not shown up for the performance and are absent from the private market.

Why does the Summers-DeLong position see the Yellen solution only the third-best response? The fundamental underlying market failure takes the form of an inability to perform the risk transformation–to produce savers of sufficient risk tolerance that they are willing to hold the vetted assets produced by financial intermediaries that must back those assets with fundamentally-risky long-term investment projects. The Yellen solution provides businesses and financial intermediaries with an overstrong incentive to create long-duration assets: those are the things that have their value boosted most by sub-first-best interest rates. The economy thus winds up investing too much in long-duration projects and too little in risky projects.

I think that the Rogoff-Koo critique of Summers-DeLong is that expansionary fiscal and credit policies are very likely to crack the government’s status as safe borrower. And if the expansion of government debt means that it also loses its status as perceived to be safe, we have not reduced but widened the disequilibrium between the (diminished) supply of safe assets from financial intermediaries (including the government) and the (enhanced) demand for safe assets from savers, and so deepened the depression.

There is another potential drawback to the Yellen solution. A well-functioning credit channel directs savers’ funds to financial intermediaries that can add value: intermediaries that can properly understand, grade, classify, and manage risks–not financial intermediaries who are writing unhedged puts when they are not engaged in a full-blown Ponzi scheme. A broken credit channel levels the playing field for financial intermediaries, eliminates the advantage prudent risk-managers ought to have over put-writers and Ponzi-schemers. Lower interest rates do not fix this but rather accentuate it by raising the potential returns to successfully selling assets perceived as safe at the very high earnings multiples associated with low interest rates. It thus rewards those who can talk a good game and create the perception relative to those who can understand and calculate the reality.

The Flame-of-Destruction Hand: Now we seem to have a fourth position advocated by the BIS. It is not fear-not monetarist–it calls for raising interest rates now, rather than keeping them low to accommodate the fall in the Wicksellian natural rate of interest. It is not drum-of-creation fiscalist-guaranteeist–it fears activist expansionary fiscal policy even more than it fears monetary ease. And it is not remove-obstacles wait-for-deleveraging to bring demand for and supply of risky and safe assets back into balance–indeed, it seems hostile to any increase in the demand for risky assets that would remove or reduce the current disequilibrium.

So what is the BIS view? I am not sure. Gavyn Davies and Martin Wolf have tried to spell it out:

Gavyn Davies: Keynesian Yellen versus Wicksellian BIS: “On [the BIS] view, monetary policy has been too easy on average…

…leading to a long term upward trend in debt and risky financial investments. The financial cycle, which extends over much longer periods than the usual business cycle in output and inflation, eventually peaked in 2008. But, even now, the BIS says that the central banks are attempting to validate the long term rise in debt and leverage, instead of allowing it to correct itself. Excessive debt, it contends, is preventing the rise in capital investment needed for a healthy recovery. Financial and household balance sheets need to be repaired (ie debt needs to be reduced) before this can take place. In contrast… Yellen… admits that mistakes were made… in the regulatory sphere…. Higher interest rates, she says, would have led to much worse unemployment, without doing much to reduce leverage and dangerous financial innovation….

The BIS argues that zero interest rates and quantitative easing are becoming increasingly ineffective in boosting GDP growth… artificially inflating asset prices… blocking a necessary correction in excessive debt. Macro-prudential and regulatory policy might be helpful here, but will not be sufficient. The main risk is that the exit from these accommodative monetary policies may come too late. The Yellen view… is an outright rejection of the view that interest rates have been too low throughout previous cycles. If anything, the “secular stagnation” argument… suggest[s]… that real interest rates have been and remain too high, because the zero lower bound prevents them from falling as far as would be required to reach the equilibrium real rate. On this view, the danger is that the exit from accommodative monetary policies will come too early, not too late…

Plus:

Gavyn Davies: ‘Artificially’ high asset prices: “Is it possible that the natural rate that seems appropriate for the real sector of the US economy…

…might sometimes be lower than a wider definition of the natural rate, which applies to the entire global economy, including the financial sector in the longer term?… New Keynesian models might not allow for excessive risk taking in the financial markets, because they usually do not contain a fully developed financial sector…. Borio… says that credit bubbles can develop, along with excessively high asset prices, if interest rates remain at present levels. On this view, the banking and shadow banking sectors can take on a life of their own, in the context of a long-term financial cycle driven by rising risk appetites among borrowers and lenders.

The resulting increase in credit and debt may not give any inflationary signals to the central bank. It could instead be felt in the demand for financial assets, in which case the price of assets may rise, without any immediate effect on the real economy or inflation. Or it might cause capital outflows which are then translated into credit bubbles in other countries…. In such circumstances, monetary policy faces a conflict. The real economy in the US might require lower interest rates to reach equilibrium, but this can cause excessive financial risk-taking domestically, or credit bubbles abroad….

What is the relevance of all this for the “artificiality” of asset prices? As Krugman argues, asset prices are not “artificially high” for as long as the Fed is able to set interest rates at the low levels that appear to be needed by the real sector of the US economy. The Fed’s low rates are in line with Paul’s version of the Wicksellian or natural interest rate, which (I think) he derives mainly from the near-term behaviour of the real sector of the US economy. However, asset prices could turn out to be artificially high, if the Fed’s low rates are judged against the higher Wicksellian or natural interest rate that could be applied to… the financial sectors in the long run. That might only become clear when the Fed is eventually forced to adjust rates upwards towards this broadly-defined natural rate. That, anyway, is my interpretation of the BIS concern….

It is, of course, possible that the excessive risk taking in the financial sector could be controlled by regulatory or macroprudential policy. The BIS is increasingly sceptical about the effectiveness of such controls, unless they are backed by higher interest rates. But, even if regulatory controls worked, they would presumably also bring down asset prices from their present levels.

And Martin Wolf:

Martin Wolf: Bad advice from Basel’s Jeremiah: “One can divide the BIS analysis…

…into three parts: what caused the crisis; where we are now on the way out of it; and what we should do….

The perspective is that of the “financial cycle”…. If the rate of interest is too low, a boom driven by expanding credit and rising asset prices may ensue…. When the financial cycle turns from boom to bust, crises erupt. Then follow the “balance sheet recessions” described by Richard Koo of the Nomura Research Institute–painful deleveraging and extended periods of feeble growth. Such cycles, argues the BIS, “tend to play out over 15 to 20 years on average”…. On the second, the BIS notes that growth has picked up over the past year, with advanced economies gaining momentum…. Overall indebtedness continues to rise. Crises, we are reminded, cast a long shadow. Furthermore, the policies of central banks are exerting extraordinary influence on financial markets, generating a “search for yield”, a disappearance of pricing for risk and a collapse in market volatility. This is true even though balance sheets remain so stretched. Meanwhile, credit excesses have emerged in a number of emerging economies….

It is on the third point–what is to be done–that the BIS turns into a prophet from the Old Testament: it demands [monetary and fiscal] austerity now. In countries that have experienced a financial crisis it recommends balance sheet repair and structural reform–deregulation, improved labour flexibility and “trimming public sector bloat”. It demands fiscal retrenchment. But unlike, say, George Osborne, the UK chancellor of the exchequer, the BIS wants to see monetary stimulus withdrawn, too, emphasising the risks of “exiting too late and too gradually”…. In countries that have experienced financial booms (the report points to Brazil, China and Turkey), it recommends pre-emptive monetary tightening and imposition of macroprudential restraints. To me… this is a blend of the wise, the foolish and the doubtful.

Start with the doubtful. The BIS is right to emphasise the enormous costs of credit-driven booms. But it ignores the context in which policy makers allowed these to occur. In particular, it ignores the evidence of a global savings glut…. Similarly, it ignores the impact of adverse shifts in the distribution of income and in business behaviour on propensities to save and invest…. The BIS insists that losses in output relative to trend are inevitable…. But by the 1950s, the US had recovered fully from the gigantic losses relative to the pre-1929 trend in GDP per head caused by the biggest crisis of all: the Great Depression (see chart). Is this not because, unlike in the pusillanimous present, the US subsequently experienced the biggest fiscal stimulus ever–the second world war? I can imagine how the BIS would have warned against such fiscal irresponsibility….

The BIS is right to add to warnings over credit booms. Their joy is fleeting and the hangover agonising. This is particularly true for countries unable to borrow easily in their own currencies or without large holdings of foreign exchange reserves. Pre-emptive action is indeed required…. The BIS is right to emphasise the case for accelerating post-crisis recognition of bad debt and reconstruction of balance sheets of both borrowers and intermediaries. This process of deleveraging is nearly always too slow….

The foolish. There is indeed an important argument to be had over the right balance to strike between fiscal and monetary reactions to financial crises. I believe we have relied too much on monetary policy, which does carry with it many of the risks the BIS rightly emphasises. But the notion that the best way to handle a crisis triggered by overleveraged balance sheets is to withdraw support for demand and even embrace outright deflation seems grotesque. The result, inevitably, would be even faster rises in real indebtedness and so yet bigger waves of bankruptcy that would lead to weaker economies and so to further increases in indebtedness. The reasons for abandoning the pre-Keynesian consensus were powerful, whatever the BIS (and many others) may think. The BIS is entitled to warn. Central banks should listen to it politely. But they must reject important parts of what it advises…

Both Gavyn Davies and Martin Wolf are very smart, very thoughtful, and very good. Still, somehow, neither the BIS report nor their attempts to summarize it manage to successfully elucidate it to me.

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Ezra Klein: Boehner is suing Obama so he doesn’t have to impeach him: “If Speaker John Boehner wins his lawsuit against President Barack Obama…

…Obama [will then] implement the Affordable Care Act’s employer mandate without further delay. Which… might mean the court will order Obama to do something he has already done. What’s even odder about the suit is that Boehner hates Obamacare’s employer mandate. And the business groups that back Boehner hate Obamacare’s employer mandate. So Boehner is lifting heaven and earth to get the court to demand Obama more rapidly enforce a policy Boehner hates, that Boehner’s allies hate, and that Obama says he’s going to start enforcing in a few months anyway…. Boehner’s argument is that this isn’t about the mandate at all. It’s about the Constitution… Boehner… was House Majority Leader in May 2006, when President George W. Bush chose to waive Medicare Part D’s penalties for low-income and disabled seniors who signed up late…. There is little evident difference between Obama’s unilateral delay of the employer mandate in Obamacare and Bush’s unilateral delay of the late-enrollment penalties in Medicare Part D. But Boehner sees one as a threat to the republic while the other passed like a breeze in the night….

There’s another possible reading of Boehner’s lawsuit. Under this theory, Boehner’s lawsuit isn’t so much about reversing what Obama has done as it’s about stopping what Republicans might do…. Calls for impeachment are mounting…. Boehner… has watched ideas like this move from ridiculous to inevitable in an instant (see Government Shutdown, 2013). He also watched what happened the last time Republicans tried to impeach a president who was more popular than they were: they lost the midterm election and Newt Gingrich had to resign as Speaker of the House…. Boehner can argue that attempting impeachment before the case finishes would be counterproductive: if Republicans raise impeachment as a remedy there’s no way the courts will get involved. They’ll just let Congress work it out. Boehner is letting Republicans throw as many parties as they want in the House so he can make sure they don’t drink and drive home….

Boehner’s particular legislative genius is his ability to keep House conservatives from detonating the Republican Party while maintaining just enough conservative credibility to retain his speakership. This might be his masterstroke.

Katharine Bradbury: Availability of Unemployment Insurance: “Economists often expect unemployment insurance (UI) benefits…

to elevate unemployment rates because recipients may choose to remain unemployed in order to continue receiving benefits, instead of accepting a job or dropping out of the labor force. This paper uses individual data from the Current Population Survey for the period between 2005 and 2013—a period during which the federal government extended and then reduced the length of benefit availability to varying degrees in different states—to investigate the influence of program parameters in the UI system on monthly transition rates of unemployed individuals. The main finding is that unemployed job losers tend to remain unemployed until they exhaust UI benefits, at which point they become more likely to drop out of the labor force; transitions to a job appear to be unaffected by UI benefit extensions. These findings imply that the longer periods of benefit eligibility under the federal programs EUC08 and EB—up to 99 weeks in many states in 2011 and 2012—contributed to the elevated jobless rates observed during that period, but not via lower employment. By the same token, the sharp contraction of benefit weeks that occurred in 2012 and continued more gradually in 2013 likely contributed to declines in unemployment and participation rates beyond what one would expect based on the improving economy alone. Similarly, the December 28, 2013 sudden cutoff of federal UI payments to an estimated 1.3 million jobless Americans who had been looking for work for more than six months is adding to the pace of transitions from unemployment to dropping out of the labor force, thus reducing the unemployment rate and the labor force participation rate further in the first half of 2014, although very modestly.”

Nicholas Bagley: Can the House sue over the employer mandate?: “The legality of delaying the employer mandate is questionable….

…[But] the lawsuit isn’t going anywhere…. The House of Representatives as an institution hasn’t suffered the sort of concrete, particularized injury that the courts are constitutionally empowered to review…. The only arguments I’ve seen in favor of standing–they’re sketched out in a memo from Boehner–don’t withstand even cursory scrutiny. The primary claim seems to be that ‘[t]here is no one else….’ But so what? The Supreme Court has been unusually emphatic in holding that ‘the assumption that if [the challengers] have no standing to sue, that no one would have standing to sue, is not a reason to find standing’. Not every fight can or should see the inside of a courtroom…. Congress could… enact a statute withdrawing the President’s claimed enforcement discretion…. Congress isn’t willing to use its power, not that it lacks the power. Finally, the memo suggests that ‘explicit House authorization for the lawsuit’ may confer standing on Congress. But why? In Chadha v. INS, the Supreme Court flatly dismissed the idea that the House or Senate, acting alone, could constitutionally wield legislative power. Boehner’s resolution has as much legal effect as an open letter signed by members of his caucus…. This lawsuit looks like a waste of time and taxpayer money.”