Category: Equitablog

Ryan Cooper: Hear that, Janet Yellen? The economy is screaming for help: “If we accept the increasingly plausible view that without this stimulus…

…the economy would immediately crash, this suggests that even for hawks who are deeply uncomfortable with unconventional stimulus, the quickest way to get the Fed to stop doing it is to stimulate so aggressively that interest rates can be gotten off the zero lower bound. As Ryan Avent argued two years ago:

One wants to scream, try overshooting for once. Try overshooting for once! Try it! Try pushing inflation up above 2 percent for a while and see if you can’t generate enough growth to soak up some slack in the economy, thereby greatly reducing the risk that any little headwind that comes along knocks the economy back below stall speed. Try it! There is no way that a year of 3 percent inflation is bad enough to justify this pitiful hiccuping recovery. Try overshooting! [The Economist]

If the actual explanation for the Fed’s behavior is a monomaniacal concern for inflation above all things, then we’re basically screwed. But if hawkish Fed elites are actually prolonging their own agony, they might be convinced to change their mind. The worst quarter of GDP in five years is an opportune time to do it…

I am on the hop from event to event right now, so I do not have time to give the keen-witted Greg a full and comprehensive answer to his question–nevertheless, the question does deserve a full, comprehensive, yet short answer. So may we crowdsource this?

On Wed, Jun 25, 2014 at 8:58 AM, Greg Ip wrote:

… 2)Separate but related, I am trying to describe the origins of stabilization policy. Keynes created a world in which such policy was needed; I assume it displaced a classical view of the business cycle which contained no role for government intervention. Can you point me to an article, by you or anyone else, that describes the classical view of the business cycle – and how Keynes displaced it?

2) You know, that is a remarkably hard question. There are really, three different ‘classical’ theories of the business cycle:

2.a) There was Joseph Schumpeter-Friedrich von Hayek view, as set forth in Schumpeter’s 1933 “Depressions” article for the “Economics of the Recovery Program” volume:

[There is a] presumption against remedial measures which work through money and credit. Policies of this class are particularly apt to produce additional trouble for the future…. [D]epressions are not simply evils, which we might attempt to suppress, but forms of something which has to be done, namely, adjustment to change…. [This creates] the chief difficulty… most of what would be effective in remedying a depression would be equally effective in preventing this adjustment…

2.b) There was Walter Bagehot’s “Lombard Street” http://www.gutenberg.org/cache/epub/4359/pg4359.txt view: have a central bank that stabilizes the money market, leans against the wind in managing interest rates, and deals with financial crises by lending freely but at a penalty rate as long as it can lend to illiquid but solvent institutions on collateral that would be good in normal times–what you should do with insolvent institutions that are TBtF Bagehot does not say, but it is consistent with the spirit of “Lombard Street” that you take their equity and all upside possibilities and resolve them as quickly as possible in a way that does the least damage…

2.c) And then there was the third view, which focused on how both inflation and deflation were evils that needed to be avoided, a Marshall-Wickell-Fisher view. For this last, let me recommend three things:

2.c.i) Alfred Marshall and Mary Paley Marshall (1881), “The Economics of Industry” 2nd ed. , Book III, chapter I (Note that page 155 contains the first mention of the “confidence fairy”):

After every crisis, in every period of commercial depression, it is said that supply is in excess of demand… a state of commercial disorganization; and that the remedy for it is a revival of confidence…. Though men have the power to purchase they may not choose to use it…. The greater part of it could be removed in an instant if confidence would return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others…. Confidence by growing would cause itself to grow…

2.c.ii) John Maynard Keynes (1923), “A Tract on Monetary Reform” http://delong.typepad.com/keynes-1923-a-tract-on-monetary-reform.pdf:

We see, therefore, that rising prices [inflation] and falling prices [deflation] each have their characteristic disadvantage. The Inflation which causes the former means Injustice to individuals and to classes–particularly to investors; and is therefore unfavorable to saving. The Deflation which causes falling prices means Impoverishment to labor and to enterprise by leading entrepreneurs to restrict production, in their endeavor to avoid loss to themselves; and is therefore disastrous to employment…. Thus Inflation is unjust and Deflation is inexpedient. Of the two, perhaps Deflation is, if we rule out exaggerated inflations such as that of Germany [in 1923-1924], the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weight one evil against the other. It is easier to agree that both are evils to be shunned…

2.c.iii) John Hicks (1937), “Mr. Keynes and the ‘Classics’: A Suggested Interpretation” http://web.econ.unito.it/bagliano/macro3/hicks_econ37.pdf:

Mr. Keynes will reply that there is no classical theory of money wages and employment. It is quite true that such a theory cannot easily be found in the textbooks, but that is only because most textbooks were written at a time when general changes in money wages in a closed system did not present an important problem. There can be little doubt that most economists have thought they had a pretty fair idea of what the relationship between money wages and employment actually was. In these circumstances, it seems worthwhile to try to construct a typical ‘classical’ theory…

At least, that is how I see it…

The eminent Matthew Yglesias sends us to Jason Furman:

and comments:

Matthew Yglesias: Health care: spending vs prices: “The prices paid for health care services and the quantity of health care services received…

…are different things. Outside the health care sector, we take it for granted that people getting more stuff is one thing (rising living standards) while rising prices for stuff is another (inflation)…. This is super important. The only caveat is that in the health care sector there’s a third wrinkle. More doctors visits is a lot better than pricier doctors visits, but what we really want out of the health care system is good health outcomes.

Just saying…

The highly respected Bruce Bartlett sends us to a brand-new cracking o the recent PSID from Fabian Pfeffer, Sheldon Danziger, and Rovert Schoeni: Wealth Levels, Wealth Inequality, and the Great Recession: “By 2013, in spite of the Great Recession…

…wealth at the 90th and 95th percentiles were higher than in 2003… net worth at the median was about $32,000 lower…. The median of net wealth not held in real estate… declined by only $6,900 between 2007 and 2013… compared to a decline in median total net worth of about $42,500…. Through at least 2013 there are very few signs of significant recovery from the losses in wealth experienced by American families during the Great Recession…

The brilliant and very thoughtful Amartya Sen (1982): Just Deserts: “The personal production view is difficult to sustain in cases of interdependent production…

…i.e., in almost all the usual cases…. A common method of attribution is according to ‘marginal product’…. This method of accounting is internally consistent only under some special assumptions, and the actual earning rates of resource owners will equal the corresponding marginal products only under some further special assumptions. But even when all these assumptions have been made… marginal product accounting, when consistent, is useful for deciding how to use additional resources… ut it does not “show” which resource has “produced” how much…. The alleged fact is, thus, a fiction, and while it might appear to be a convenient fiction, it is more convenient for some than for others….

The personal production view… confounds the marginal impact with total contribution, glosses over the issues of relative prices, and equates “being more productive” with “owning more productive resources”… is richer in powerful rhetoric than in substance…. An Indian barber or circus performer may not be producing any less than a British barber or circus performer–just the opposite if I am any judge–but will certainly earn a great deal less…. The smaller earnings… need not, in fact, reflect only failure of what [P.T.] Bauer calls [the Indians’] “aptitudes and motivations for economic achievement…

Should-Reads:

1. John Scalzi: How Not to Talk About Your Money, Very Rich Edition: “Very rich people… everyone knows that you are very rich. Trying to assure everyone that you’re different from all the other very rich people… is probably not the winning strategy you think it is. There also comes a certain point at which ‘working hard’ is not a reasonably complete explanation… to the millions of people who are also working hard and… somehow lack the millions…. It’s nice to be in the rare air where one can make six figures for showing up to give a speech. Don’t confuse that place in the world with one that is available merely through simple ‘hard work’. There’s a lot more that goes into it than that, much of it not directly owing to one’s own planning or exertions. Context, as always, matters. If I had a net worth of nine figures or more, any time I was asked for comment about it, the short version of it would be ‘I have been very fortunate, and I know it’. Hell, that’s my standard response now, and I am nowhere near worth that much…”

2. Heather Boushey: Job quality matters: How our future economic competitiveness hinges on the quality of parents’ jobs: “Children’s kindergarten skill levels are correlated with their subsequent success (or failure) in the job market as adults, even accounting for the quality and quantity of elementary, secondary, and post-secondary schooling…. Low-income workers have even more limited access to policies to help them address conflicts between earning a living and caring for the next generation. Too many families rely on a fragile patchwork of familial and non-relative care to try to balance the demands of work and home…”

3. Jared Bernstein: The Risk of Insular Wonkiness: “As I listened to… many strong and thoughtful ideas to fight back against poverty… I couldn’t help but wonder: ‘why are we all talking about these ideas as if they have any traction in the near or medium term? How can we ignore the political realities that will block these ideas for probably years to come?’… All I’m saying is that unless we’re interested in a very insular conversation between like-minded wonks, we need to think and act more in ways that will hasten the day when facts and smart ideas targeted at significant and growing problems are once again welcomed outside the conference room and in the halls of power.”

4. Andrew Lai, Roger Cohen, and Charles Steindel (2011): The Effects of Marginal Tax Rates on Interstate Migration in the U.S.: “Using annual IRS migration data from 1992 to 2008, we study how taxes and other economic factors affect the migration flows of taxpayers and income…. Marginal tax increases have a small but significant effect on net out-migration from a state. Calibrating the model for New Jersey, we estimate that the state’s cumulative losses from the 2004 ‘millionaires’ tax’ totaled roughly 20,000 taxpayers and $2.5 billion in income…”

Should Be Aware of:

1. Nick Bunker: How paid leave insurance can help economic growth: “The United States is one of the few rich, industrialized countries without a law that allows workers to earn paid time off for family or medical reasons…. Heather Boushey… Alexandra Mitukiewicz… [and] Ann O’Leary looked at the economic consequences of paid family and medical leave insurance…. Leave insurance appears to increase employee retention… increased labor force participation rate and work hours…. An issue of this scale requires a national effort…”

2. Gerald Seib: Three Forces Are Disrupting the Political Order: “Crazy things are happening…. Americans agree with President Barack Obama on… Iraq and Afghanistan, climate change, immigration, but his approval rating slumps. One of the most powerful Republicans in Congress outspends an unknown primary opponent 40 to 1 and loses. The economy adds 1.8 million jobs over nine months, yet just 27% of Americans think the economy will get better…. The world is being shaken by… globalization, alienation and populism. Each… disrupts…. Countries that American workers never previously considered economic competitors… [are.] Shocks ranging from the 9/11 terror attacks to the rise of the Islamic State of Iraq and Syria show that borders and even nation-states may become anachronisms…. The reactions… are an attraction to isolationism and protectionism…. Americans… also are feeling increasingly alienated from traditional institutions…. 55% agree with this statement: ‘The economic and political systems in the country are stacked against people like me.’… 27% say they’d vote for an independent… if given the chance…. Even while the job-approval rating of the Democratic president fell to 41% in the new Journal/NBC poll, sentiments toward Republicans were lower. In fact, voters said that by a small margin, they wanted Democrats to win control of Congress in this November’s election. It isn’t logical—-but logic isn’t the order of the day…”

3. Scott Lemieux: You Can’t Address Climate Change Without A Green Lantern: “Shorter Verbatim Yves Smith: ‘Paulson, who has long been an ardent conservationist (and in contrast to his alpha Wall Street male standing, lives modestly), made a forceful pitch for carbon taxes. The irony of this proposal is that we have a Republican showing what a right-winger Obama really is.’ I know! I will never forgive Obama for vetoing the carbon tax… [of] the Republican House and red-state Senate Democrats… [and] act[ing] through EPA regulations…. [Smith] manage[s] to hit almost every Green Lantern trope: conservative Republicans treated with far more charity than moderate Democrats, complete obliviousness to the realities of the American political process, policies not actually favored by any American conservatives in positions of any authority described as ‘conservative’, and an implicit assumption that if it’s not possible to accomplish everything then it’s preferable to do nothing. It’s a Bully Window the Overton Pulpit superfecta.”

4. Barry Ritholtz: The Shame of Alternative Investments: “Why [are] so many state pensions… underfunded and underperforming[?]… The solidifying consensus that what has become known as the Yale model–outsized investments in hedge funds, venture capital and private equity–no longer works… there just aren’t enough good alternative investments to go around… none of this is cutting-edge theory or newly discovered knowledge… institutional inertia… [means] even a failing approach to investing holds on to its adherents long past its sell-by date…. For reasons unfathomable to me, the expected returns for alternatives are always far above those of bonds and equities…. The real trouble comes at public pension funds. The higher expected returns–based as they are on wishes and gossamer dreams–allow states to contribute that much less to their public employees pensions and retirement accounts…. The big scam isn’t the high fees or underperformance. It is the knowing, systematic and willful shortfall in contributions by the states. Alternative investments are merely the vehicle by which they accomplish this.”

5. Noah Deich: How feasible and expensive would gigatonne scale CDR likely be if we tried to enact it today?: “One way to quickly achieve near-gigatonne-scale CDR would be to shut down the approximately 1/2 of the 300 GW of coal fired electricity generation capacity in the US and build new biomass gasification power plants with carbon capture and storage (BECCS) in its place… for a net benefit of nearly 1.5B tons of CO2–roughly a quarter of all CO2 emissions in the US…. The US Energy Information Agency (EIA) does not even estimate biomass IGCC + CCS costs… does estimate that biomass combined cycle power costs about $8,000/kW. Assuming BECCS has the same 50% premium… coal CCS has over conventional coal… $12,000/kW (and would be by far the most expensive technology in the EIA’s estimates)…. $1.8T… the necessary CO2 transportation and storage infrastructure… roughly $3T… variable costs of power generation would also increase…. $3T up front and $400B annually is a lot of money…”

Already-Noted Must-Reads:

1. Robert Kopp et al.: American Climate Prospectus: Economic Risks in the United States: “Uncertainty in the equilibrium climate sensitivity is a major contributor to overall uncertainty in projections of future climate change and its potential impacts. Scientists have high confidence, based on observed climate change, climate models, feedback analysis, and paleoclimate evidence that the long-term climate sensitivity (over hundreds to thousands of years) is likely in the range of 3°F to 8°F warming per CO2 doubling, extremely likely (95% probability) greater than 2°F, and very likely (90% probability) less than 11°F (Collins et al. 2013). This warming is not realized instantaneously, as the ocean serves as a heat sink, slowing temperature rise. A more immediate measure, the “transient climate response,” indicates that a doubling of CO2 over 70 years is likely to cause a warming of between 2°F and 5°F over that period of time (Collins et al. 2013)…”

2. Paul Krugman: Sympathy for the Trustafarians: “A number of people have asked me to comment on Greg Mankiw’s… strange piece, oddly disconnected from the real concerns about patrimonial capitalism…. If there’s one thing I thought economists were trained to do, it was to be clear about opportunity cost. We should compare accumulation of dynastic wealth with some alternative use of resources–not assume, as Mankiw in effect does, that if not passed on to heirs that wealth would simply disappear. Maybe he’s assuming that the alternative would be riotous living by the current rich, but that’s not a policy alternative…. But the larger criticism of Mankiw’s piece is that it ignores the main reason we’re concerned about the concentration of wealth in family dynasties–the belief that it warps our political economy…. Not only did people like Teddy Roosevelt openly talk about this problem, so (as Thomas Piketty points out) did Irving Fisher in his 1919 presidential address to the American Economic Association. What’s curious is that conservative economists are well aware of the danger of ‘regulatory capture’… yet blithely dismiss (or refuse even to mention) the essentially equivalent problem of democratic institutions hijacked by concentrated wealth. I take regulatory capture quite seriously…. I take plutocratic capture equally seriously. And this is not an issue you can deal with by claiming that the benefits of capital accumulation trickle down to workers…. ‘More capital is good’ is not a helpful contribution to the discussion.”

Robert Kopp et al.: American Climate Prospectus: Economic Risks in the United States: “Uncertainty in the equilibrium climate sensitivity…

…is a major contributor to overall uncertainty in projections of future climate change and its potential impacts. Scientists have high confidence, based on observed climate change, climate models, feedback analysis, and paleoclimate evidence that the long-term climate sensitivity (over hundreds to thousands of years) is likely in the range of 3°F to 8°F warming per CO2 doubling, extremely likely (95% probability) greater than 2°F, and very likely (90% probability) less than 11°F (Collins et al. 2013). This warming is not realized instantaneously, as the ocean serves as a heat sink, slowing temperature rise. A more immediate measure, the “transient climate response,” indicates that a doubling of CO2 over 70 years is likely to cause a warming of between 2°F and 5°F over that period of time (Collins et al. 2013)…

Paul Krugman: Sympathy for the Trustafarians: “A number of people have asked me to comment on Greg Mankiw’s…

…strange piece, oddly disconnected from the real concerns about patrimonial capitalism…. If there’s one thing I thought economists were trained to do, it was to be clear about opportunity cost. We should compare accumulation of dynastic wealth with some alternative use of resources–not assume, as Mankiw in effect does, that if not passed on to heirs that wealth would simply disappear. Maybe he’s assuming that the alternative would be riotous living by the current rich, but that’s not a policy alternative…. But the larger criticism of Mankiw’s piece is that it ignores the main reason we’re concerned about the concentration of wealth in family dynasties–the belief that it warps our political economy…. Not only did people like Teddy Roosevelt openly talk about this problem, so (as Thomas Piketty points out) did Irving Fisher in his 1919 presidential address to the American Economic Association. What’s curious is that conservative economists are well aware of the danger of ‘regulatory capture’… yet blithely dismiss (or refuse even to mention) the essentially equivalent problem of democratic institutions hijacked by concentrated wealth. I take regulatory capture quite seriously…. I take plutocratic capture equally seriously. And this is not an issue you can deal with by claiming that the benefits of capital accumulation trickle down to workers…. ‘More capital is good’ is not a helpful contribution to the discussion.