Category: Equitablog

Simon Wren-Lewis: Sticky prices: How We Confuse Students, and Sometimes Ourselves: “In week one I talked about time periods in macro, and how the ‘short run’ was the length of time ‘it takes prices to fully adjust’….

[This] is at best highly misleading… the short run is the length of time it takes… monetary policy to achieve the real rate of interest implied by the RBC, or Classical, model.  Calling this the time period it takes prices to fully adjust only makes sense when monetary policy involves some kind of nominal anchor…. The big danger in equating Keynesian economics with sticky prices is that students forget about the crucial role monetary policy is playing…. Yet the linking of the short run with sticky prices is ubiquitous…. Mankiw… says:

In the long run, prices are flexible and can respond to changes in supply or demand. In the short run, many prices are sticky at some predetermined level. Because prices behave differently in the short run than the long run, economic policies have different effects over different time horizons.

Continue reading “Morning Must-Read: Simon Wren-Lewis: Sticky Prices and Teaching Macroeconomics: How We Confuse Students, and Sometimes Ourselves” →

Ten Questions Tim Geithner’s Stress Test Should Answer About His Tenure at the Federal Reserve:

1. Why in 2007 did the Federal Reserve Bank of New York not understand that the risk associated with “originate to distribute” mortgage-backed securities and their associated derivatives had not left the financial sector?

2. Why in 2007 did the Federal Reserve Bank of New York not understand that the risk associated with mortgages ha not been distributed but rather concentrated into the highly-leveraged too-big-to-fail banks?

3. Why in 2007 did the Federal Reserve and the Treasury not use their regulatory powers to force the too-big-to-fail banks to substantially raise equity?

4. Why at the start of 2008 did the Federal Reserve not do what Greenspan did in 1997–not shift preserving short-run price stability to a lower priority than maintaining financial stability?

5. Why did the Federal Reserve effectively lower its target rate for nominal GDP growth at the start of 2008?

6. Why in the spring of 2008 did the Federal Reserve not require all the peers and near-peers of Bear Stearns to substantially increase their equity?

7. Why in the spring of 2008 did the Federal Reserve not develop a plan for how it would “resolve” the situation if additional too-big-to-fail entities (cough, Lehman) became the object of a bank run?

8. Why, if the Federal Reserve did not believe it had the legal authority to properly “resolve” Lehman in the fall because it was then not just illiquid but insolvent, did the Federal Reserve not “resolve” the top-big-to-fail Lehman situation in the summer, when Lehman crossed the line from being solvent-and-liquid to insolvent-but-still-liquid?

9. How, if the Federal Reserve did not have the power to “resolve” the insolvent Lehman on Sunday, did it acquire to power to “resolve” the insolvent AIG on Tuesday?

10. Why did the Federal Reserve effectively, again, lower its target rate for nominal GDP growth in the fall of 2008?

Should-Reads:

1. Paul Krugman: Already in the Lowflation Trap: “Dean Baker, reacting to Neil Irwin, feels that he needs to make the perennial point that zero inflation is not some kind of economic Rubicon. Below-target inflation is already a problem, and a very serious problem if you don’t have an easy way to provide economic stimulus…. Europe’s low and falling inflation isn’t a problem because it might turn into deflation–it’s a problem because of what it’s doing right now…. It’s not that something could go wrong, but the fact that it already has gone wrong. And remember, above all, that the risks aren’t symmetric. Controlling inflation may be painful, but we do know how to do it. Exiting deflation or lowflation is really, really hard, which is why you never want to go there.”

2. Simon Wren-Lewis: Economists and methodology: “A feeling that the methodology being used is unproblematic, and therefore requires little discussion. I cannot help giving the example of macroeconomics to show that this view is quite wrong. The methodology of macroeconomics in the 1960s was heavily evidence based. Microeconomics was used to suggest aggregate relationships, but not to determine them. Consistency with the data… governed…. The methodology of macroeconomics now is very different. Consistency with microeconomic theory governs… and evidence plays a much more indirect role. Now… I know enough to recognise this as an important methodological change. Yet I find many macroeconomists just assume that their methodology is unproblematic…. Most methodological discussion of economics is (and should be) about what economists do, rather than what they think they do. That is why I find that the more interesting and accurate methodological writing on economics looks at the models and methods economists actually use, rather than relying on selected quotations…”

Should Be Aware of:

Continue reading “Things to Read on the Afternoon of May 10, 2014” →

Andrew Gelman: Troublesome Inheritance critique: Nicholas Wade’s Dated Assumptions About Race, Genes, and Culture: “The racism of the day seems reasonable and very possibly true…

…but the racism of the past always seems so ridiculous…. Wade… writes about the big differences in economic success between whites, blacks, Asians, and other groups and offers a sophisticated argument that racial differences arise from genetic differences that are amplified by culture…. Wade’s argument… racial groups have genetically evolved to differ in cognitive traits such as intelligence and creativity… “minor differences… invisible in an individual, have major consequences at the level of a society”… his views are uncomfortable truths that have been suppressed by a left-wing social-science establishment….

Continue reading “Afternoon Must-Read: Andrew Gelman: Troublesome Inheritance critique: Nicholas Wade’s Dated Assumptions About Race, Genes, and Culture” →

One of the most important things I learned in my first two months working in the Clinton administration back in 1993 was what we called the “Bob Rubin Question”: ending a meeting with: “OK. That’s what we are going to do now. But what else should we do? What if we are wrong in our understanding of the situation? What, two years from now, will we then wish we had done today when we look back and say ‘if only…’?”

Now I find that this is SCIENCE!!:

Oliver Burkeman: This column will change your life: hindsight–it’s not just for past events: “One obvious conclusion… and I’m not saying it’s wrong…

…is that people are idiots. But a more interesting one is that hindsight… doesn’t just make things look different; it makes them look so utterly different that it’s impossible, when taking a decision in the moment, even to begin to grasp how it’ll strike you later on…. [A] technique… invented by the psychologist Gary Klein, and which Daniel Kahneman, his Nobel-winning colleague, describes as his favourite method for making better decisions… the “premortem”…. Imagine yourself in the future, after the project you’re considering has ended in spectacular failure…. You’re screwed. Everything went as badly as you could have feared. Now: why? Asking the question this way, Klein explains, has an almost magical effect…. Another advocate of “prospective hindsight”… Karl Weick, argues that it works because of a cognitive quirk: we find it easier to imagine the detailed causes of a single outcome than causes of multiple outcomes…. ‘I mentioned it at Davos’, Kahneman said a while back, and ‘the chairman of a large corporation said it was worth coming to Davos for’…. Hindsight, we’re told, is a wonderful thing. But hindsight in advance is even better…

Roger Myerson: Rethinking the Principles of Bank Regulation: A Review of Admati and Hellwig’s “The Bankers’ New Clothes”: “Worthy of such global attention as Keynes’s General Theory received in 1936…

…[is] The Banker’ New Clothes: What’s Wrong with Banking and What to Do about It by Anat Admati and Martin Hellwig…. A book for the general public about fundamental problems of financial instability in our time… banks should be required to have much more equity…. In response to all their arguments against the increasingly complex provisions for minimizing banks’ capital requirements, Admati and Hellwig report (p. 182) that they have never received a coherent answer to the basic question of why banks should not have equity levels between 20 and 30 percent of their total assets…. This recommendation is simple, but it is based on their deep command of theory. The book is long… because it takes time to rebut all the bankers’ arguments…

Over at the WCEG: I still do not have a copy of Tim Geithner’s Stress Test. That means I cannot take on the task of explaining, justifying, and putting in context (1) Bernanke-Geithner Federal Reserve and then (2) Obama administration macroeconomic policies from 2007-2012. All I can do right now is lay out my own errors of judgment from 2007-2012.

As I look back, I see that my serious errors of judgment were only secondarily about the state of the economy. They were primarily and overwhelmingly about senior Bernanke-Geithner Federal Reserve and Obama-Geithner policymakers and (a) how they viewed the economy and (b) what policies they would pursue.

My errors were:

Continue reading “Tim Geithner Has Stressed Me Out: Saturday Focus: May 10, 2014” →

So this morning I am reading the highly-intelligent Reihan Salam’s bill of indictment against ObamaCare. He says that ObamaCare “will eventually have to be either drastically reformed or replaced outright” because of its many problems. As I, at least, read the problems he thinks he sees, I find myself thinking that they are of five kinds:

(1) Problems that seem to me to be problems of politics:

1. The more familiar people become with Obamacare and its consequences, the less they like it….
2. 62 percent oppose the law, an increase of 4 percentage points since November….
3. 20 states… have so far refused to take part in [Medicaid expansion].

Continue reading “Reading Reihan Salam’s “Why I Signed Up for Obamacare”: The Honest Broker for the Week of May 10, 2014″ →

Should-Reads:

1. Tim Hatton: Height of World War I Servicemen: “In the following half century the height of males increased by about two inches…. Sanitary reforms and housing renewal improved the urban environment, and industry gradually became less toxic. Illiteracy disappeared while average education increased by 2-3 years. More and better education, combined with modest medical advances, brought better understanding of the benefit to children of nutrition and hygiene. Together, these developments help to explain the apparent puzzle of the improvement in average health status during a period of war and depression that predates the advent of universal health services…”

2. Harold Pollack: Death on the Installment Plan
   Now we know: Rejecting the Medicaid expansion could kill nearly 6,000 people each year: “The study examined the impact of the bipartisan insurance expansion enacted in Massachusetts in 2006—a.k.a. ‘RomneyCare’, which provided the basic model for the ACA…. Benjamin Sommers, Sharon Long and Katherine Baicker examined a decade’s worth of mortality data in Massachusetts counties, comparing trends to those found in carefully chosen comparison counties in other states…. Insurance coverage reduced [non-elderly adult] mortality rates [for deaths amenable to health care] by about 30 percent. For every 830 people newly insured, Massachusetts prevented one death per year…. Do these results generalize?… Massachusetts has done a better and more enthusiastic job implementing RomneyCare than many states (and the federal government) have done thus far with ACA. On the other hand, Massachusetts experienced the strongest survival benefits in low-income areas that contain many uninsured people…. Massachusetts began its reform as a prosperous liberal state with effective public health polices and a strong infrastructure of safety-net care. Other states are starting with a much less favorable baseline…”

Should Be Aware of:

Continue reading “Things to Read on the Afternoon of May 9, 2014” →

Andrew Ross Sorkin: What Timothy Geithner Really Thinks: “What is certain, however, is…

…Geithner had a predisposition that Wall Street, even as it was, remained essential to the functioning of the U.S. economy in just about every sector:

I did not view Wall Street as a cabal of idiots or crooks. My jobs mostly exposed me to talented senior bankers, and selection bias probably gave me an impression that the U.S. financial sector was more capable and ethical than it really was.

During his first few months in the job, Geithner fought with Summers, who felt that his protégé had become overly solicitous of the banks. Geithner dismissed Summers as espousing “the hedge-fund view.” (“Hedge-fund executives tended to see the banks as dumb, lumbering giants,” Geithner writes.)

Continue reading “Timothy Geithner: Department of “WTF?!?!”: Friday Focus: May 9, 2014″ →