Category: Equitablog

Should-Read: George W. Evans, Seppo Honkapohja, and Kaushik Mitra: Expectations, Stagnation and Fiscal Policy: “Persistent stagnation and fiscal policy are examined in a New Keynesian model with adaptive learning determining expectations… http://www.bankofengland.co.uk/research/Documents/conferences/conference03040717/expectationspolicy.pdf

…We impose inflation and consumption lower bounds, which can be relevant when agents are pessimistic. The inflation target is locally but not globally stable un- der learning. Pessimistic initial expectations may sink the economy into steady-state stagnation with deflation. The deflation rate can be near zero for discount factors near one or if credit frictions are present. Following a severe pessimistic expectations shock a large temporary fiscal stimulus is needed to avoid or emerge from stagnation. A modest stimulus is sufficient if implemented early…

Must-Read: Some wishful thinking from Larry Summers. No, it is not true that “the United States does the right thing”, not even “after exhausting the alternatives…” And I am not reassured but horrified by how the “business community, cultural leaders and many congressional Republicans” have responded to Donald Trump as President and what surrounds him:

Larry Summers: Mexico isn’t taking Trump’s threats seriously now: “Relative to my last visit to Mexico in March, leaders have moved from being appalled and alarmed by the Trump administration to being appalled and bemused… https://www.ft.com/content/4b33f856-69fa-3e4d-b3bd-cb8a69648a68

…I suppose this is a kind of progress for the US, if not for the US president. It is not that they find Donald Trump’s rhetoric any more rational…. But they have come to understand that… there is likely to be less connection between his rhetoric and action than they had previously supposed…. Relative to a few months ago, I was asked much less about excessive presidential power or risks to democracy, and much more about impeachment scenarios. I did not know what say when asked whether the president and his team believed what they said about bilateral trade deficits as way of judging trade relationships. I responded by saying that using bilateral trade deficits to diagnose trade barriers was to economics what creationism was to biology, or the idea that the sun revolves around the Earth was to astronomy. Increasingly, I think the president and Wilbur Ross, his commerce secretary, believe what they say, which is an embarrassment to their alma maters.

I left my Mexican friends with a line of Churchill’s in which I have increasing confidence after seeing the response of the business community, cultural leaders and many congressional Republicans to this administration: “The United States does the right thing, but only after exhausting the alternatives.” The exhaustion of alternatives stage in our national life will end, and in my view its end cannot come soon enough.

Should-Read: Mary Eschelbach Hansen and Nicolas L. Ziebarth: Credit Relationships and Business Bankruptcy during the Great Depression: “Stickiness makes relationships beneficial to borrowers in times of their own distress but makes them potentially problematic when lenders themselves face hardship… http://pubs.aeaweb.org/doi/pdfplus/10.1257/mac.20150218

…We exploit a natural experiment in Mississippi during the Great Depression that generated plausibly exogenous differences in financial distress for banks… Dun & Bradstreet… original bankruptcy filings… financial distress increased business exit but did not increase the bankruptcy rate… caused both banks and trade creditors to recalibrate their collections strategies…

Must-Read: Naughty, naughty, Mike Boskin!

Bill Clinton’s presidency began not with “lack of discipline and a failed health care reform effort”. Bill Clinton’s presidency with a major tax increase and spending growth=reduction Reconciliation Bill plus NAFTA. The Clinton Reconciliation Bill—that not a single Republican did not vote against—was what moved us from the unsustainable and imprudent fiscal policies of those Mike Boskin worked for to a trajectory that—with the good luck of catching the wave of the dot-com boom—brought the large budget surpluses of the late 1990s.

Mike Boskin’s faction then threw those budget surpluses away on tax cuts for the rich.

And the Republican Congressional caucuses of the 1990s had very, very little to do with it—except to try as hard as they could to block it.

It’s just arithmetic, after all. It’s easy to check.

Let me recommend you take Dan Davies’s One-Minute MBA http://www.bradford-delong.com/2017/08/daniel-daviess-one-minute-mba.html, with particular attention to Lesson (1)(d).

Also, take a look at Young Juicebox Matt’s piece http://www.bradford-delong.com/2017/08/weekend-reading-matthew-yglesias-trumps-big-mistake-on-health-care-was-not-realizing-republicans-were-lying.html, particularly paragraph 7: remember, the Project Syndicate audience is not as gullible as the Fox News audience.

Michael J. Boskin: Can Trump Turn His Presidency Around?: “Bill Clinton’s administration began with a lack of discipline… https://www.project-syndicate.org/commentary/can-trump-turn-his-presidency-around-by-michael-boskin-2017-08

…a failed attempt at health-care reform, and a loss for the Democrats in the 1994 midterm elections. But Clinton turned things around, appointing new aides, moving toward the political center, winning reelection in 1996, and working with a Republican-controlled Congress to balance the budget and reform welfare…

Should-Read: Simon Wren-Lewis: Japan and the burden of government debt: “There is currently a very good reason to write about the Japanese economy… https://mainlymacro.blogspot.co.uk/2017/08/japan-and-burden-of-government-debt.html

…and that is a very strong 2107 Q2 performance. Annualised growth was 4%… led by domestic demand rather than trade…. Between 2006 and 2016, Japan increased GDP per head by a total of about 5.5%, compared to around 5% in the US and about 3% for the UK. Good compared to other countries, but all these countries should have had stronger recoveries from the recession…. The government is trying to stimulate growth using a modest fiscal stimulus and large scale quantitative easing (short and long interest rates are exactly zero) as well as implementing various structural reforms. But the striking thing about all this is that their net government debt to GDP ratio is 125% and rising….

High government debt could crowd out private investment (although some dispute this), but not when real long term rates are zero and inflation is near zero. Servicing high debt could discourage labour supply, but again not when interest rates are zero. Nor is debt a burden on future generations when the real rate of interest is well below the growth rate. Of course most people think such high debt levels are a real concern because of ‘the markets’. But the markets will only stop buying this debt if they expect default or rampant inflation, and there is no way a government with its own currency can be forced to default. There is also no way it will choose to default with interest rates so low….

But what happens when growth finally raises inflation, and interest rates rise. Will debt not be a problem then? Maybe, but only in the long term, so the government will have plenty of time to fix that roof when the sun shines. Right now Japan does worry about its high levels of government debt, but it rightly worries about the combination of low growth and low inflation much more. In that sense it sets a good example to other countries.

Must-Read: Brad Setser: G-3 Coordination Failures of the Past Eight Years?: “I want to look back… [at the] coordination failures over the past eight years… https://www.cfr.org/blog/g-3-coordination-failures-past-eight-years-riff-coure-and-brainard

…one reason why I would argue that central banks should put a bit more weight on… international spillovers…. The global pivot to fiscal consolidation that was enshrined in the Toronto G-20 communique was wildly premature. It put a ton of pressure on monetary policy to support demand. Too much pressure. It slowed the global recovery. It was actually a pretty well-coordinated move, just in the wrong direction…. A second failure. In the face of a set of fairly common shocks—the slow global recovery, the premature fiscal pivot—G-3 monetary policies diverged a bit too much. The Fed famously and controversially did QE2 back in 2010…. The problem wasn’t that the Fed acted. It was that the other major central banks didn’t….

The other large advanced economies followed the U.S. with a lag. And that lag had exchange rate consequences…. The world would have been better off with more coordinated easing—with other central banks acting when the Fed acted, not with a lag—back in 2010 and 2011 and 2012. Instead it more or less got a coordinated fiscal tightening and an uncoordinated monetary offset. Call it a missed opportunity…. And now I worry that the Europeans have gotten perhaps a bit too fond of the policy mix that produced a weak euro…. Even now the eurozone’s domestic demand is far below what I consider a reasonable estimate of where it should be…

Shpould-Read: Neel Kashkari: Fed official: Businesses should raise wages before complaining of worker shortage: “Common refrain… we have jobs available, but simply can’t find qualified workers to fill them… http://www.businessinsider.com/fed-official-businesses-should-raise-wages-before-complaining-of-worker-shortage-2017-8

… Economists, including top Federal Reserve officials, lend credibility to this dubious claim by arguing there is a “skills gap” among US workers that is preventing firms from finding employees with the right backgrounds. However, ample research and basic common sense suggests that wage stagnation… is a symptom of an anemic labor market, not a fully recovered one. Credit to Minneapolis Fed President Neel Kashkari for pointing that out during a speech to business leaders on Monday. “If you’re not raising wages, then it just sounds like whining,” he told a group of business people at a Rotary Club meeting in Sioux Falls, S.D…

Should-Read: “Enhancing” or “replacing”? Machines enhancing human brain power has been a thing ever since the first human notched a stick every time there was a new moon. If “AI” is to have a meaning, it will need a less all-inclusive definition…

Jacques Bughin and Eric Hazan: The new spring of artificial intelligence: “The Industrial Revolution was about machines enhancing human muscle power. The AI revolution is about machines enhancing human brain power… http://voxeu.org/article/new-spring-artificial-intelligence-few-early-economics

Computer vision, natural language processing, virtual assistants, smart robotics, and autonomous vehicles [are] all… underpinned by a new generation of machine-learning algorithms…. There are three reasons why AI is experiencing a new spring and will not go way:

• First, more and more of clever investors, from venture capital and private equity, have tripled their AI investments over the past three years are now investing billions in AI. And even if this is small option bets–about 3% of total venture capital funding today–it is growing very quickly, even faster than biotech.
• Second, while private equity and venture capital firms can still be wrong, of course, we found that corporate investment in AI is already three times the amount of private equity and venture capital firms. Among the corporations betting on AI, the most bullish are high-tech companies such as Intel and Samsung, along with the digital native players, such as Alphabet, Facebook and Amazon. Automotive companies are active, too—think about GM acquiring Cruise Automation for more than $1 billion last year. For anyone questioning the wisdom of paying so much for relatively new companies, it is worth noting that AI investments are already paying off—remember Kiva, the robotics company Amazon bought for $775 million in 2012? Kiva robotics used for logistics in Amazon reported to generate returns on investment of 50% for its new owner.

• Third, the set of AI technologies we focus on are actually being deployed…. We found two-thirds of the companies are AI-aware… three clusters…. 20%… already serious adopters–mostly deploying machine learning or computer vision technologies…. 40% of firms have begun to experiment or are partial adopters…. Out of the 40% who are not adopting, the main reason isn’t that they don’t believe in AI. Our research shows there is a mix of commercial and technical obstacles; regarding the later, 28% of firms don’t feel they have the technical capabilities to implement…

Should-Read: Maurice Obstfeld, Jonathan D. Ostry, and Mahvash S. Qureshi: Trilemma redux: Evidence from emerging market economies: “The synchronous rise and fall of cross-border capital flows, domestic credit, and asset prices… http://voxeu.org/article/trilemma-redux-evidence-emerging-market-economies

…across countries has raised questions about the relevance of the exchange rate regime in a world of high capital mobility. This column presents evidence from emerging market economies, which shows that exchange rate regimes do matter. The transmission of global financial shocks to domestic financial and macro-economic conditions, as well as to capital flows, is magnified under fixed exchange rate regimes relative to more flexible regimes…