Must-Read: Yes, a high-pressure economy can be very popular. Any other questions?

Nico Voigtländer and Hans-Joachim Voth: Highway to Hitler: “Can infrastructure investment win “hearts and minds”?…

…We analyze a famous case – the building of the highway network in Nazi Germany. Construction began shortly after Hitler’s takeover of the government, and was one of the regime’s most important projects. We collect new data on highway construction, and examine its role in increasing support for the Nazi regime during the period that led up to the 1934 referendum. The plebiscite merged the offices of chancellor and president, establishing Hitler’s supreme power as Führer. Our results suggest that highway construction was highly effective, building popular support and helping to entrench the Nazi dictatorship.

Must-Read: If we think that the task of expansionary fiscal policy is to allow for tighter monetary policy and so raise nominal interest rates by 300 basis points to get asset prices back to what we think of as appropriate levels, then we need a big fiscal stimulus: $400 billion a year of increased deficits, largely via higher spending, seems called for.

That is a largely independent question of what the level and direction of national investment should be. There are two big issues here:

• How do we rebalance asset prices–i.e., how do we fund private and public investment?
• What should the level of investment be?

Jared Bernstein: The Macro-Economy Doesn’t Care Which Party Signs the Stimulus Check: “I yield to no one in my concerns about the damage…

…But… let’s separate out an infrastructure plan from a big, regressive tax cut, sky-high tariffs, whacking Obamacare, and other bad ideas…. Investment in neglected public goods–roads, bridges, water systems, airports, shipping ports, broadband, public schools, mass transit (DC Metro!)–would help generated needed demand in places that are still suffering from economic slack and could help boost lagging productivity as well. That argument is not rendered invalid because Republicans pass the plan….

The plan matters. During the campaign… characteristically muddled stuff from team Trump about leveraging private investment through tax credits, which implies infrastructure usage that spins off some kind of investor payouts–ie, user fees. Also, bridges to nowhere…. So if we’re talking about either of those, I retract my endorsement…. But a smart infrastructure plan could help. And if it did lead to greater resource utilization, as I suspect it would–that’s the Keynesian point–and that in turn boosted inflation and interest rates, that’s a feature, not a bug… very low levels… have not been a signal that things are great; they’re symptoms of secular stagnation….

Finally, on numerous grounds, I’d strongly oppose the highly regressive tax cut I believe is coming…. Its impact will be wasted on tax cuts for the rich. Since they’re not income-constrained in the first place, they’re less likely to spend…. Second, trillions in “permanent” tax cuts, infrastructure spending, and bumping up the defense budget (another Trump priority) will force strong pressure to cut spending in other areas that will inevitably ding the most vulnerable. We’re going to need more revenue in the future, not less…

Must-Read: A very nice exercise. The only complaint I have with the paper is that I do wish they would highlight the comparison of their measure to NIPA government purchases–where is it different, how is it different, why is it different, etc.?

David Cashin, Jamie Lenney, Byron Lutz and William Peterman: Fiscal Policy Changes and Aggregate Demand in the U.S. Before, During and Following the Great Recession: “We examine the effect of federal and subnational fiscal policy changes on aggregate demand in the U.S….

…by introducing the fiscal effect (FE) measure. FE can be decomposed into three components. Discretionary FE quantifies the effect of discretionary or legislated policy changes. Cyclical FE captures the effect of the automatic stabilizers—changes in government taxes and spending arising from the business cycle. Residual FE measures the effect of all changes in government revenues and outlays which cannot be categorized as either discretionary or cyclical; for example, it captures the effect of the secular increase in entitlement program spending due to the aging of the population.

We use FE to examine the contribution of fiscal policy changes to growth in real GDP over the course of the Great Recession and current expansion. We compare this contribution to the contributions to growth in aggregate demand made by fiscal policy changes over past expansions. In doing so, we highlight that the strong support of government policy to GDP growth during the Great Recession was followed by a historically weak contribution over the course of the current expansion.

Must-Read: There is a big problem with Elmendorf and Sheiner…

What we as economists want to do and have been trained to do is to:

• take quantities and prices,
• interpret the prices as costate variables that the market and the current régime are using to currently solve their own peculiar and suboptimal dubious social welfare maximization problem,
• switch over from the market and the current régime’s to the real, sensible social welfare maximization problem,
• solve that problem under perfect foresight to figure out what good policies would be,
• and then adjust for uncertainty and risk.

The problem is that this requires that prices be coherent–that they actually be the costate values for the peculiar and suboptimal dubious social welfare maximization that the market and the current régime are solving. But if we know one thing now, it is that current asset prices are not coherent: the equity risk premium; the level of safe interest rates in a world with productive capital; etc…

Thus we fact a huge problem in interpreting Elmendorf and Sheiner.

And then there are the other problems with the paper as well:

• the metaphysical status of CBO estimates that it uses as a springboard:
  • The R&E tax credit…
  • The Medicare provider cuts…
  • The Cadillac Tax…
  • The Special Assistant to the Secretary of HHS for Exercising the Powers of the IPAB…
• r < g
• what is the price of a consol?
• how is this possible?
• financial repression
• risk premium–equity vs. bonds…
• how to adjust perfect-foresight results for uncertainty?

I do not want to criticize the paper as bad–it is very good. But I do want to say that it is grossly inadequate, and we desperately need–somehow–to do better.

Douglas Elmendorf and Louise Sheiner: Federal Budget Policy with an Aging Population and Persistently Low Interest Rates: “Debt is rising in part because of a major demographic shift as the baby boom generation retires…

…It is projected to occur even though interest rates on Treasury borrowing likely will be persistently lower than historic norms…. We argue that restraining the debt is necessary to give the government room to maneuver if a crisis of any sort occurs. In addition, we observe that the aging of the U.S. population, which lowers the fraction of the population that is working, means that the country should save more now than otherwise, which can be achieved by reducing federal debt.

How much and how quickly should the federal government tighten its belt? We note that, while debt should eventually decrease relative to GDP, the fact that U.S. government borrowing rates are at historical lows and likely to stay low for some time implies spending cuts and tax increases should be delayed and smaller in size than widely believed. Low long-term interest rates mean that the U.S. should borrow to make additional public investments. They also reduce the payoff from near-term debt reduction.

After considering other factors—including the role that fiscal policy can play during economic downturns when short-term interest rates are already so low that the Federal Reserve has little room to cut them—we argue for measured, gradual debt reduction with a higher debt-to-GDP ratio than has historically been the case.

Must-Read: It is important that fiscal stimulus (a) not include too much of giveaways of monopoly rights over what should be public infrastructure to plutocrats allied with the régime, and (b) be debt-financed–I would say long-term debt financed. It is also important that Treasury, Fed, OCC, and company gear up to prepare to use reserve requirements of various kinds to manage the Treasury market. Such is only prudent when venturing into the unknown policy space that secular stagnation seems to call for.

That said, backup for my fiscal principles:

Four from the Fiscal Expansion File: Summers, Krugman, Yellen, and Romer and Romer:

• Larry Summers http://larrysummers.com/2016/02/17/the-age-of-secular-stagnation/: “By setting yields so low and bond prices so high, markets are sending a clear signal that they want more, not less, government debt. By stimulating growth and enabling an inflation increase that would permit a reduction in real capital costs, fiscal expansion now would crowd investment in rather than out. Well-intentioned proposals to curtail prospective pension benefits, in contrast, might make matters even worse by encouraging increased saving and reduced consumption, thus exacerbating secular stagnation…”

• Paul Krugman http://krugman.blogs.nytimes.com/2015/09/15/keynesianism-explained/?_r=0: “The implications for the world we’ve been living in since 2008 seem very clear: aggressive monetary expansion, plus fiscal stimulus as long as the zero lower bound constrains monetary policy…”

• Janet Yellen http://www.businessinsider.com/janet-yellen-us-economic-outlook-speech-july-10-2015-7: “By 2011… fiscal policies were holding back economic growth. However, the effects… now seem to be mostly behind us…”

• Christina Romer and David Romer https://ineteconomics.org/uploads/general/romer-and-romer-evaluation-of-friedman1.pdf: “For the permanent increase in spending, of which Senator Sanders is proposing roughly 1.4% of GDP, standard estimates indicate that it would increase GDP growth in the first year by between 1.4% and 2.2%. That is, the fiscal multiplier is between 1 and 1.6. After the first year, the continued higher spending would maintain the effect on the level of GDP, but not have any additional impact on its growth rate…”

Must-Read: Frederic Bastiat is a very good economist–concerned with properly analyzing things in general equilibrium. He works hard to make sure to include distant and indirect but inevitable consequences of policies as well as immediate and obvious ones in his benefit-cost analyses. But for Bastiat the question to be answered is: is the market or the government more likely to perform this mission most efficiently?

Frederic Bastiat is a liberal in the modern sense–concerned with positive as much as negative liberty, eager to use government to boost people’s power to accomplish their purposes (when it can effectively do so) as well as to preserve individuals’ freedom of action from pointless regulatory meddling:

Frederic Bastiat: [As a Modern Liberal][]: “[O]ften, nearly always if you will, the government official [receives his salary and] renders an equivalent service to Jacques Bonhomme…

In this case there is… only an exchange…. When Jacques Bonhomme gives a hundred sous to a government official for a really useful service, this is exactly the same as when he gives a hundred sous to a shoemaker for a pair of shoes. It’s a case of give-and-take, and the score is even…

[…]

There is an article in the Constitution which states:

Society assists and encourages the development of labor…. through the establishment by the state, the departments, and the municipalities, of appropriate public works to employ idle hands.

As a temporary measure in a time of crisis, during a severe winter, this intervention on the part of the taxpayer could have good effects… as insurance. It adds nothing to the number of jobs nor to total wages, but it takes labor and wages from ordinary times and doles them out, at a loss it is true, in difficult times…

[…]

Jacques Bonhomme has sweated to earn his hundred-sou piece…. The tax intervenes to take this satisfaction away from him and give it to someone else…. [I]t is up to those who levy the tax to give some good reasons for it…. If the state says to him:

I shall take a hundred sous from you to pay the policemen who relieve you of the necessity for guarding your own security, to pave the street you traverse every day, to pay the magistrate who sees to it that your property and your liberty are respected, to feed the soldier who defends our frontiers…

[L]ast year I was… told….

A certain amount of ostentation in the ministerial and diplomatic salons is part of the machinery of constitutional governments, etc., etc…

Whether or not such arguments can be controverted, they certainly deserve serious scrutiny. They are based on the public interest, rightly or wrongly estimated; and, personally, I can make more of a case for them than many of our Catos, moved by a narrow spirit of niggardliness or jealousy…

[…]

Should the state subsidize the arts?… [A]rts broaden, elevate, and poetize the soul of a nation; that they draw it away from material preoccupations, giving it a feeling for the beautiful, and thus react favorably on its manners, its customs, its morals, and even on its industry. One can ask where music would be in France without the Théâtre-Italien and the Conservatory; dramatic art without the Théâtre-Français….

To these reasons and many others, whose power I do not contest, one can oppose many no less cogent…. Do the rights of the legislator go so far as to allow him to dip into the wages of the artisan in order to supplement the profits of the artist?… I confess that I am one of those who think that the choice… should come from below, not from above, from the citizens, not from the legislator…

Must-Read: The fact that the rest of the economy pays the financial sector 2% of net asset value a year for “managing” our money indicates an enormous market failure. So does the current 7%-point/year gap between the S&P 500 earnings yield and short-term safe bond rates. Moving your portfolio from active to passive management almost surely–unless you are invested with Renaissance, Bridgwater, or one of the few other hedge funds that has an edge–helps you avoid the costs of these market failures. But does it raise or lower them for the economy as a whole?

I ought to have an informed view about this. I am distressed to find that I do not:

Robin Wigglesworth: Buy The Dip: The Death of Active Asset Management?: “The WSJ has run an annoyingly good series on the whole active versus passive asset management theme…

…Credit where credit is due etc…. On the idea that active will come back as the market becomes increasingly ruled by passive flows… active asset management performance has actually deteriorated as flows into passive have grown…. On interest rates somehow suppressing performance…. This is something you should be able to deal with. This isn’t a Rumsfeldian unknown unknown….

[On] the WSJ’s more optimistic take on active bond fund management…. Bond markets are seeing the same, accelerating trend towards passive investing…. The piece on the Nevada Public Employees’ Retirement System…. Sitting on our hands is often the best choice. That dopamine hit we feel when we take a gamble and it pays off can be too intoxicating for some to ignore…

Stephen Cohen and J. Bradford DeLong (2016): Concrete Economics: The Hamilton Approach to Economic Policy (Cambridge: Harvard University Press) http://amzn.to/2fJnSEe | Keynote