Must-Read: Martin Wolf: Donald Trump’s False Promises

Posted on by Brad DeLong

Must-Read: Anything wrong with this analysis? I cannot see anything:

Martin Wolf: Donald Trump’s False Promises: “Fiscal loosening with monetary tightening would mean a stronger dollar and a rising current account deficit…

…would, as in the early 1980s, increase protectionist pressures–Ronald Reagan’s administration was quite protectionist in its first term…. But protection against imports would raise the currency’s value further, shifting the adjustment on to unprotected sectors–above all, on to competitive exporters…. A strong dollar must weaken the manufacturing Mr Trump seeks to help…. The president-elect has also promised to eliminate Obamacare and most environmental and financial regulations. It is hard to believe any of this would succour the prospects of the working class… worse health cover, a dirtier environment, more predatory behaviour by financial institutions and, at worst, even another financial crisis. Protectionism, too, will fail to help… his supporters… [who] depend on cheap imported goods….

A burst of infrastructure spending, regressive tax cuts, protectionism, cuts in federal spending and radical deregulation. A big rise in infrastructure spending would indeed help construction workers. But little else in these plans would help the working class…. The longer-term consequences are likely to be grim, not least for his angry, but fooled, supporters. Next time, they might be even angrier. Where that might lead is terrifying.

Note to Self: I Still Fail to Understand Ken Rogoff’s Medium-Long Term Macroeconomic Optimism…

Posted on by Brad DeLong

Ken Rogoff: “In nine years, nobody will be talking about ‘secular stagnation’. I’ve been debating Larry on this for a year, and I started saying ‘in ten years…, and so for consistency I now say ‘in nine years…”.

10 Year Treasury Constant Maturity Rate FRED St Louis Fed

This is a wager that the full-employment long-run in which money and its associates are a veil that does not affect or disturb the Say’s Law operation of the economy will come not more than 18 years after the shock of 2017–or at least that whatever remnants of the effects of that shock on the business cycle come 2025 will be dwarfed the effects of other business cycle shocks subsequent to now.

I do know from experience that one disagrees with Ken Rogoff at one’s grave intellectual peril. But is he correct here? I really cannot follow him to the conclusion he wants me to reach…

Things to reread and chew over:

  • Paul Krugman (2015): The Inflationista Puzzle: “Traditional IS-LM analysis said that the Fed’s [expansionary QE] policies would have little effect on inflation; so did the translation of that analysis into a stripped-down New Keynesian framework that I did back in 1998, starting the modern liquidity-trap literature. We even had solid recent empirical evidence: Japan’s attempt at quantitative easing in the naughties…. I’m still not sure why relatively moderate conservatives like Feldstein didn’t find all this convincing back in 2009…”

  • J. Bradford DeLong (2015): New Economic Thinking, Hicks-Hansen-Wicksell Macro, and Blocking the Back Propagation Induction-Unraveling from the Long Run Omega Point

  • Paul Krugman (2015): Backward Induction and Brad DeLong: “Brad DeLong is, unusually, unhappy with my analysis in a discussion of the inflationista puzzle–the mystery of why so many economists failed to grasp the implications of a liquidity trap, and still fail to grasp those implications despite 6 years of being wrong. Brad sorta-kinda defends the inflationistas on the basis of backward induction; I find myself somewhat baffled by that defense…”

  • Paul Krugman (2015): Rethinking Japan: “Secular stagnation and self-fulfilling prophecies: Back in 1998… I used a strategic simplification… [assumed] the Wicksellian natural rate… would return to a normal, positive level at some future date. This… provided a neat way to deal with the intuition that increasing the money supply must eventually raise prices by the same proportional amount; it was easy to show that this proposition applied only if the money increase was perceived as permanent, so that the liquidity trap became an expectations problem… [so] that if the central bank could “credibly promise to be irresponsible,” it could gain traction even in a liquidity trap. But what is this future period of Wicksellian normality of which we speak?… Japan looks like a country in which a negative Wicksellian rate is a more or less permanent condition. If that’s the reality, even a credible promise to be irresponsible might do nothing…. The only way to be at all sure of raising inflation is to accompany a changed monetary regime with a burst of fiscal stimulus…. While the goal of raising inflation is, in large part, to make space for fiscal consolidation, the first part of that strategy needs to involve fiscal expansion. This isn’t at all a paradox, but it’s unconventional enough that one despairs of turning the argument into policy…”

  • Paul Krugman (2015): St. Augustine and Secular Stagnation: “The assumption here is that the neutral rate will eventually rise so that monetary policy can take over the job of achieving full employment. What if we have doubts about whether that will ever happen? Well, that’s the secular stagnation question… a situation in which the neutral interest rate is normally, persistently below zero. And this raises a puzzle: If we worry about secular stagnation, should we then say that St. Augustine no longer applies, because better days are never coming? No. The way to deal with secular stagnation, if we believe in our models, is to raise the long-run neutral interest rate…. If we can do this via structural reform and/or self-financing infrastructure investment, fine. If not, raise the inflation target. And how do we get to the higher target inflation rate, when monetary policy is having trouble getting traction? Fiscal policy! If you’re really worried about secular stagnation, you should advocate a combination of a raised inflation target and a burst of fiscal stimulus to help the central bank get there. So the St. Augustine approach is right either way, with secular stagnation suggesting the need to be even less chaste in the short run.”

  • J. Bradford DeLong (2015): Must-Read: Paul Krugman: Rethinking Japan: “Paul Krugman’s original argument assumed that the economy would eventually head towards a long-run equilibrium in which flexible wages and prices would make Say’s Law hold… [with] the price level would be proportional to the money stock. That now looks up for grabs. It is the fact that that is up for grabs that currently disturbs Paul. Without a full-employment Say’s Law equilibrium out there in the transversality condition to which the present day is anchored by intertemporal financial-market and intertemporal consumer-utility arbitrage, all the neat little mathematical tricks that Paul and Olivier Blanchard built up at the end of the 1970s to solve for the current equilibrium break in their hands…. There is… more. Paul Krugman’s original argument also assumed back-propagation into the present via financial-market… and consumer-satisfaction intertemporal… arbitrage of the effects of that future well-behaved full-employment equilibrium. The equilibrium has to be there. And the intertemporal arbitrage mechanisms have to work. Both have to do their thing…”

  • J. Bradford DeLong (2015): The Scary Debate Over Secular Stagnation: Hiccup… or Endgame?

  • Paul Krugman (2015): On Being Against Secular Stagnation Before You Were for It

  • Duncan Weldon (2016): Negative Yields, the Euthanasia of the Rentier, and Political Economy: “I understand the mechanics of engine that took us here but not what the driver was thinking…”

  • J. Bradford DeLong (2015): Just What Are the Risks That Alarm Ken Rogoff?: “This part of Ken Rogoff’s piece appears to me to be very much on the wrong track: ‘Ken Rogoff: Debt Supercycle, Not Secular Stagnation: Robert Barro… has shown that in canonical equilibrium macroeconomic models small changes in the market perception of tail risks can lead both to significantly lower real risk-free interest rates and a higher equity premium…. Obstfeld (2013) has argued cogently that governments in countries with large financial sectors need to have an ample cushion, as otherwise government borrowing might become very expensive in precisely the states of nature where the private sector has problems…’ We need to be clear about what the relevant tail-risk states that Ken Rogoff is talking about are…. [They are that] even though it was sold at a high price and carries a low interest rate, the issuing of government debt is very expensive to the government [because] when the time comes in the bad state of the world for it to raise the money to amortize the debt, it finds that it really would very much rather not do so. It is clear if you are Argentina or Greece what the risk is: it is of a large national-level terms-of-trade or political shock, something that you can insure against by investing in the ultimate reserves of the global monetary system. If you are the United States or Germany or Japan or Britain, what is the risk? What is the risk that cannot be handled at low real resource cost by a not-injudicious amount of inflation, or of financial repression?”

  • J. Bradford DeLong (2015): Watching a Discussion: The Omega Point

Must-Read: Jared Bernstein and Ben Spielberg: Preparing for the Next Recession: Lessons from the American Recovery and Reinvestment Act

Posted on by Brad DeLong

Must-Read: I dissent from one of Jared and Ben’s points here: it is not at all clear to me that a lower national debt is always and everywhere a better thing. At current interest rates–and until interest rates “normalize”, if they ever do–there are major plusses from a higher debt, and no minuses I can see. And if a high debt stops being optimal because interest rates normalize? Then we can (and should) pay it down.

The argument that we should not have a higher debt now is an argument about political disfunction when it comes time that it is appropriate to pay it down, not an argument about the economics:

Jared Bernstein and Ben Spielberg: Preparing for the Next Recession: Lessons from the American Recovery and Reinvestment Act: “Moving forward… a stronger set of automatic stabilizers would help…

…we recommend that policymakers:

  • Make UI’s EB program more responsive to economic conditions….
  • Have temporarily higher SNAP benefits (and perhaps higher SNAP administrative funds for states) take effect automatically when a trigger… reaches certain thresholds;
  • Make state fiscal relief, in the form of higher federal payments to help states cover their Medicaid costs, take effect automatically… and
  • Prepare for additional discretionary steps during downturns by establishing a dedicated fund for subsidized jobs and job creation programs and considering one-time housing vouchers….

Some policymakers… may hesitate to enact them due to concerns that such measures would increase our debt as a share of GDP…. All else being equal, we agree that a lower debt-to-GDP ratio is better for the economy over the long run.  All else is not equal, however, especially during recessions. The benefits of more effective fiscal stimulus measures to fight recessions outweigh the potential drawbacks of higher debt…

Should-Read: Noah Smith: Peak Finance Looks Like It’s Over

Posted on by Brad DeLong

Should-Read: Noah Smith applies standard economic logic to declare that Peak Finance has passed. The problem is that standard economic logic would not have predicted the hypertrophy of finance in the first place, especially given the zero sum nature of active portfolio management:

Noah Smith: Peak Finance Looks Like It’s Over: “How much of the financial industry will soon be obsolete?…

…As long as capitalism lives, there will be a financial industry. What’s happening, however, is a winnowing…. For the past seven decades, but especially since 1980, finance has grown fat indeed. The share of gross domestic product going to the finance, insurance and real estate industries rose from less than 4 percent in the early 20th century to more than 8 percent by the start of the 21st…. Financial-industry profits also soared, briefly topping 40 percent of all U.S. business profits in the first years of the century. Compensation for financial sector employees far outpaced that of workers in other industries, even after accounting for their average higher skill levels….

Asset management is a second area that will probably be squeezed by the double fists of technology and regulation. As [Thomas] Philippon has shown, asset management, along with real estate, is one of the two sectors responsible for most of the financial industry’s growth. But that might just make it ripe for compression. As with trading, the biggest force putting pressure on asset management is new technology…. Each asset manager will be able to handle much larger volumes…. Passive investing also means that each dollar of assets takes less time and effort to manage…

Should-Read: Mehreen Khan: Carney: world at risk of low rate ‘trap’ for decades

Posted on by Brad DeLong

Should-Read: IMHO, the phrase “structural reform” should be banned from discussion. It is as close to being completely uninformative as a phrase could possibly be. But Carney’s main point–that monetary policy has been the only thing “keeping the patient alive” is certainly very true:

Mehreen Khan: Carney: world at risk of low rate ‘trap’ for decades: “The world economy risks being stuck in a low interest rate “trap” for decades without efforts to boost growth through structural reforms…

…Mark Carney has warned. The governor of the Bank of England said monetary policy was the only thing “keeping the patient alive” in the world’s economic policy mix eight years on from the financial crisis. Low rates around the world were the result of structural factors such as ageing demographics rather than central bank policy, Mr Carney told MPs on Tuesday. “Curing the patient requires the operation”, said Mr Carney. “Monetary policy is keeping the patient alive”.

Must- and Should-Reads: November 15, 2016

Posted on by Brad DeLong

Interesting Reads:

Should-Read: Dietz Vollrath: Labor’s Share, Profits, and the Productivity Slowdown

Posted on by Brad DeLong

Should-Read: Dietz Vollrath: Labor’s Share, Profits, and the Productivity Slowdown: “There’s been a slowdown in measured productivity growth… since about 2000…

…At the same time, there has been increasing attention given to the fact that labor’s share of GDP has been trending downward over the last 30 years or so…. The flip side of this declining labor share is a less well-documented sense that this is related to greater rents being collected by firms with more market power…. What I want to do here is show how these two trends are related in some fundamental sense through how we measure productivity growth. The TL;DR version is that a falling labor share (and rising profit share of GDP) will necessarily lead to a decline in measured productivity growth, even if underlying innovation doesn’t change. The reason is that if firms have increasing market power, then they are using inputs less efficiently from an aggregate perspective, and measured productivity growth is about how efficiently we use inputs. So increased market power–captured by the decline in labor share–will put a drag on productivity growth…

Should-Read: Barry Eichengreen: Asia Needs to Spell Out Changes They Want in International Monetary System

Posted on by Brad DeLong

Should-Read: Barry Eichengreen: Asia Needs to Spell Out Changes They Want in International Monetary System: “China and Asia need an international monetary system that is stable…

…eliminates imbalances smoothly… provide[s] emergency assistance where it is needed…. The problem of IMF stigma… remains as potent as ever…. CMIM… has yet to be activated…. The adequacy of the actual existing global financial safety net is less than meets the eye…. Countries with deficits don’t want to allow their currencies to depreciate because doing so will increase the burden of servicing foreign-currency debts. Countries in surplus hesitate to allow their currencies to appreciate for fear of losing competitiveness…. A stronger sanction would be that when a chronic surplus country buys foreign assets with its currency to prevent its exchange rate from rising, the IMF could sell foreign assets in exchange for that same national currency, neutralizing the inappropriate national intervention in the foreign exchange market.
Clearly, there would have to be strong support among IMF members for this kind of direct market action. Asian countries could exercise leadership by advocating just such a step…

Fiscal Expansion Needs to Be Done Right

Posted on by Brad DeLong
10 Year Treasury Constant Maturity Rate FRED St Louis Fed

Fiscal expansion now is really a no-brainer:

  • borrow at unbelievably low rates;
  • use it to put people to work doing useful things to make America more productive;
  • if we are near full employment, it will also push up interest rates, restore equilibrium to the banking sectors, and reduce the chances of future bubbly financial vulnerabilities;
  • if we are not near full employment, it will pull people back into the labor force and raise production and employment now as well as in the future.

What’s the downside? Implementation. Larry Summers thinks it will be very badly implemented indeed:

Larry Summers: A Badly Designed US Stimulus Will Only Hurt the Working Class: “Rüdiger Dornbusch made an extensive study of… populist economic programmes….

Over the medium- and long-term they were catastrophic for the working class in whose name they were launched. This could be the fate of the Trump programme given its design errors, implausible assumptions and reckless disregard for global economics…. Tax credits for equity investment and total private sector participation that will not cover the most important projects, not reach many of the most important investors, and involve substantial mis-targeting…. The highest return infrastructure investments–such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernising the air traffic control system–do not generate a commercial return and so are excluded….

Trump’s global plan… rests on a misunderstanding…. The plan seems to assume we can pressure countries not to let their currencies depreciate…. [But] not even US presidents… can repeal the laws of economics. Populist economics will play out differently in the US than in emerging markets. But the results will be no better…

Back in 1980 there were a great many people who thought they had Reagan’s approval and baton for:

  • cutting interest rates,
  • returning to the gold standard,
  • balancing the budget,
  • boosting military spending
  • cutting taxes,
  • cutting “weak claims” to federal dollars by successful rent seekers,
  • cutting off federal support to “weak claimants” who did not look or act like real America.

All six of these factions were correct: they all did have Reagan’s approval baton. But few of these goals were consistent with the others. The final policy outcome in the 1980s was random. It was disastrous for midwestern manufacturing, disastrous for fiscal stability, a negative for economic growth, but an extremely strong positive for the rich and superrich whose taxes were cut the most.

Because the last group speaks with a loud voice, there are lots of people today who think that Reagan’s economic policies were, in some vague way they do not understand, a success. But that is the wrong lesson. The right lesson is: incoherent and contradictory policy goals produce largely-random policies that are very unlikely to turn out well.

Must-Read: Larry Summers: A Badly Designed US Stimulus Will Only Hurt the Working Class

Posted on by Brad DeLong

Must-Read: Larry Summers: A Badly Designed US Stimulus Will Only Hurt the Working Class: “Investors have… concluded that… very expansionary fiscal policy and major reductions in regulation…

…in sectors ranging from energy to finance to drug pricing will raise demand and reflate the American economy. The result has been a rise in real interest rates and inflation expectations, along with a strong stock market and a strong dollar…. [But] initial market responses… are poor predictors…. Rüdiger Dornbusch made an extensive study of… populist economic programmes…. Over the medium- and long-term they were catastrophic for the working class in whose name they were launched. This could be the fate of the Trump programme given its design errors, implausible assumptions and reckless disregard for global economics….

Tax credits for equity investment and total private sector participation that will not cover the most important projects, not reach many of the most important investors, and involve substantial mis-targeting…. The highest return infrastructure investments–such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernising the air traffic control system–do not generate a commercial return and so are excluded…. Nor can the non-taxable pension funds, endowments and sovereign wealth funds that are the most promising sources of capital for infrastructure take advantage…. [AND] the Trump tax reform proposals are too expensive. Many… only benefit the high-saving wealthy….

Trump’s global plan… rests on a misunderstanding…. The Mexican peso has depreciated about 10%… rais[ing] the cost of anything the US exports to Mexico and to lower the cost of anything Mexico exports to the US… mak[ing] Mexico and other emerging markets much cheaper relative to the US for global companies… US workers, particularly in manufacturing, will see increased pressure. The plan seems to assume we can pressure countries not to let their currencies depreciate…. [But] not even US presidents… can repeal the laws of economics.

Populist economics will play out differently in the US than in emerging markets. But the results will be no better…