Must-Read: IMF: 17th Annual Research Conference: Macroeconomics after the Great Recession, November 3-4, 2016: “The theme… is “Macroeconomics after the Great Recession”…

…honor[ing] Olivier Blanchard’s contributions to economic research and policy…. The conference will bring together an outstanding array of economists and policymakers, many of whom studied or worked in collaboration with Blanchard. Lawrence Summers (Harvard University) will deliver the Mundell-Fleming Lecture…. Christine Lagarde… David Lipton… Ugo Panizza… Charles Wyplosz… Jesper Lindé… Christoph Trebesch… Jeromin Zettelmeyer… Athanasios Orphanides… François Gourio… Anil K. Kashyap… Jae Sim… Galina Hale… Poul Thomsen… Lewis Alexander… Janice Eberly… Ricardo Caballero… Romain Duval… Davide Furceri… Beth Anne Wilson… James Poterba… Hamid Faruqee… Chang Yong Rhee… Suman S. Basu… Atish R. Ghosh… Jonathan D. Ostry… Pablo E. Winant… Anton Korinek… Philip R. Lane… Gian Maria Milesi-Ferretti… Linda Tesar … Lawrence H. Summers… Maurice Obstfeld… Sharmini Coorey… Tito Cordella… Giovanni Dell’Ariccia… Robert Marquez… Patricia Mosser… Gideon Bornstein… Guido Lorenzoni… Olivier Jeanne… Vitor Gaspar… Alberto Alesina… Gualtiero Azzalini… Carlo Favero… Francesco Giavazzi… Armando Miano… Chris Erceg… Thomas Philippon… Francisco Roldán… Marcos Chamon… Adam Posen… George Akerlof… Peter A. Diamond… Ayşegül Şahin… Betsey Stevenson… Giuseppe Bertola… Juan Francisco Jimeno… Maurice Obstfeld… Olivier Blanchard… Stanley Fischer… Kristin Forbes… Federico Sturzenegger…

Must-Read: Mervyn King: The End of Alchemy: “I tend not to blame individual bankers, but the economics profession as a whole…

…The crisis was a failure of a system and the ideas that underpinned it, not of individual policy-makers or bankers, incompetent and greedy though some of them undoubtedly were.. There was a general misunderstanding of how the world economy worked…. Economists have been cast by many as the villain. An abstract and increasingly mathematical discipline, economics is seen as having failed to predict the crisis…. rather like blaming science for the occasional occurrence of a natural disaster. Yet we would blame scientists if incorrect theories made disasters more likely or created a perception that they could never occur, and… economics has encouraged ways of thinking that made crises more probable…..

Economics must change, perhaps quite radically, as a result of the searing experience of the crisis…. When push came to shove, the very sector that had espoused the merits of market discipline was allowed to carry on only by dint of taxpayer support. The creditworthiness of the state was put on the line….

Why have money and banking, the alchemists of a market economy, turned into its Achilles heel?… The economic failures of a modern capitalist economy stem from our system of money and banking, the consequences for the economy as a whole, and how we can end the alchemy…. In the 1990s not only did inflation fall to levels unseen for a generation, but central banks and their governors were hailed for inaugurating an era of economic growth with low inflation–the Great Stability or Great Moderation. Politicians worshipped at the altar of finance, bringing gifts in the form of lax regulation and receiving support, and sometimes campaign contributions, in return. Then came the fall…. The recession is hurting people who were not responsible for our present predicament, and they are, naturally, angry. There is a need to channel that anger into a careful analysis of what went wrong and a determination to put things right. The economy is behaving in ways that we did not expect, and new ideas will be needed if we are to prevent a repetition of the Great Recession and restore prosperity…

Must-Read: As I have said before, I think Ann Pettifor here fundamentally misreads what is going on. I think she has fallen victim to a version of what Ernst Gellner cruelly but accurately called the “wrong address” neo-Marxist theory of history: that parcels that were supposed to be delivered to “class” were somehow delivered to “nation-state” or “ethnicity” instead. This theory has a codicil that if we close our eyes, Tap our heels together three times, wish really hard, and argue really eloquently then when we open our eyes we will see that it was always really about class, exploitation, and capitalism all along.

I am sorry: they have been waiting up on the hilltop for the millennium ever since 1848. It is time to try something very different.

Still: very well argued, and very much worth reading:

Ann Pettifor: Brexit and Its Consequences: “The ‘Brexit’ vote is but the latest manifestation of popular dissatisfaction with the utopian ideal of autonomous markets beyond the reach of regulatory democracy…

…Brexit represented the collective, if (to my mind) often misguided, efforts of those ‘left behind’ in Britain to protect themselves from the predatory nature of market fundamentalism. In a Polanyian sense, it is a form of social self-protection from self-regulating markets in money, trade and labour. Globalization was, and remains, the utopian ambition of those many economists, financiers, politicians, and policy-makers that were once aptly defined by George Soros as ‘market fundamentalists’…. When more than 17 million British voters opted to end ties with the European Union on the 23 June 2016, they exposed the fragility and even futility of the ambition to build markets beyond the reach of regulatory democracy. By doing so, British voters rejected the advice of dozens of leading economists and several powerful financial institutions. The outcome threatens to undermine the pivotal role played by the City of London in ‘globalizing’ and financializing the world economy….

The economic theories and policies that led to the Great Financial Crisis… the structures and operation of an increasingly globalized, autonomous, self-regulating market in finance, trade, and labour…. The destabilizing consequences of the crisis and the reversal of the globalization agenda triggered countervailing nationalist and protectionist movements…. Re-regulating the British economy in favour of finance and enriching the 1% while shrinking labour’s share of income resulted in rising inequality and lit a still smouldering fuse of popular resentment. Resentment made most explicit in the Brexit vote….

The economic profession’s deflationary, liberal finance bias, and the failure to include money, debt, and banks in economic analyses and modelling made it nigh impossible for the profession to correctly predict, prevent, or mitigate the ongoing crisis…. Today’s policy-makers struggle to stabilize an unbalanced global financial system, and doggedly oppose expansionary policies needed to ensure employment and recovery. The necessary restructuring and rebalancing of the global economy have been postponed. With the historic Brexit vote, the British people rejected this flawed brand of economics—and in particular the dominant liberal finance narrative. And they did so because the hardship they are experiencing—repressed wages, diminished public services, rising housing costs and shortages, and insecure employment—is indirectly a consequence of the theories and policies of the mainstream economics profession….

Britain’s ‘Brexit’ vote is but the latest manifestation of popular dissatisfaction with the economists’ globalized, marketized society. And if there should be any doubt that these movements are both nationalistic and protectionist, consider Donald Trump’s campaign threat to build a wall between Mexico and the US, to deter migrants, ‘gangs, drug traffickers and cartels’ (Trump website). Trump’s plan for financing the wall involves the introduction of controls over the movement of capital. If the Mexican government resisted, argued Trump, the US would cut off the billions of dollars that undocumented Mexican immigrants working in the US send to their families annually…. Nationalism, protectionism, and populism are not confined to Western nations. In India, a BJP MP, Subramanian Swamy, fired a salvo at the Reserve Bank of India (RBI) governor Raghuram Rajan that led to his unexpected decision not to seek a second term….

Karl Polanyi predicted in The Great Transformation that no sooner will today’s utopians have institutionalized their ideal of a global economy, apparently detached from political, social, and cultural relations, than powerful counter-movements—from the right no less than the left—would be mobilized. The Brexit vote was, to my mind, just one manifestation of the expected resistance to market fundamentalism….

the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society … . Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way.

Brexit has endangered British society in yet another way, but the vote was, I contend, a form of social self-protection from self-regulating markets in money, trade, and labour.

Ann Pettifor (June 2016): Brexit: Economists Dangerously Irrelevant: “We… call for an urgent, independent, public inquiry into the economics profession[‘s]…

…precipitating both the financial crisis of 2007-9… the subsequent very slow ‘recovery’… [and its] role of the profession in the run up to the British European referendum campaign…. It may just be that the prospect of hardship to come might not have been very compelling for those already suffering the hardship of low wages, insecure low-skilled jobs, bad housing, high rents, an under-resourced and increasingly privatised NHS, and other forms of public sector ‘austerity’. With this historic vote, the British people have… rejected economics–and in particular the dominant economic narrative….

Economists led the way to financial liberalisation of the past 40 years, which led to soaring levels of debt, crises and financial ruin. Economists dictated the terms for austerity that has so harmed the economy and society over the past years. As the policies have failed, the vast majority of economists have refused to concede wrongdoing, nor have societies been offered alternative economics policies…. It is hardly surprising, therefore, that the British public did not find the opinion of Remain ‘experts compelling’…. The “experts” and the economic stories they tell, have been well and truly walloped by the result of this referendum. And rightly so….

I voted to Remain. I do not believe that Brexit is a wise decision. I fear its consequences in energising the Far Right both in Britain but also across both Europe and the US…. But the people are not to blame. The economics profession, and their friends amongst the world’s financial elites, are to blame. They engineered their own political and financial bail-outs after the grave financial crisis of 2007-9. Economists cheered on politicians and effectively urged them to transfer the burden of losses on to those most innocent of the crisis. Conservative and Social Democratic politicians with friends in financial circles, were only too happy to oblige…

Ann Pettifor (April 2016): Why I Will Vote Remain: “Back in 1975 I did not just oppose membership of the EU, I actively campaigned against it…

…In the 1990s I strongly opposed Britain’s membership of the Exchange Rate Mechanism (ERM)…. I am firmly opposed to the way in which European Treaties… have embedded market fundamentalist economic policies into quasi-constitutional law…. So why then, am I voting to Remain?….

First and foremost, the… continent is now on the brink of fracturing…. The situation is of course exacerbated by the EU’s ‘free’ market principles for the untrammelled and unmanaged movement of capital, trade and labour. And for the commodification of land and labour. These liberal finance principles have triggered popular resistance…. Right-wing populism–a reaction to, and movement against market fundamentalism–now poses a real threat to European democracy, and to European peace and stability…. I am not prepared to be party to such disruption at such a tense time in European political history….

A second reason… is… Britain is heavily responsible for the market fundamentalism entrenched in the European Treaties…. Europe’s social welfare model has been severely strained by Anglo-American policies for de-regulation, privatisation and ‘structural’ changes to labour markets, now alas more widely shared within the EU. Our responsibility for such policies requires that we act responsibly in helping to get them reversed….

My third reason is… the move to Brexit is led by the most reactionary forces in Britain…. They stand for market fundamentalism, not for the more progressive EU we seek. The EU’s gains on social and labour standards, on environmental protection and climate change–themselves at risk–would be dismantled…

Must-Read: Noah Smith: Want More Startups? Build a Better Safety Net: “What was wrong with the theory?… Acemoglu et al…. [thought] the thing that determines entrepreneurial success is… how hard you try…

…When it comes to entrepreneurship, there’s another factor that’s probably a lot more important than effort. It’s risk. For a prospective entrepreneur, the choice… is between starting a business and working for someone else. The difference in effort between those two career paths probably isn’t that big. But entrepreneurship is much, much riskier…. The risk theory of entrepreneurship says that when people already have a lot of risk, they’re less likely to take on more…. So if the risk theory is right, a stronger safety net should lead to more entrepreneurial activity, not less…. That’s what the evidence seems to indicate…. The data is piling up–at the margin, risk is a lot more important than effort in determining who starts a business…

Must-Read: No. It will not. It would have had to shift its inflation target up to 3% or 4%/year–and then met that target–in order to have what it takes to fight the next recession. Its failure to recognize that will in all likelihood be judged very harshly by future monetary historians:

Jared Bernstein: Will the Federal Reserve really have what it takes to fight off the next recession?: “Someone called me the other day all wound up because some market prognosticator convinced her that a U.S. recession was right around the corner…

…I think I talked her down on that point…. But I think I did succeed in getting her equally nervous about a different point: There is, of course, a recession out there somewhere. The problem isn’t that we don’t know where; it’s that we’re not ready for it…. The main countercyclical tool at the Fed’s disposal is the interest rate they control, the federal funds rate (FFR), a benchmark for borrowing costs throughout the economy. Historically, as Reifschneider’s Table 1 shows, they lowered it an average of around five percentage points in past recessions. Well, right now the FFR is sitting at less than half-a-percent, which gives them very little room to cut. That’s the limited firepower problem and it’s the topic of Reifschneider’s paper. He argues that this concern may be overblown…. I hope Reifschneider’s optimistic scenarios are correct. But I fear they’re not and we’d be crazy not to have a Plan B.

Must-Read: I have concluded that I have a strong disagreement with Ann Pettifor here. The BREXIT vote is not the result of a class- and social structure-based Polanyi process. Yes, people believe that the communities in which they live, the money they make, and the industries in which they work are important parts of their lives, that they deserve to have their expectations about those things satisfied, and that a society that fails to satisfy those expectations is not a good society. Yes, Polanyi was correct in his grand argument that turning land, labor, and finance into commodities subject to the wreakings of a market society would inevitably disappoint a great many of those expectations and so potentially causing massive backlash against a liberal or neoliberal order.

But what we are seeing now is not that backlash.

Consider Germany: the secret Keynesianism of an undervalued currency means the neoliberal economic order is just dandy for Germany: no “economic anxiety” here! Yet Angela Merkel is in as much trouble from her indigenous domestic Trumpists as is any centrist political leader in the North Atlantic.

The “economically anxious” did not drive the BREXIT vote. The nativists did:

Ann Pettifor: Brexit and Its Consequences: “The ‘Brexit’ vote is but the latest manifestation of popular dissatisfaction with the utopian ideal of autonomous markets beyond the reach of regulatory democracy…

…Brexit represented the collective, if (to my mind) often misguided, efforts of those ‘left behind’ in Britain to protect themselves from the predatory nature of market fundamentalism. In a Polanyian sense, it is a form of social self-protection from self-regulating markets in money, trade and labour…. The economic profession’s deflationary, liberal finance bias, and the failure to include money, debt, and banks in economic analyses and modelling made it nigh impossible for the profession to correctly predict, prevent, or mitigate the ongoing crisis….

Today’s policy-makers struggle to stabilize an unbalanced global financial system, and doggedly oppose expansionary policies needed to ensure employment and recovery. The necessary restructuring and rebalancing of the global economy have been postponed. With the historic Brexit vote, the British people rejected this flawed brand of economics—and in particular the dominant liberal finance narrative. And they did so because the hardship they are experiencing—repressed wages, diminished public services, rising housing costs and shortages, and insecure employment—is indirectly a consequence of the theories and policies of the mainstream economics profession…. Britain’s ‘Brexit’ vote is but the latest manifestation of popular dissatisfaction with the economists’ globalized, marketized society…

Must-Read: More on Nick Rowe’s self-assumed Sisyphean task…

Look: the standard New Keynesian model is a version of the Prescott RBC model, minimally tweaked to deliver Old Keynesian qualitative behavior. Its purpose is to show that the methodological straitjacket demanded by Prescott has no implications other than making it much harder to fit the data.

It has no other proper purpose.

Nick Rowe’s criticisms are correct:

Nick Rowe: New Keynesians Just Assume Full Employment: “Anyone with even an ounce of Old Keynesian blood… if they understood what the New Keynesians are doing, would be screaming blue murder that we are teaching this New Keynesian model to our students as the main macro model, and that central banks are using this model to set monetary policy…

I’m now going to make this point so simply and clearly that any New Keynesian macroeconomist will be able to understand it…. Only consumption…. Self-employed hairdressers, cutting each other’s hair…. All goods are services… labour the only input… counsumption, output, and employment… all the same thing. And… prices and wages… the same thing too…. No exogenous shocks…. No growth…. A constant population of very many, very small, identical, infinitely-lived agents, with logarithmic utility of consumption, and a rate of time-preference proper of n.

The individual agent’s consumption-Euler equation, with r(t) as the one-period real interest rate, is therefore:

C(t)/C(t+1) = (1+n)/(1+r(t))….

Assume the central bank sets a real interest rate r(t). Suppose the “full employment”… equilibrium is… 100 haircuts per agent per year consumption, income, and employment. Forever and ever. The central bank’s job is to set r(t) such that C(t)=100, for all t. Inspecting the consumption-Euler equation, we see that this requires the central bank to set r(t)=n for all t. Assume the central bank does this…. [But] setting r(t)=n for all t only pins down the expected growth rate of consumption… to zero…. It does not pin down the level….

Suppose initially we are at full employment. C(t)=100. Then every agent has a bad case of animal spirits. There’s a sunspot. Or someone forgets to sacrifice a goat. So each agent expects every other agent to consume at C(t)=50 from now on…. His optimal response… if he expects the central bank to continue to set r(t)=n, is to cut his own consumption immediately to 50 and keep it there. C(t)=50… is also an equilibrium with r(t)=n. So is any rate of unemployment between 0% and 100%.

What can the central bank do to counter the bad animal spirits? If it cuts r(t) below n, even temporarily, we know there exists no rational expectations equilibrium in which there is always full employment. All we know is that we must have negative equilibrium growth in consumption for as long as r(t) remains below n. It is not obvious to me how making people expect negative growth in their incomes from now on should cause everyone to expect a higher level of income right now from a higher level of everyone else’s consumption right now. Sacrificing a goat sounds more promising as a method of restoring full employment. Did every other New Keynesian macroeconomist already know about this, and just swept it under the mathematical rug? Didn’t I get the memo?

Here’s Gali:

Under the assumption that the effects of nominal rigidities vanish asymptotically [lim as T goes to infinity of the output gap at time T goes to zero]. In that case one can solve the [consumption-Euler equation] forward to yield…”

Bull—-. It’s got nothing to do with the effects of nominal rigidities. What he really means is “We need to just assume the economy always approaches full employment… otherwise… we will eventually get hyperinflation or hyperdeflation, and we can’t have our model predicting that, can we?” That Neo-Wicksellian/New Keynesian nonsense is what the best schools have been teaching their best students for the last decade or so…

The way out I prefer to take is to say: Look: the central bank doesn’t set r(t) = n for all t–it follows some reasonable feedback rule to stabilize the economy. Want to know what are reasonable feedback rules? They are the ones that stabilize the economy. Unhappy with that? Go back to Lloyd Metzler’s version of IS-LM, and recognize that the New Keynesian model is a jerry-rigged minimally-tweaked RBC model…