Must-Read: Sebastian Mallaby: The Doubts of Alan Greenspan

Posted on by Brad DeLong

Must-Read: WTF?! I see Sebastian Mallaby, apparently thinking he is defending Alan Greenspan’s reputation.

He is not: he is making Greenspan appear a really bad actor indeed.

He is making Greenspan appear to be somebody who knew the dangers of the housing bubble in the mid-2000s, and let the risk of a little political heat–“devastating TV ads…”–dissuade him from doing his job.

Needless to say, I think Mallaby is way wrong here:

Sebastian Mallaby: The Doubts of Alan Greenspan:

In Jan. 2004, with house prices starting to look frothy, Mr. Greenspan repeated his warning, predicting a repeat of the tech bust…

…“It sounds as though we’re back in the late ’90s,” he worried to his colleagues. “The potential snap-back effects are large.”… Long before the 2008 crisis, he had understood the lessons that were celebrated as new insights in the wake of the crash. Of course, this begs a question: If Mr. Greenspan understood the danger of bubbles, why did he nonetheless permit them—even rationalizing his policy with a public insistence that the best way to deal with bubbles was to clean up after they burst?…

The political environment…. Greenspan was a hardened Washington veteran…. He calculated that acting forcefully against bubbles would lead only to frustration and hostile political scrutiny. And his caution was vindicated. When he did try to rein in risk-taking—calling, for example, for restraints on the government-sponsored housing lenders—he felt the heat. The housing-industrial complex denounced him for failing to understand mortgage finance and ran devastating TV ads to deter members of Congress from supporting Mr. Greenspan’s calls for regulatory intervention.

It is too easy, and too comforting, to blame Alan Greenspan’s supposed intellectual errors for the 2008 crisis…. The origins of the crisis lay not in the maestro’s failure of understanding–which would be easy to correct. Rather, it lay in the failure of our politics. Who in this electoral season would bet that we are safer now?

How Seriously Should We Take the New Keynesian Model?

Posted on by Brad DeLong
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Nick Rowe continues his long twilight struggle to try to take the New Keynesian-DSGE seriously, to understand what the model says, and to explain what is really going on in the New Keynesian DSGE model to the world. I said that I think this is a Sisyphean task. Let me expand on that here:

Now there is a long–and very successful–tradition in the natural sciences of taking the model that produces the right numbers seriously. Max Planck introduced a mathematical fudge in order to fit the cavity-radiation spectrum. Taking that fudge seriously produced quantum mechanics. Maxwell’s equations produced equivalent effects via two very different physical processes from moving a wire near a magnet and moving a magnet near a wire. Taking that equivalence seriously produced relativity theory.

And economists think they ought to be engaged in the same business of taking what their models say seriously. They shouldn’t. For one thing, their models don’t capture what is going on in the real world with any precision. For another, their models’ fudge factors lack hooks into possible underlying processes.

Now to business:

In the basic New Keynesian model, you see, the central bank “sets the nominal interest rate” and that, combined with the inflation rate, produces the real interest rate that people face when they use their Euler equation to decide how much less (or more) than their income they should spend. When the interest rate high, saving to spend later is expensive and so people do less of it and spend more now. When the interest rate is low, saving to spend later is cheap and so people do more of it and spend less now.

But how does the central bank “set the nominal interest rate” in practice? What does it physically (or, rather, financially) do?

¯_(ツ)_/¯

In a normal IS-LM model, there are three commodities:

  1. currently-produced goods and services,
  2. bonds, and
  3. money.

In a normal IS-LM model, the central bank raises the interest rate by selling some of the bonds it has in its portfolio for cash and burns the cash it thus collects (for cash is, remember, nothing but a nominal liability of the central bank). It thus creates an excess supply (at the previous interest rate) for bonds and an excess demand (at the previous interest rate) for cash. Those wanting to hold more cash slow down their purchases of currently-produced goods and services (thus creating an excess supply of currently produced goods and services) and sell some of their bonds (thus decreasing the excess supply of bonds). Those wanting to hold fewer bonds sell bonds for cash. Thus the interest rate rises, the flow quantity of currently-produced goods and services falls, and the sticky price of currently-produced goods and services stays where it is. Adjustment continues until supply equals demand for both money and bonds at the new equilibrium interest rate and at a new flow quantity of currently produced goods and services.

In the New Keynesian model?…

Nick Rowe: Cheshire Cats and New Keynesian Central Banks:

How can money disappear from a New Keynesian model, but the Central Bank still set a nominal rate of interest and create a recession by setting it too high?…

Ignore what New Keynesians say about their own New Keynesian models and listen to me instead. I will tell you how it is possible…. The Cheshire Cat has disappeared, but its smile remains. And its smile (or frown) has real effects. The New Keynesian model is a model of a monetary exchange economy, not a barter economy. The rate of interest is the rate of interest paid on central bank money, not on bonds. Raising the interest rate paid on money creates an excess demand for money which creates a recession. Or it makes no sense at all.

I will take “it makes no sense at all” for $2000, Alex…

Either there is a normal money-supply money-demand sector behind the model, which is brought out whenever it is wanted but suppressed whenever it raises issues that the model builders want ignored, or it makes no sense at all…

Must-Read: Paul Krugman: A General Theory Of Austerity?

Posted on by Brad DeLong

Must-Read: Paul Krugman: A General Theory Of Austerity?:

as someone who was in the trenches during the US austerity fights, I was struck by how readily mainstream figures who weren’t especially right-wing in general got sucked into the notion that debt reduction was THE central issue. Ezra Klein documented this phenomenon with respect to Bowles-Simpson:

For reasons I’ve never quite understood, the rules of reportorial neutrality don’t apply when it comes to the deficit. On this one issue, reporters are permitted to openly cheer a particular set of highly controversial policy solutions. At Tuesday’s Playbook breakfast, for instance, Mike Allen, as a straightforward and fair a reporter as you’ll find, asked Simpson and Bowles whether they believed Obama would do “the right thing” on entitlements — with “the right thing” clearly meaning “cut entitlements.”

Meanwhile, as Brad Setser points out, the IMF — whose research department has done heroic work puncturing austerity theories and supporting a broadly Keynesian view of macroeconomics — is, in practice, pushing for fiscal contraction almost everywhere.

Again, this doesn’t exactly contradict Simon’s argument, but maybe suggests that there is a bit more to it.

Must-Read: Temina Madon, Karen J. Hofman, Linda Kupfer, and Roger I. Glass: Implementation Science

Posted on by Brad DeLong

Must-Read: Temina Madon, Karen J. Hofman, Linda Kupfer, and Roger I. Glass: Implementation Science:

We face a formidable gap between innovations in health… and their delivery….

Nearly 14,000 people in sub-Saharan Africa and South Asia die daily from HIV, malaria, and diarrhea…. Many evidence-based innovations fail to produce results when transferred to communities… because their implementation is untested, unsuitable, or incomplete…. Insecticide-treated bed nets can prevent malaria… yet… fewer than 10% of children in 28 sub-Saharan African countries regularly slept with this protection…. The same is true of strategies to prevent mother-to-child transmission of HIV….

Why is effective implementation, particularly in resource-poor countries, such an intractable problem?… Scientists have been slow to view implementation as a dynamic, adaptive, multiscale phenomenon that can be addressed through a research agenda…. People living in poverty face a bewildering constellation of social constraints and health threats…. Recent billion-dollar increases in budgets for global health have provided only limited support for studies needed to ensure maximum impact. Instead, planners often assume that clinical research findings can be immediately translated into public health impact, simply by issuing “one-size-fits- all” clinical guidelines or best practices without engaging in systematic study of how health outcomes vary across community settings…

Must-Read: Robert Skidelsky: The Scarecrow of National Debt

Posted on by Brad DeLong

Must-Read: Robert Skidelsky: The Scarecrow of National Debt:

Most people are more worried by government debt than about taxation…

Borrowing strikes them as a way of taxing by stealth. “How are they going to pay it back?” my friend asked. “Think of the burden on our children and grandchildren.”… Horror of debt is particularly marked in the elderly, perhaps out of an ancient feeling that one should not meet one’s Maker with a negative balance sheet. I should also add that my friend is extremely well educated, and had, in fact, played a prominent role in public life. But public finance is a mystery to him….

One should not attribute this gut feeling to financial illiteracy. It has been receiving strong support from those supposedly well-versed in public finance, particularly since the economic collapse of 2008. Britain’s national debt currently stands at 84% of GDP. This is dangerously near the threshold of 90% identified by Harvard economist Kenneth Rogoff, beyond which economic growth stalls.

The magical properties of this number were never properly revealed, and the data supporting the conclusion were questioned, to say the least. But Rogoff has not retreated from his claim, and he now gives a reason for his alarm. With US government debt running at 82% of GDP, the danger is of a “fast upward shift in interest rates.” The “potentially massive” fiscal costs of this could well require “significant tax and spending adjustments”… the financial leg of the familiar “crowding out” argument….

But… a government that can issue debt in its own currency can easily keep interest rates low. The rates are bounded… [but] these limits are quite distant in the UK and the US…. Continuous increases in both countries’ national debt since the crash have been accompanied by a fall in the cost of government borrowing to near zero. The other leg of the argument for reducing the national debt has to do with the “burden on future generations.”… The idea that additional government spending, whether financed by taxation or borrowing, is bound to reduce private consumption by the same amount assumes that no flow of additional income results from the extra government spending – in other words, that the economy is already at full capacity. This has not been true of most countries since 2008.  
 
But in the face of such weighty, if fallacious, testimony to the contrary, who am I to persuade my elderly friend to ignore his gut when it comes to thinking about the national debt?

Must-Read: Gene D’Avolio, Efi Gildor, and Andrei Shleifer (2001): Technology, Information Production, and Market Efficiency

Posted on by Brad DeLong

Must-Read: Gene D’Avolio, Efi Gildor, and Andrei Shleifer (2001): Technology, Information Production, and Market Efficiency:

A recent study by Financial Executives International (FEI) and NYU graduate student Min Wu… associate[s] these [earnings] restatements with losses of market value of $31.2 billion in 2000, $24.2 billion in 1999, and $17.7 billion in 1998…

…The largest event involved Microstrategy (MSTR), whose stock fell by $11.9 billion over three days surrounding a revenue recognition based restatement of earnings. Two-thirds of all restatements are by Nasdaq firms. This is partly driven by the disproportionate number of restatements in the computer manufacturing and software industries. Arthur Andersen finds that these two segments accounted for 27 per- cent of all restatements from 1997 to 2000…

No, State Governments Have Not Been the Sacred Hearths of Human Liberty in America. Why Do You Ask?

Posted on by Brad DeLong
Mcculloch vs maryland Google Search

The extremely-sharp Miles Kimball quotes Randy Barnett, who is… not so:

Randy Barnett: Growing up, I was like most Americans in my reverence for the Constitution… Until I took Constitutional Law at Harvard Law School.

The experience was completely disillusioning, but not because of the professor, Laurence Tribe, who was an engaging and open-minded teacher. No, what disillusioned me was reading the opinions of the U.S. Supreme Court. Throughout the semester, as we covered one constitutional clause after another, passages that sounded great to me were drained by the Court of their obviously power-constraining meanings. First was the Necessary and Proper Clause in McCulloch v. Maryland (1819)..

WTF!? To declare, given the ends that an authority shall aim at, that it has the powers “necessary and proper” to attain them is not “obviously power-constraining”. It turns the ends from being a pious hope to something capable of accomplishment.

Moreover, McCulloch vs. Maryland is in no sense an unleashing of the powers of the government. The decision, in fact, constrains government: it shrinks the powers that the government of the state of Maryland has. At most, it’s zero-sum. It sets the powers of the federal government high: the Second Bank of the United States can operate in Maryland. It sets the powers of the state government high: the state is prohibited from using its taxing power to make operation of the Second Bank of the United States impossible.

Sometimes government power should be at the local level; sometimes the state level; sometimes the national level; sometimes the global level. Circumstances alter cases. But to say that it is a rule or that there should be a strong presumption that governmental powers exercised at the state level create more freedom than powers exercised at the federal level is just weird.

Or, rather, it is just weird unless we look at the historical context. Then we see where Randy Barnett is coming from:

Historically, in America, to expand the powers of state governments relative to those of the federal government has not been the road to victory for human liberty. Rather, it has been the reverse. It has been the road to expanded slavery, to Jim Crow, and to regressive rent-extraction to local elites via the county courthouse and that statehouse.

A strong predisposition that states rather than feds should wield power has no proper place in libertarian thought. But it has a very strong place in American libertarian thought. Why? Because it is the keystone of the arch that has been the libertarian-racist alliance here in America since the 1950s. That alliance has done so much to bring shame to libertarian political philosophy and political philosophers. And it continues to wreak its damage today.

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Must-Read: Brad Setser: The ECB on the Slowdown in Global Trade

Posted on by Brad DeLong

Must-Read: Brad Setser: The ECB on the Slowdown in Global Trade:

I have long thought that China was too big an economy for manufacturing exports to account for 35 percent of its GDP…

…especially when that high level of exports relative to GDP corresponded with a large overall surplus. An adjustment that returned China to “normal” thus almost certainly would be accompanied by some form of a slowdown in global trade…. And… China’s post-crisis growth has coincided with fairly steady falls in its imports of manufactures relative to its GDP…. There is plenty of evidence that components once imported are now increasingly made in China (see for example Chapter 1 of this IMF report). Global value chains got compressed…. And imports of manufactured goods for domestic use (measured as the difference between processing imports and all manufactured imports) also seem to be sliding….

The IMF’s analysis in the new WEO chapter on trade points in a similar direction. The Fund argues that the slowdown in global trade stems mostly from a slowdown in investment… [and] China’s imports recently have fallen by a bit faster than can be explained by its model…. A lot of the story on global trade reduces to a China story, both directly, and indirectly though China’s impact on commodities. The ECB’s statistical work maps well to a set of stylized facts about the evolution of China’s trade.

Must-Read: Larry Summers: Four Things the Fed Should Do Now

Posted on by Brad DeLong

Must-Read: Larry Summers: Four Things the Fed Should Do Now:

The neutral rate is now close to zero and it may well remain under 2 percent for the foreseeable future…

With the economy growing at below 2 percent over the last year, total hours of work essentially flat for the last 6 months, and with long term inflation expectations declining there is no reason to think we are currently much below the neutral rate…. [The Fed] should acknowledge at least to itself that it has damaged its credibility by repeatedly  holding out the prospects of much more tightening than the market anticipated, being ignored by the market, and then having the market turn out to be right. It should recognize output and inflation and unemployment would all be closer to their target levels today and in their forecasts if rates had not been increased last December. It should move to bring its stated plans more in line with external expectations regarding how much tightening the economy can tolerate….

The Fed should make real the idea that its inflation target is symmetric…. It should be clear that until inflation expectations look to be rising above 2 percent there is no need to restrain the economy…. The Fed should make clear that it sees risk as asymmetric right now.  If the economy falls into recession there is a real risk of a Japan scenario…. There is no great risk if inflation drifts above two percent. It might, as I have noted, actually be desirable. And if not, policy can be tightened to prevent the economy from overheating as has occurred many times in the past.

Eric Rosengren, in explaining his dissent on the decision not to raise rates in September, argues that the Fed has historically had a hard time tapping the brakes and that if the Fed has to cool off an overheated economy a recession is likely to result. I am not sure what aspect of history he has in mind here…. On occasion… recession was the price of bringing it back to desired levels.  Rosengren’s case would be made by examples where so much extra slack was induced that the economy undershot on inflation. I am not aware of such instances…. It takes a tortured argument to believe that you can prevent a car from stopping by hitting the brakes…

Must-Reads: September 30, 2016

Posted on by Brad DeLong

Should Reads:

[14,000-year-old campsite in Argentina adds to an archaeological mystery: http://arstechnica.com/science/2016/09/14000-year-old-campsite-in-argentina-adds-to-an-archaeological-mystery/